Broker tips: Great Portland Estates, Serco
Goldman Sachs downgraded its stance on shares of Great Portland Estates to 'sell' from 'neutral' on Tuesday as it highlighted a weak market ahead.
The bank, which cut its price target on the stock to 585p from 616p, pointed out that the shares currently trade at an 11% discount to one-year forward net asset value, in line with 10-year history and not reflecting the risks ahead, including Brexit.
"Our view of the London office market from here remains largely unchanged and we believe a steady new supply, together with risks on the demand side (including Brexit, dependency on technology, media and telecoms and flexible office tenants), are likely to lead to weaker trends going forward," GS said. It continues to forecast 4%/5% declines in Central London office rents for 2020/21.
Goldman also argued that a falling investment market was unlikely to present opportunities.
"In our view, GPE has positioned itself defensively in anticipation of a significant market correction; however, given the slow, steady value declines we forecast (versus previous downturns), we see limited acquisition opportunities ahead."
The bank cut its 2019-20 acquisitions assumptions from £200m a year to £50m and said it expects GPE to remain net sellers over this period.
Analysts at Jefferies raised their target price on public services outfit Serco on Tuesday, saying the group's acquisition of Alion Science and Technology's naval systems business unit should "catalyse a shift in customer perception" and had "attractive economics".
Serco announced the $225m acquisition of Alion's naval unit on a cash/debt-free basis on 23 May, an "unsurprising development" that Jefferies said was consistent with the group's strategy and a logical exit for Alion.
The broker, which also maintained its 'buy' rating on the firm, highlighted what it said were the numerous benefits of the transaction.
Jefferies noted that although Serco's attempts to provide higher value-added services in US defence had heretofore achieved only "modest progress" and that a major breakthrough had been elusive given the group's lack of a track record.
The outsourcer's acquisition of BTP in 2018 for enhancing capability but said the Alion acquisition, which provides ship/submarine design, systems engineering and production management services, should lead to "a more meaningful shift" in customer perception, Jefferies highlighted.
"Moreover, the transaction generates $3-4m worth of cost synergies and maybe revenue synergies in international markets too," Jefferies said.
In turn, the company's EBITDA margin was expected to improve from 6.0% to 7.3%.
Although the transaction was still subject to approval, Jefferies was anticipating few problems and assumed the unit would be consolidated by the end of the year.