Broker tips: Victrex, Howden Joinery

Berenberg lowered its target price on speciality chemicals outfit Victrex from 2,250p to 2,200p on Friday, stating the group's "cautious" third-quarter sales update brought it "one step closer" to the end of the downgrade cycle, but adding that it was "not there yet".

Berenberg's analysts noted that if anything, Victrex's third quarter appeared to have been "sequentially worse" than its second, with volumes falling 21% to 912 tonnes of PEEK polymers in the quarter, driven by a broad-based weakness in the autos, electronics and industrial end-markets.

However, Berenberg said there was "a way back to reliable volume growth" for Victrex, but said it involved "a cyclical upswing that is unlikely to materialise in the next few months".

The German bank cut its earnings per share estimates for 2019 by 6%, primarily reflecting the aforementioned lower volumes, while noting that its downgrade to 2020 numbers was less, owing to "more-favourable FX".

Looking forward, Berenberg said Victrex will see "very easy comparable numbers" after the fourth quarter and benefits from dividend support. The analysts also pointed out the Victrex was "an obvious beneficiary" from any GBP depreciation that would accompany a hard Brexit.

"We believe that Victrex's core volumes are likely to normalise at mid-single-digit percentage levels from 2020. We also think that its commercialisation of the downstream pipeline will be successful. In the short term, however, the valuation is full, and non-FX-related earnings upgrades unlikely to materialise," said Berenberg.

The analysts concluded by saying Victrex's 17x 2020 price/earnings ration, in long-run averages, was "not a compelling valuation level for a cyclical name with mid-single-digit earnings growth", leading it to reiterate its 'hold' rating on the stock.

Analysts at Canaccord Genuity raised their target price on Howden Joinery to 525p from 515p on Friday after the group delivered a "solid set of results" a day earlier, with turnover and gross profit as expected and lower than anticipated operating costs boosting earnings.

Canaccord credited Howden's management for improving gross margins "as promised", with an early price rise sticking well, and also highlighted that while volumes had been "more subdued", there appeared to be more growth early in the second half.

As expected, Howden's balance sheet was "strong", with net cash of £217m and earnings growth further boosted by the group's recent share buyback.

"It is too early to conclude how the strategic initiatives are delivering but these are good results from a sound business," said Canaccord.

Looking forward, the Canadian broker said the key issue for Howden's remained the macro outlook and its "all-important period 11 trading period", which is likely to coincide with a "politically eventful" time at the end of October with Britain scheduled to leave the European Union, perhaps causing a decline in consumer spending.

"We have slightly increased our full-year expectations and expect more gross margin improvement in the second half, but acknowledge the risks facing the group in the second half," said Canaccord

"All in all, the group looks very robust."