Broker tips: Unite Group, WH Smith, NatWest
Analysts at Berenberg upgraded student accommodation provider Unite Group from 'hold' to 'buy' on Wednesday, stating increased visibility had provided the stock with re-rating potential.
Berenberg said as the UK real estate sector normalises, Unite, the largest owner and operator of purpose-built student accommodation in the UK, remained "well-placed", with the analysts expecting to see a normalisation of operations, combined with long-duration demand tailwinds, development completions and operating margin improvements to justify a re-rating of the shares, which currently trade at roughly 25% below pre-Covid-19-pandemic levels.
The German bank said Unite had outperformed expectations in 2020, despite significant rent concessions being made, and highlighted that following recent management commentary and comments from Boris Johnson, which suggested that any steps taken to ease lockdown measures were irreversible, operational visibility across the student accommodation subsector had improved "materially".
"When this is taken alongside demographic, societal and supply tailwinds, we expect occupational demand to increase materially ahead of the next academic year and remain resilient over our forecast horizon," said the analysts, who rolled forward their model and increased their price target on the stock from 1,000.0p to 1,250p.
"Combined with Unite’s best-in-class portfolio, we expect these tailwinds to result in resilient, secure, inflation-plus EPS growth and a re-rating of the shares, which remain circa 25% below February 2020 peaks."
JP Morgan increased its price target for WH Smith but cut its rating to 'neutral' after the shares' strong performance so far in 2021.
WH Smith's travel business remains valuable and has "vast roll-out potential" worldwide despite its recent troubles during the Covid-19 pandemic, JP Morgan said. The stationer and bookseller's high street business also includes online brands such as the Funky Pigeon online greetings card business.
JP Morgan downgraded WH Smith shares from 'overweight' and increased its price target by 11% to £17.93. The broker cut its adjusted pretax profit forecast for 2021 by 6% and its 2022 estimate by 14%.
WH Smith's travel business has been hit hard by the near shutdown of air and rail travel during the pandemic. This was initially made worse by the company's $400.0m cash purchase of US travel retailer Marshall in late 2020 though WH Smith said North America was its best-performing travel market early in 2021.
Travel is a "unique business" with long-term growth prospects and high returns and is insulated from online competition, JP Morgan said. WH Smith's US acquisitions have given it a foothold in a market that should recovery more quickly than others because 85% of US air travel is domestic, it added.
Online brands such as Funky Pigeon arguably make up most of the high street business's valuation, JP Morgan said. High street profits have been stable aided by a decade of margin improvement. Further cost cuts may be harder but online growth and £22m of rent savings should offset reduced post-pandemic footfall.
Deutsche Bank upgraded NatWest to ‘hold’ from ‘sell’ on Wednesday as it took a look at Irish banks after NatWest’s announced exit from the country.
DB said it has been nearly 10 years since the Irish real estate crisis, yet the banking sector remains in flux.
"NatWest's announced exit from Ireland offers opportunities for local banks to acquire high-quality assets and to quickly expand in a country where credit growth has been lacking for the last decade," it said.
NatWest said in February that it would pull out of Ireland and focus on the UK market and Deutsche pointed out that NatWest trades at a price-to-earnings premium to Lloyds and Barclays, reflecting its excess capital position. However, it said that given the nature of the excess capital such a premium is unjustified.
"For NatWest, we believe that an exit from Ireland in a capital generative manner over multiple years is entirely possible. However, if NatWest retains the tracker book and non-performing loans, shareholders could be waiting a very long time to see that excess capital return to group level and be paid out.
"Excess capital is often cited as the bull case for NatWest- but the majority sits in Ireland. It could be trapped (if deals fall through); less than expected (if NatWest has to shoulder restructuring costs); or take a long time to extract (as tracker mortgages roll off very slowly).
"Without the excess capital story, we just see a UK bank trading at a 20% premium to Barclays or a 5% premium to Lloyds, and we would rather own these," said DB, which maintained its 170.0p price target on the shares.