Broker tips: Shire, Grafton, Travis Perkins, Britvic

JPMorgan Cazenove downgraded specialty biopharmaceutical group Shire to 'neutral' from 'overweight' on Tuesday, slashing the price target to 3,600p from 5,000p.

The bank said that while the valuation remains undemanding, there are few 2018 or 2019 catalysts beyond the potential spin-off of the Neuroscience division, which it does not see as creating fundamental value.

"We believe a spin could highlight the disproportionate earnings contribution from the short-lived Neuroscience franchise," it said, as it remodelled the split company following the full-year results last week. It now reckons the Neuroscience division has a 60% EBITDA margin, which implies that the remainder Rare Disease division has a 37% EBITDA margin, with expansion potential.

Shire said in its full-year results last week that it had completed the first stage of the strategic review of the Neuroscience division and concluded that the business warrants additional focus and investment. "There is a strong business rationale for creating two distinct business divisions within Shire: a Rare Disease division and a Neuroscience division," it said.

The company said at the time that it expects to report the operational performance metrics of each division separately beginning with the first quarter of 2018. Meanwhile, the second stage of the review will continue to evaluate all strategic alternatives, including the merits of an independent listing for each of the two divisions.

Analysts at Berenberg upgraded Grafton but downgraded Travis Perkins on Tuesday as they took a look at UK construction distributors.

Grafton - which announced the acquisition of specialist decorators' merchant Leyland on Monday - was lifted to 'buy' from 'hold', with the target rice upped to 920p from 800p. The bank said that the company's 32% EBITA exposure to Ireland and the Netherlands, along with its 29% exposure to the rapidly-growing Selco business means that positive earnings momentum will continue.

In addition, the upgrade to EBITA guidance in the January trading update and the strong like-for-like sales growth delivered in the UK merchanting business has made it reassess its views and it now reckons the risk/reward trade-off is more favourable.

Berenberg cut its stance on Travis Perkins to 'hold' from 'buy' and reduced the target price to 1,550p from 1,800p.

While it still believes the company will be a long-term winner in the UK general merchanting space with its investments in the supply chain, in the nearer term it expects limited earnings momentum and reasons for a re-rating given Perkins' 100% UK exposure.

In terms of the broader repair, maintenance and improvement market, Berenberg said it expects activity to be flat, at best, this year.

"We remain cautious about spending in the near term with mortgage approvals and housing transactions down slightly year-on-year. Although the UK merchant space looks cheap relative to recent history, we believe there are limited catalysts for a re-rating beyond a recovery in broader equity markets given ongoing uncertainty in the UK and a lack of positive drivers for UK RMI (repair, maintenance and improvement) activity."

After having fallen 15% in the past month, Shore Capital now thinks drink maker Britvic looks like a 'buy'.

Britvic’s share price declined sharply post its first-quarter statement on 31 January and in absolute terms has fallen by 15% in the past month and closer to 20% peak to trough, notes analyst Phil Carroll.

After moving to a negative stance on the stock in December due to concerns over valuation especially with the uncertainty of sugar tax ahead, he now believes Britvic shares "look compelling".

Carroll's forecasts are below consensus expectations and there is a prospect of a "rising attractive free cash flow yield" once the drink-maker emerges from its three-year capital investment programme and therefore, the ShoreCap man's recommendation has been upgraded from 'sell' to 'buy'.

The shares are currently trading for 13.6 times the 2018 full year earnings per share of 50.8p that Carroll has forecast, which take account of a shift in some customer-related investment spend from selling and distribution costs to revenue and moves some incentives from suppliers from revenue to cost of sales.

"The valuation based on Bloomberg consensus is 13.0x. We believe we have taken quite a prudent view of the year ahead given the introduction of the sugar tax," the analyst said. But he stressed that "even taking into account any downward pressure on market expectations, the valuation remains historically attractive".