Broker tips: Redrow, Taylor Wimpey, Meggitt, Craneware
By Iain Gilbert
Date: Tuesday 31 Mar 2020
(Sharecast News) - JP Morgan has reduced its forecasts for the UK housebuilding sector, including cutting its rating on Redrow and Taylor Wimpey.
In a note published on Tuesday, the bank said the sector had underperformed the FTSE 100 and FTSE 250 by 17 and 10 percentage points respectively, "demonstrating the cyclical nature of the sector".
"While the potential impact from Covid-19 remains uncertain, we take a cautious stance by incorporating 30% decline in completions and 5% drop in average selling prices for 2020, resulting in a 40% cut to CY-2021 estimated earnings per share on average."
But JP Morgan also warned there could be potential for a 45% decline in revised pre-tax profit estimates, should the fall in completions worsen to 45% and average selling price slide by 10%.
Within individual companies, the bank said that with dividend and land spend being cut across the sector, the focus now was shifting increasingly to balance sheet resilience. It downgraded Redrow and Taylor Wimpey to 'neutral', from 'overweight', after flagging up both stocks as having a "limited cushion" in terms of liquidity.
Morgan Stanley upgraded Meggitt to 'overweight' as the investment bank recommended buying shares in the aerospace sector.
Andrew Humphrey and his team at Morgan Stanley reduced short-term earnings forecasts for the sector but predicted a recovery in demand for flights once the Covid-19 crisis passes.
Humphrey cut earnings per share estimates on average by 40% in 2020 and 28% in 2021 for companies with mainly civil aerospace exposure. He cut his price target for Meggitt, the maker of brakes and other aerospace parts, to 382p from 570p but increased the company's rating to 'overweight' from 'equal-weight'.
Meggitt's share price has more than halved in 2020, reflecting concerns about its debt and that its aftermarket may be more vulnerable than rivals.
"We believe Meggitt's high and defensive military exposure may be underappreciated, and that exposure to business and regional jet aftermarket provides gearing into a faster recovery in domestic travel," Humphrey wrote. "Recent underperformance creates a tactical opportunity."
Analysts at Berenberg lowered their target price on software and services firm Craneware from 2,500p to 2,000p on Tuesday, despite noting that the firm appeared to be "well positioned" in the current Covid-19 environment.
However, while Berenberg said it did see "some impact" on 2020 full-year estimates, the analysts pointed out that Craneware had "a number of qualities" that made it "a rare asset" in today's market.
The German bank highlighted that Craneware has "excellent" revenue visibility over the next three years, stable 28% underlying earnings margins and also pointed out that the group remained free cashflow generative with a "pristine" balance sheet.
"These qualities have yet to be seen by the market, with shares declining 40% year-to-date. We feel this leaves a valuation that ascribes little to its growth opportunities and, considering recent momentum in new sales, offers an attractive risk-reward profile," said Berenberg, which also reiterated its 'buy' rating on the firm.
"Craneware is in a robust position to not only move through this period of uncertainty, but also to possibly take advantage of the share price volatility by buying back shares."
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