Broker tips: Pennon, Boohoo, RBS, Lloyds
Analysts at RBC Capital Markets upgraded British utility company Pennon from 'sector perform' to 'outperform' on Friday, on the back of expectations for "strong growth" in its recycling and energy recovery and waste management unit, Viridor.
RBC predicted solid growth in Viridor through opportunities in plastics recycling and believed that growth in the unit would support a "sector-leading dividend" and mitigate lower returns in regulated water.
Pennon's £65m investment in plastics recycling facilities was announced with an "attractive" 15% internal rate of return hurdle rate and a forecast contribution of around £20.0m to underlying earnings per year and with another two opportunities in the area, RBC felt Viridor was showing "a strong capability to leverage existing experience and gain significant cost efficiencies".
RBC said this should contribute to "a strong earnings profile" for the business going forward, helping support Pennon's "sector-leading dividend".
Furthermore, the Canadian broker now expected South West Water to continue to be one of the "top performers" on return on retained earnings, with a nominal RoRE of roughly 7.4% versus its previous assumption of 8.1%.
"Despite a strong recovery in PNN over the last two weeks, we believe there is still further upside given the positive outlook for Viridor," said RBC, which also raised its price target on the group's shares from 825p to 875p.
"Our updated estimates account for a lower regulated return, which reduces our FY21E estimates, however, this is offset by additional revenues from plastic recycling in 2022."
Over at Liberum, analysts upped their target price on online fashion retailer Boohoo from 280p to 320p on Friday following the group's "very positive" first-half trading update.
Liberum praised Boohoo for continuing to outperform after the group's management on Thursday upgraded sales growth guidance for the full-year to between 33% and 38% from 25-30%.
"This reflects the recent acquisitions of three new brands, but it is still a circa 5% point underlying increase driven by continued momentum in the core business," the broker said.
It added that earnings before interest, tax, depreciation and amortisation margin guidance was reiterated at "a healthy" 10%.
"This is another impressive update from the group - over the past year we have already upgraded our full-year 2020 profit before tax estimates by 16% - where the multi-brand, multi-geography approach is working very well," said Liberum, which reiterated its 'buy' rating on the shares.
It said all of Boohoo's brands continue to gain share in their focus markets as the company's branded, fast-fashion, lower-priced offer, supported by its test-and-repeat model "sits in a sweet spot that is driving strong growth across territories".
Deutsche Bank downgraded its stance on shares of RBS and Lloyds Banking Group on Friday as it took a look at UK banks.
"Lloyds and RBS are more exposed to mortgage refinancing pressure given the size of their respective standard variable rate (SVR) portfolios, while Barclays and HSBC have relatively smaller SVR books," the bank said.
It downgraded its rating on both to 'hold' from 'buy, cutting the price target on Lloyds to 55p from 74p and on RBS to 215p from 290p.
Deutsche said buy-rated Barclays remains its top pick and it prefers the stock over Lloyds, RBS and hold-rated CYBG given its revenue and geographic diversification - lower dependence on the UK - non-GBP earnings, lower structural hedge income and SVR book.
"While the market is more than pricing in the disruptive scenario, valuation multiples are short of the BoE 'disorderly' scenario (updated 5.5% GDP impact). Our analysis suggests that the Barclays' share price is closest to pricing in a more severe disorderly Brexit scenario."