Broker tips: Safestore, Rentokil, Crest Nicholson

Analysts at Berenberg downgraded their recommendation for shares of self-storage company Safestore from 'buy' to 'hold' on Friday, stating that the group's outperformance was likely to slow.

Berenberg said Safestore, which released its first-half results on 18 June, had shown "remarkably strong" trading despite a two-month impact from the Covid-19 pandemic, with 6% like-for-like and 9% overall revenue growth.

Due to this, and better-than-expected lockdown trading in May and June, the analysts upgraded their forecasts for 2020 by roughly 2%.

However, Berenberg downgraded its recommendation on the group as a result of shares having recovered to their price target and on expectations that further positive earnings surprises were "unlikely" over the next 12 months.

"We continue to see Safestore as an exceptional long-term equity story, although expect a pause in growth through the inevitably weaker economic outlook for the remainder of the year," said Berenberg.

The German bank added that while earnings growth may be supported by further European expansion, it considers this to be largely in the price at current levels, and would await a more "attractive entry point" before returning as buyers.

JPMorgan Cazenove upgraded its recommendation on shares of Rentokil Initial to ‘overweight’ from ‘neutral’ on Friday and lifted the price target to 560p from 430p as it pointed to earnings upside and M&A optionality.

The bank said it lost its nerve after the company’s Covid-19 update and moved to ‘neutral’ as it reckoned the stock was riskier than, for example, Experian on the same multiple, given its exposure to the hospitality sector.

"However, recent newsflow has been more supportive than we feared," JPM said. "We still see risks to receivables and the profit & loss from client defaults, but we cannot ignore the potential upgrades to 2020 consensus and we believe Rentokil is likely to resume M&A during H2."

JPM highlighted positive earnings momentum and said it still sees Rentokil as a long-term winner.

"We see potential upside to 2020 consensus as there are still a number of relatively bearish forecasts out there," it said. JPM’s 2020 pre-tax profit estimate of £314m is around 10% above Bloomberg consensus and sits towards the top of the company consensus range of £163m to £319m, it said.

In a sector note, Jefferies said Crest Nicholson's margins would be squeezed by lower volumes and selling prices leading to earnings reductions. Jefferies downgraded the shares from 'buy' and reduced its price target to 226p from 331p.

Jefferies analyst Glynis Johnson said share prices were building in a worse trading environment than was likely but that this would take time to be borne out.

"In a context where we believe investors will continue to shy away from stocks with perceived higher-risk profiles, we believe Crest's share price will continue to be a laggard relative to its peers, until firm evidence of margin improvement and cash conversion," Johnson said.

Johnson said share prices implied a fall of 10% or more for house prices which was overdone given factors underpinning valuations including government support.

"We believe with banks' willingness to lend on Help to Buy, strong buy vs rent economics, the greater priority of homes post lock-down, and decades of under-supply will continue to provide a resilient demand profile," she wrote in a note to clients.