Broker tips: Experian, N Brown, Ferguson, Travis Perkins
Morgan Stanley upped its rating on shares of credit-checking firm Experian to ‘overweight’ from ‘equalweight’ on Wednesday as it pointed to a change in regulation in Brazil that should benefit the group.
The bank, which upped its target price on the shares to 2,950p from 2,360p, said the change in regulation from ‘opt-in’ to ‘opt-out’ in Brazil will accelerate the collection of positive credit. In turn, this should lead to higher consumer credit penetration and a richer credit data set for bureaus.
"We estimate higher credit penetration will add 2% organic growth for Experian in Brazi and a richer data set should drive development of Experian's Decisioning and Consumer business, adding a further 4% to its Brazilian organic growth," MS said.
The bank said the full benefits will take time to come though as bureaus build credit history, but the cyclical recovery in Brazil should drive strong organic growth in the near term, meaning Brazil can show higher growth for longer.
MS said it sees $1.2bn incremental revenue in Brazil from the changes.
Analysts at Berenberg cut their target price on 'hold' rated N Brown on Wednesday, saying the retailer's operational performance over the last few months was not going "in the same direction" as it had when the firm's strong run began at the start of 2019.
A trading update from the company last week saw the shares tumble after adjusted pre-tax profit guidance for both 2020 and 2021 was cut from roughly £83m to £70m-72m. Berenberg said N Brown was "clearly" facing several significant headwinds.
Berenberg said a difficult retail backdrop was hurting both N Brown's top line and gross margins of products, while regulation was starting to impact financial services and recent exceptional costs had left the balance sheet leveraged.
The German bank took the midpoint of N Brown's revised guidance for each variable, with the exception of costs, which it noted management had been able to manage well historically, and now assumes the group can reduce costs by 7.5% and for 2020 adjusted pre-tax profits to be £68m and earnings per share 19p.
"We think there is a higher likelihood that numbers continue to be reduced in the short to medium term, so would prefer to see signs of improvement before turning more positive," said Berenberg.
UBS upgraded its stance on Ferguson on Wednesday but downgraded Travis Perkins, as it took a look at the European building materials sector.
"After a strong re-rating in 2019, we are somewhat more selective but we see some opportunities in the sector," UBS said.
The bank upgraded plumbing and heating company Ferguson - formerly Wolseley - to ‘buy’ from ‘neutral’ and boosted the price target to 8,075p from 6,600p on margin growth and some further multiple re-rating potential.
"We recognise a part of the re-rating story has played out, with the shares trading on 17x price-to-earnings versus a trough of 12x in Dec-18. The discount to US peers has narrowed to circa 15% from a peak of 35%. However, we think the probability of an eventual re-listing in the US is relatively high and we expect the board to recommend a dual listing as a first step."
It downgraded its rating on builders’ merchant Travis Perkins to ‘sell’ from ‘neutral’ but lifted the price target to 1,400p from 1,380p after the recent re-rating. UBS said the shares look expensive and the market is getting "over-optimistic" about a UK recovery.
"Shares have re-rated from a trough of 10x to 14.5x P/E (long-term average around 11.5x and peak multiple around 16x) which we think exposes shareholder to downside, in particular ahead of potentially earning dilutive streamlining of the portfolio," UBS said.
Irish building materials company CRH remained its ‘top pick’, rated at ‘buy’ with a 3,300p price target.