Broker tips: Reckitt Benckiser, UK Mail, Mitchells&Butlers

The risk-reward trade-off inherent in holding shares of consumer goods giant Reckitt Benckiser is tilted to the upside, in the opinion of analysts at Morgan Stanley, given the company’s strategic optionality.

More specifically, the firm is targeting a shift in its portfolio towards higher growth and margin business in consumer health. As well, its valuation is underpinned by what should remain “solid operational performance” in the core business, the broker argues.

Thus, under its bull case – which integrates a marked change in the portfolio – the stock could reach 6,400p, despite already finding itself at the upper end of absolute and historical ranges.

Its consumer health division should continue to be one of the best growth stories across the European staples sector, with on-going growth in line with the average for the last three years of 8%. Near-term momentum should be supported by easier comparables and a strong innovation line up.

The company is also expected to become a consolidator in the sector, which in turn should translate into a positive mix on the rate of sales growth and its margin profile.

Under a “bear” case of slowing core momentum together with lower possibilities of deals in that area then the stock would fall to 4,600p.

Once taken into account all of the above Morgan Stanley upped its price target on the stock to 5,600p from 5,100p previously while maintaining is recommendation at “equal-weight”.

Numis has cut all its forecasts on Mitchells & Butlers by 5%, in the wake of disappointing results from the pubs and restaurants operator.

After the group said like-for-like sales grew 0.1% in the nine weeks to 20 September and were flat over the second half, broker Numis said it expects full year margins to fall by 50 basis points due to the lack of like-for-like sales growth, initial dilution from the Orchid acquisition, higher pre-opening costs and competitive pricing.

“Mitchells & Butlers is struggling to maximise the potential of its high quality estate,” Numis said in a note.

“Although we have cut our 2015 forecast by 5%, we fear there is downside risk to our assumptions of 1% like-for-like sales growth and 30 new openings.”

Neither does the competitive pricing seem to be having much impact on overall sales.

Numis reiterated its ‘hold’ stance on Mitchells & Butlers shares, with a target price of 420p.

Mitchells & Butlers shares were down 4.67% to 386.66p at 10:00 on Thursday.

Broker Investec has downgraded UK Mail after the parcel courier said the usual autumn pick-up in parcel traffic had failed to materialise.

The broker has moved UK Mail to 'add' from 'buy' after the company said first-half revenue would be lower than last year due to worse-than-expected second quarter parcel volumes, casting uncertainty over annual results. It also reduced its target price to 600p from 700p.

Investec analyst John Lawson said: "The UK parcels sector seems to be going through a more challenging period than previously anticipated, as UK Mail has not seen the normal seasonal pick-up at the rate expected.

"Whether this is due to macro factors, Scottish referendum worries or customers just deferring potential purchases until later in the year, it is impossible to say at this stage.

"Until we get clarity, we have moved to 'add', reduced estimates and lowered our target price to 600p."

Shares fell 70p or 12.4% to 495p at 13:39 in London.