Broker tips: SSE, Rentokil Initial, Marks & Spencer

Goldman Sachs downgraded shares of SSE to ‘neutral’ from ‘buy’ on Tuesday following outperformance.

It noted that since being added to the ‘buy’ list on 7 January 2019, the shares are up 37% versus the FTSE World Europe up 15%.

On a total return basis, SSE has risen 49% versus 28% for the Stoxx 600 utilities index over the period.

"During 2019, we observed a major step-up in public awareness of climate change issues and more countries outlining net zero policies (UK net zero by 2050). These are likely to provide 30 years of growth and regulatory stability in climate infrastructure, with most of the growth concentrated in renewable activities," Goldman said.

"Against this backdrop, SSE has de-risked its business model (via disposals) towards more visible activities (renewables & networks) and secured sizable renewable auction wins over 2019, factors that have driven the stock’s re-rating, in our view."

GS said industry consolidation could provide upside, but it sees better risk/reward elsewhere. The bank lifted its price target on the stock to 1,461p from 1,369p.

Credit Suisse downgraded Rentokil Initial to ‘neutral’ from ‘outperform’ on Tuesday, cutting the price target to 450p from 460p.

The bank pointed to stable growth but FX headwinds, slower margin accretion and diminishing US pest opportunities. It cut its earnings per share estimate for 2019 by 1% and for 2020-21 by 7-9% to reflect the impact of FX as sterling has strengthened and a more cautious view on the company reaching its 18% margin target for North America by 2021.

"We think Rentokil can continue to generate around 4% organic revenue growth, margin accretion and recycle excess cash into value creative M&A," it said. "The vast majority of its end markets are innately stable providing the opportunity to compound low-volatility value in the medium to long term."

However, CS said it sees challenges from FX headwinds in the near term and rising wage costs in the US, that have seen Rollins break a multi-year winning streak of margin growth in the past two years.

"This will, we think, add incremental challenges to reaching its 2021 North American margin target," it said.

"Given the combination of falling forecasts, slowing group margin growth, declining US M&A opportunity set and a PE of 29.2x we downgrade to neutral," CS said.

Marks & Spencer got a boot on Tuesday as Berenberg double-upgraded its stance on shares of the retailer to ‘buy’ from ‘sell’ ahead of a third-quarter trading update this week.

The bank said it expects the update to show "a significant improvement" in Clothing and Home and "ongoing positives" in the food segment.

Following a poor first half for C&H, which saw like-for-like sales fall 5.5%, Berenberg expects an improvement in LFL sales in the third quarter, driven by better availability and a stronger market backdrop. It noted that management already reported at the interims a big improvement in C&H sales growth in October.

In addition, Berenberg said the recent announcement that Richard Price, an experienced merchant, will join the business in 2020 to lead the clothing and home business is "a significant positive", while the Ocado joint venture provides a longer-term growth opportunity in the grocery business.

"While challenges certainly remain, including online weakness, execution risk in the Ocado JV, the legacy store estate restricting M&S’s ability to adapt to the changing retail landscape, and a less-than-watertight balance sheet, we believe this is more than priced in," it said.

The bank lifted its FY21/FY22 earnings per shares forecasts by 7%/13% and its price target to 250p from 160p.