Broker tips: Ferguson, Greencoat Renewables, Pets at Home

JPMorgan Cazenove upped its stance on shares of plumbing and heating products distributor Ferguson to 'overweight' from 'neutral' on Wednesday after the stock sold off the day before on the back of half-year results.

Ferguson shares slumped on Tuesday after the company reported a strong first half but cut its full-year guidance as it said growth had moderated in its markets.

JPM said the recent underperformance and Tuesday's selloff were overdone and that there is 24% upside potential to its unchanged 5,950p price target.

"We see scope for a material re-rating through H2, as we believe new estimates will prove to be sensibly based, we see scope for US lead-indicators to start improving, and we expect scope for further buybacks to fall into view, making what is already a discounted valuation look particularly attractive."

It said the company's new growth guidance is sensibly based and implies a much less alarming view on volumes in the core US markets than on first view.

"Furthermore we expect margin trends to begin showing signs of improvement in H2, reflecting actions in H1, reduced labour inflation, and better margin mix.

"We are also somewhat more positive on the scope for US residential data to improve over the next six months. Together we think these factors should start to drive a re-rating, meaning the recent disconnect versus the US home improvement players reverses."

Analysts at RBC Capital Markets upgraded Greencoat Renewables to 'outperform' on Wednesday, noting favourable winds had blown the Irish infrastructure company to an inflection point in its development.

RBC felt that Greencoat had clearly delivered on its IPO pledges over the course of 2018, and following its recent equity raise, the firm looked set to have "a healthy growth profile" in the rapidly developing Irish wind market that offers "excellent cashflow visibility".

"We believe GRP should trade at a premium, not a discount, valuation to peers," said RBC.

The Canadian broker, which also upped its target price on the group to €1.20 from its previous €1.10 per share standing, said there were two structural drivers of continued growth in wind capacity across Ireland that should allow Greencoat to continue its expansion before eventually looking to new European geographies - policy and demand.

RBC noted that Irish onshore wind capacity dominates renewables in Ireland and also stated that Ireland was "an outlier" in Europe in terms of electricity demand growth.

"EirGrid forecasts demand could grow by up to 57% over the next decade, largely driven by increased usage from data centres," add the analysts.

With Greencoat trading at around a 5% premium compared to the peer average of 10%, RBC felt now was the time to take advantage of a firm scaled up and ready to benefit from attractive market growth.

"We do not see this discount as warranted, especially given the recently increased scale, growth prospects and excellent cashflow visibility," concluded RBC.

Citi has upgraded its rating on Pets at Home, arguing that management has a “viable” plan to secure the company’s future.

Citi now has a ‘buy’ recommendation on the London-listed company, which owns a string of retail outlets as well 450 veterinary practices, and a price target of 180p.

Analyst Matthew Garland said: “Concern about the sustainability of the retail business, and the longer-term performance of the vet group, has kept Pets at Home’s share price at historically low levels.

“However, after the vet strategy update, we argue management has articulated a viable plan to turn around the business, supported by a combination of strong market dynamics and company initiatives. This should drive EBIT growth and a longer term free cash flow opportunity.”

Garland conceded risks to gross margin remained in the retail business, but added: “Factors including private-label penetration and weighting of premium pricing in more discretionary categories could mitigate further dilution.”

Shares in the company were head 3% at 159p by 1245GMT.

The UK high street is currently enduring a difficult period, as Brexit uncertainty weighs on consumer confidence However, Pets at Home said at its last update in January that like-for-like sales had grown 4.7% in its retail business in the 12 weeks to 3 January.

At its vet business, underlying revenues improved 9.1%, while group revenues were ahead 5.1% on the same basis.