Broker tips: Centrica, Travis Perkins, Land Securites
British Gas owner Centrica was under the cosh on Friday as Citi cut its stance on the stock to 'neutral' from 'buy' and trimmed the price target to 144p.
"In our view, Centrica shares are already fully reflecting the challenging retail market and pricing in a probable dividend cut with its 9% dividend yield," Citi said.
However, it argued that unless the company is able to revitalise its current strategy by delivering growth in some of its new business lines or to curb the level of churn in retail or to improve the commodity output, there is little reason for investors to own the shares.
Earlier this week, RBC Capital Markets downgraded Centrica to 'underperform' from 'outperform', saying it expects a dividend cut and that the shares are still expensive relative to peers despite recent underperformance.
"Aside from the dividend, our primary concern remains a lack of visible growth for the company, and we remain unconvinced that areas such as Connected Home or Distributed Energy and Power will ever be significant earners for the group," said the Canadian bank.
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.
Lastly, the market has already factored much of the upside from an orderly Brexit outturn into the UK real estate sector, broker Liberum believes, accounting for the 9% rise so far this year.
Liberum noted that a "potential" value trade in real estate "could still reside in the extent to which equity markets have over-priced a correction in [the retail sub-sector] values for the majors".
However, the analysts said they were "not ready to make this call" as they felt the market is likely to only be "at the cusp of a correction in underlying asset values", with capital values [per square foot] for some retail are "well above alternative use and levels of financial leverage are higher this feels too early".
The nearest to sticking their neck out was to express a preference for Land Securities, principally due to its unlevered discount and lower retail exposure.
Given share price performances year-to-date, Assura and Unite were downgraded from 'buy' to 'hold'.
Derwent London and Great Portland Estates, both reiterated on 'hold' ratings, "offer the cleanest assessment of Brexit risk" as they are solely focus(ed) on the London office market with small committed development pipelines.