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Broker tips: Britvic, Morrison's, Pennon, IMI

By Iain Gilbert

Date: Friday 13 Sep 2019

Broker tips: Britvic, Morrison's, Pennon, IMI

(Sharecast News) - Jefferies upgraded its stance on shares of drinks maker Britvic to 'buy' from 'hold' on Friday, lifting the price target to 1,000p from 880p as it said the market under-estimates its growth potential.
The bank said its buy case is built on 10 strategic priorities and growth levers. These include improving investor confidence, improving free cash flow, stronger revenue growth, a turnaround in Brazil and M&A/capital returns optionality.

"We see upside risk to street expectations beyond F19 as well as opportunity for re-rating," it said.

Jefferies expects Britvic's capital markets day on 9 October to provide more granularity on the growth agenda "as the company harvests benefits of the multi-year production footprint/capability upgrade".

It noted that this will the first time in years that the company hosts a CMD, including a visit to its flagship manufacturing site at Rugby.

"We believe the decision to schedule a CMD points to the company's confidence in the next leg of the story. We expect the day to be focused on explaining the revenue opportunity on the back of the business capability programme (BCP)."

Jefferies noted that the BCP has not only optimised the cost base but also laid the foundation for accelerated value creation with greater product and pack flexibility.

It also said that improving free cash flow conversion opens the door for a buyback in the medium turn which is worth to 3% to earnings per share.

Analysts at Berenberg raised their target price on grocery chain WM Morrison slightly higher on Friday, praising the group's first-half performance.

They credited Morrison's for its ability to surpass expectations, despite facing "a very challenging trading environment", with pre-tax profits of £192m coming in 3% ahead of consensus estimates.

Furthermore, the German broker pointed out that with underlying free cash flow remaining "robust", increasing by 17% year-on-year, there was plenty to support excess capital returns to shareholders.

Berenberg said it remained "confident" about the outlook for Morrison's second half trading and expected profit growth would accelerate, with the group set to benefit from easing comparatives, reduced drag from wholesale start-up costs and the lower costs associated with its online channel.

The analysts also hailed Morrison's extension of its contract with Amazon and the addition of two new wholesale partners.

"Despite shares increasing 11% since we last published, we continue to believe Morrison looks cheap," said Berenberg.

"We believe a premium is justified given the group has one of the strongest balance sheets in European food retail and strong FCF generation supports a high level of capital returns with a c7% dividend yield."

In addition to raising its price target on Morrison's from 230p to 235p per share, Berenberg also reiterated its 'buy' rating on the grocer.

Over at JP Morgan, analysts stayed at 'neutral' on shares of UK waste and water group Pennon following its Capital Markets event on Thursday, telling clients that for now regulatory and UK political risks offset the scope for growth in the company's waste unit.

In a research note sent to clients, they sounded a positive note on the company's plans to grow its plastic waste recycling footprint, especially given the social pressure for Britain to stop exporting roughly two-thirds of the 1m tonnes of garbage collected each year.

On top of that, the UK's plans were to increase plastic recycling from 46.0% to 75.0%, they said.

"Policy settings are currently geared towards increasing the proportion of plastics recycled and increasing the amount that is processed within the UK. Given the consumer and commercial push in this sector, government policy is lagging."

However, they went on to add that: "our neutrality remains towards the UK waters due to persistent elevated regulatory risk (final decision due in Dec) and political risk (rising likelihood of UK general election)."

Back at Berenberg, analysts initiated coverage of valve manufacturer IMI at 'sell' on Friday with an 875p price target, highlighting risks to near-term earnings.

While the change in management has injected some optimism into the story after several years of subdued performance, there are a number of risks.

Berenberg said it expects the precision division, which accounts for around 50% of IMI's revenue and earnings before interest and tax, to experience an accelerated decline in revenue due to its exposure to weak manufacturing PMIs and a heavy truck production cycle that it reckons is about to roll over.

Meanwhile, the critical division faces structural headwinds and the turnaround is likely to take longer than expected, it said, while the hydronic arm has not grown in a decade.

"While management has impressed by reacting early to the market weakness, our earnings per share forecasts are 3%/5% below consensus for FY 2019/2020," Berenberg said.


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