Broker tips: Marshalls, Sports Direct, Ultra Electronics

Analysts at Canaccord Genuity upped their target price on British stone and concrete manufacturer Marshalls on Thursday, seeing benefits from its "relatively sizeable" acquisition of Edenhall.

Canaccord said Marshalls' acquisition of the concrete brick manufacturer had increased the group's exposure to the "attractive" new housing and brick market, consistent with its strategy.

"Financially the deal looks attractive; it is earnings enhancing in its first full year and leverage remains at a very conservative level in 2019 despite the acquisition"

Having factored in the Edenhall acquisition, Canaccord now expects Marshalls to turn in pre-tax profits of £62m and £66.5m over the next two years.

The Canadian broker also praised the firm for its ability to continue delivering upgrades against a "very challenging wider UK construction market" and outperform many of its peers in the sector.

While the FTSE 250 constituent's valuation continued to sit at a premium to the sector, over recent years it felt its premium "looks justified" and so Canaccord maintained its 'buy' rating on Marshalls and set a new 500p target price for the shares.

Peel Hunt downgraded its stance on Sports Direct to ‘hold’ from ‘add’ on Thursday and cut the price target to 260p from 450p following the retailer’s interim results.

Sports Direct posted a 26.8% drop in first-half pre-tax profit to £64.4m, on revenue of £1.79bn, up 4.5% from the same period a year ago. Underlying earnings before interest, tax, depreciation and amortisation excluding House of Fraser was up 15.5% to £180.3m, but including HoF they were down 4.7% to £148.8m.

Sports Direct said that since its acquisition in August, HoF has contributed £70.1m of revenue and a loss before tax of £31.6m.

Peel Hunt said the figures were solid given the circumstances but it has run out of patience with the lack of visibility on strategy.

"Yes it’s all very interesting to hear a deep dive on Flannels, but investors required chapter and verse on the plans for House of Fraser, as opposed to an extremely optimistic pledge for it to break even next year. It’s the same with the core business: yes, the elevation programme is working but what about the non-elevated stores? What’s the plan for them?

"Clearly current trading is very poor, as it is everywhere, and our new forecasts reflect a tough Christmas ahead for both the core stores and HoF (our numbers now reflect the HoF losses, there’s no change to underlying EBITDA expectations)."

The brokerage said the stock’s valuation suggests forecast momentum here, and it is no longer convinced that this exists.

Barclays downgraded Ultra Electronics on Thursday as it foresees material margin compression in the current year.

A squeeze of 200 basis points of margin is anticipated out to the 2020 financial year as the defence contractor feels the full impact of IFRS 15 accounting standards and consequently lower provision releases, together with a lack of new accretive acquisition activity.

"These factors are exacerbated by mix effect, execution and pricing pressure," Barclays analyst Charlotte Keyworth said.

She also highlighted increased risk around results for 2018's results, due in early March, "given it represents an important opportunity for the new CEO (now in situ for six months) to report findings and reset expectations", while also raising concerns about the US Department of Justice's proposed antitrust investigation into the sonobuoy joint venture between Ultra and Sparton.

Keyworth downgraded the shares to 'underweight' from 'equal weight' and slashed the price target to 1,120p from 1,460p.