Broker tips: Intertek, Wolseley, Pearson

Intertek was lifted by a double upgrade from Jefferies, which raised its stance on the stock to ‘buy’ from ‘underperform’ and upped the price target to 4,300p from 3,000p.

“Our recommendation is not predicated on a major near term beat. More, that we believe we should see from here a steady on-going improvement in a range of metrics, including organic growth, margins and free cash flow,” the bank said.

Jefferies said its analysis of margin levers provides a strong case for profit growth faster than revenues, while strong FCF allows it to formally model M&A.

“Looking ahead, we expect that the process around M&A will become more rigorous. Partly we expect that this will be a sector phenomenon as players shy away from deals in cyclical areas and anything related to commodities (both mining and oil and gas) and as multiples across the sector move up.”

Jefferies upped its full-year earnings per share estimate for 2017 to 188.10p from 170.80p.

The bank said its ‘underperform’ rating had been based on weakness in the trade division from a slower oil cargo business in 2016; lower for longer in oil and gas capex and opex activities in the resources business and concerns over sustainability of growth and margins in the products business.

Jefferies said updates from Intertek have confirmed some of these fears, but the products business remained resilient and margins have expanded on an organic basis.

Goldman Sachs has initiated Wolseley, the FTSE 100-listed distributor of heating and plumbing products, with a ‘neutral’ rating and target price of 4,600p.

The bank said it believes Wolseley is strongly positioned with first and second ranks across 80% of its main markets. Goldman also thinks the company’s B2C e-commerce offering will continue to add to its growth opportunities going forward.

“Over the last four years the company has managed to significantly improve its returns profile owing to restructuring efforts and strong growth in its core market, the USA,” Goldman said.

“We believe this is fairly reflected in its valuation and combined with mixed leading indicators outside the USA, we see limited upside to our 12-month price target of 4,600p.”

Goldman said risks to Wolseley include macro-economic changes, the reversal of recent foreign exchange trends, failure to execute on restructuring and acquisitions and pricing pressure from online peers.

The bank noted that Wolseley has reduced its exposure to new construction but its Renovation, Maintenance & Improvement (RMI) end-markets remain closely correlated to macro-economic developments.

“US leading indicators are broadly stable, while the UK & Nordics (predominantly Denmark) paint a more mixed picture.”

Education publisher Pearson got a boost on Tuesday as Morgan Stanley reiterated its ‘overweight’ rating on the stock and 1,050p price target, saying the market’s expectations of another profit warning are unlikely to materialise.

MS said the stock is too cheap, now down 25% from its highs and with a 2018 free cash flow yield of about 10% versus a price-to-earnings of 10x.

It added that Pearson shares are the worst-performing large dollar earners in the UK post the Brexit vote.

It said the shares have fallen since the first-half results on worries that lower H1 gross sales and higher returns in the US college business will lead it to miss its 2016 guidance of pre-restructuring cost EBITA of £580m-£620m, to abandon its 2018 £800m EBITA target and to cut its thinly covered dividend.

“Our view is that Pearson has structural challenges. I thas too much print (35%), it does not have enough proprietary content and there is customer resistance to the high price of US college textbooks,” the bank said.

However, while accepting these shortcomings it also argued that the US College downturn will not be enough to cause Pearson to reduce its guidance for 2016, after it was already cut by around £400m in January 2016.

In addition, it said next year is likely to be an up year for the company as the US Schools adoption market bounces back, the effect of lost US testing contracts falls away, the UK qualifications business picks up and the US college market improves.

“We expect Pearson to reiterate its guidance at Q3, including an unchanged dividend payment of 52p and both its £580m-£620m pre restructuring EBITA guidance for 2016 and its £800m 2018 EBITA guidance.”