Broker tips: National Grid, CVS Group

National Grid looks the most attractive of the utilities stocks listed in London, said Barclays as it initiated coverage on the sector with the view that water companies are "fair value".

National Grid is seen as being attractive for three reasons: that regulator Ofgem will "likely improve from here, which could see returns rising", that the company "is becoming more American but trades at a significant discount to US peers" and that "downside risk limited with material upside potential".

On this last point, Barclays analysts estimate NG is trading at a combined UK and US 14% premium to the regulatory asset base valuation, which implies a UK value at a 14% discount to March 2020 regulatory asset base.

National Grid, therefore, was given a 950p price target and an 'overweight' rating.

RBC Capital Markets downgraded its stance on veterinary services provider CVS Group to 'sector perform' from 'outperform' and slashed the price target to 600p from 1,180p after its profit warning on Tuesday.

"The CVS investment case appears to be unravelling and we think the latest profit warning and reset to expectations is likely to leave investors on the sidelines for some time," it said.

CVS said on Tuesday that given its financial performance in the first half of 2019, it now expects full-year earnings before interest, taxes, depreciation and amortisation to be "materially below" current market expectations.

RBC said the deterioration in trading has been quicker and worse than expected.

"This is frustrating as we believe we had factored cost pressures into our model, but the continued weaker than expected performance from acquisitions and pricing pressures from pharma companies/suppliers on products (a new negative) are disappointing."

The bank said its thesis rested on CVS' ability to buy, integrate and achieve synergies to drive growth and this appears to be falling away.

"Whilst we see value in CVS' footprint and established network, the downward pressure on earnings could persist and hence the risk is too high for us to remain optimistic."