Broker tips: Derwent, Great Portland, Rolls Royce
Analysts at Berenberg initiated coverage on real estate firms Derwent and Great Portland at 'sell' on Wednesday as part of a note on the broader sector.
Berenberg said the listed London office market had many attractions for both UK and international investors, including providing exposure to a real estate market in "one of the world’s leading cities", but warned that the sector appeared to be "walking a tightrope".
"Although we acknowledge an improvement in portfolio quality and applaud the deleveraging activity undertaken to date, we still expect a cyclical market correction to impact the listed sector meaningfully," said the German investment bank.
"Capital values and rents are at all-time highs and have begun to turn, while increasing tenant expectations are putting pressure on operating margins and increasing building obsolescence."
Discussing Derwent, Berenberg said despite outperformance over the cycle to date, it expects market challenges to have a material impact on the valuations of Derwent’s assets.
Berenberg also noted that with a higher proportion of its portfolio under development, a "significant proportion" of development upside already appeared to have been reflected and warned it may even need to be revised should the cycle slow.
Over at Great Portland, Berenberg pointed out that Great Portland Estates has a greater weighting toward secondary assets, much like Derwent, and warned that it felt there were some development execution risks, especially if those asset values were to fall.
"If the cycle continues, despite the ongoing accretive share buyback, Great Portland is arguably under-geared," said Berenberg.
"We think there is the greatest potential for consensus downgrades at Great Portland Estates, especially if further asset sales are concluded."
Berenberg hit Derwent with a price target of 2,650p, while it issued Great Portland with a 600p per share target.
Rolls-Royce got a boost on Wednesday as Credit Suisse upped its stance on the stock to 'outperform' from 'neutral' and hiked the price target to 1,065p from 900p as it said issues with the Trent 1000 engine seem to be on the mend.
CS said the engine, which powers the Boeing 787, has been the key execution impediment to the case but now appears to be showing signs of improvement.
"A technical fix for the main issue has been certified at the end of December 2018 and has just started to be installed on grounded engines. Storage data shows that the number of parked aircraft/engines has been reducing steadily for four months now, reducing the pressure on both airlines and Rolls-Royce," it said.
With that issue back on the right path, a key downside risk to free cash flow expectations is lifted, the bank said.
Investors can now concentrate on the pace of the reorganisation launched in June 2018 and the Trent XWB strong performance.
CS added that it's now more comfortable with the company's ability to deliver on its 2020 target of around £1bn of free cash flow.