RBC Capital ups Travis Perkins to 'outperform' as it takes longer-term view

RBC Capital Markets upgraded its rating for builders' merchant Travis Perkins to 'outperform' from 'sector perform' on Friday, lifting the price target to 1,550p from 1,180p as it took a long view on the stock.

"Brexit and the macro mean uncertainty is high, but we have taken a longer-term view and looked at what TPK could look like in five years," it said. "We see potential for a more focused group, higher growth and margins, a re-rating and significant returns of cash to shareholders. Execution is a risk, but we see risk reward as in favour."

In the short-term, the Canadian bank expects trading to remain tough, but 2019 forecasts are achievable with some potential catalysts such as a Brexit resolution and the disposal of the plumbing and heating division.

RBC said it has assumed a disposal of P&H at the end of this year and Wickes at the end of next year.

"If we look out five years, then we see the current level of dividend as sustainable, even with dilution on disposals, and we see the potential for cash returns of circa £1.35bn.

"Added together, we believe the company can return more than half its current market cap on a five-year view, leaving a business with lease adjusted net debt to EBITA of 1.75x versus 2.7x today."

It estimated that the disposals of P&H and Wickes would reduce the leased debt of the business by around £1.1bn to £400m, so also de-risk the business from a financial perspective.

At 1055 GMT, the shares were up 1.7% to 1,229.50p.