Broker tips: Breedon, John Wood Group, Computacenter
Analysts at Berenberg upped their target price on British construction firm Breedon on Thursday following the group's conditional agreement to acquire part of CEMEX UK's assets.
Berenberg raised its price target on the group from 85.0p to 105.0p, stating that the addition of CEMEX's 100 active operations spread across the UK - including 28 active quarries, 49 active RMC plants, 14 active asphalt plants, four active building product plants and a cement terminal - would increase Breedon's domestic market share while also offering a "complementary footprint" to attractive regions.
"In our view, the assets acquired by Breedon are complementary to the group's current footprint, increasing exposure to the north-east, Scotland, Wales, Norfolk, the East Midlands and Yorkshire," said the broker.
"In particular, we are excited about the mid-term potential in the north-east if the UK government does increase public sector investment as speculated."
Moreover, Berenberg pointed out that Breedon's management believes the group will achieve synergies of £2.0m from taking out overheads.
"Even if we assume no top-line growth, if the group can increase margins in line with its UK division, we think EBIT for this acquisition could rise to c£19.0m, 19.0% above current forecasts.
"With the infrastructure pipeline robust and plenty of synergies and operational improvements to come from this acquisition, we remain buyers of Breedon."
Over at Morgan Stanley, analysts labelled the sharp drop in shares of John Wood Group in the wake of the Competition and Markets Authority's launch of an inquiry into the sale of its nuclear assets "overdone".
Financial markets had read too much into the CMA's announcement, analyst Lillian Starke said in a research note sent to clients.
According to Starke, it was just part of the regular procedure required to complete the transaction and mot a final decision.
"We believe the stock reaction suggests the market is already pricing a negative outcome from the inquiry. The language used by the CMA in its announcement is in-line with other investigations launched, and therefore we don't think it implies any indication on the CMA's decision or view on the deal."
Morgan Stanley had an 'overweight' recommendation and 620.0p target price on the shares.
Analysts at UBS downgraded their rating on Computacenter from 'neutral' to 'sell' on Thursday, stating the group's valuation following its recent re-rating was "challenging".
While UBS upped its price target on the firm from 1,485p to 1,625p, the analysts said with the shares already trading at a 19x 2020 price-to-earnings ratio after a 76% increase in 2019, they believe the risk/reward scenario on the shares was now "unattractive at current levels".
The Swiss bank highlighted that public sector strength had buoyed sales at Computacenter through the end of 2019, as did improvements in its US operations, where cloud-related sales accelerated, and further progress in settling several of 2018's problem contracts in Germany.
"We are now looking for pre-tax profit of £143m (was £134m) and £146m (was £137m) in 2020. A positive trading update in December sets the scene for a solid trading update on 23 January," said UBS.
However, with Germany and the UK accounting for over 80% of profits and both economies facing challenges in 2020, according to UBS, the analysts said they had identified risks to continued growth in 2020.
"We see our estimate of just 3% sales and EPS growth in 2020 as unlikely to support such enthusiasm. This estimate reflects an expected weaker macro environment especially in Germany and the UK, and some likely easing of Windows 10 related demand," said UBS.
"Computacenter is a good business, but we see an unattractive risk-reward following the recent re-rating. Sell."