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Berenberg upgrades Grafton, downgrades Travis Perkins
Berenberg upgraded Grafton but downgraded Travis Perkins on Tuesday as it took a look at UK construction distributors.
Grafton - which announced the acquisition of specialist decorators' mechant Leyland on Monday - was lifted to 'buy' from 'hold', with the target rice upped to 920p from 800p. The bank said that the company's 32% EBITA exposure to Ireland and the Netherlands, along with its 29% exposure to the rapidly-growing Selco business means that positive earnings momentum will continue.
In addition, the upgrade to EBITA guidance in the January trading update and the strong like-for-like sales growth delivered in the UK merchanting business has made it reassess its views and it now reckons the risk/reward trade-off is more favourable.
Berenberg cut its stance on Travis Perkins to 'hold' from 'buy' and reduced the target price to 1,550p from 1,800p.
While it still believes the company will be a long-term winner in the UK general merchanting space with its investments in the supply chain, in the nearer term it expects limited earnings momentum and reasons for a re-rating given Perkins' 100% UK exposure.
The bank rates both SIG and Howden Joinery at 'hold'. As far as SIG is concerned, it said that following the group's capital markets day at the end of last year, it is more confident in management's ability to reduce the cost base. However, the current share price fairly reflects the speed at which this can be achieved.
On Howden, it said that despite having the strongest balance sheet of the four, its exposure to the UK leaves it cautious. "The group remains a quality operator and is outperforming peers, but we believe this is reflected in current valuation."
In terms of the broader repair, maintenance and improvement market, Berenberg said it expects activity to be flat, at best, this year.
"We remain cautious about spending in the near term with mortgage approvals and housing transactions down slightly year-on-year. Although the UK merchant space looks cheap relative to recent history, we believe there are limited catalysts for a re-rating beyond a recovery in broader equity markets given ongoing uncertainty in the UK and a lack of positive drivers for UK RMI (repair, maintenance and improvement) activity."
At 1030 GMT, Grafton shares were up 2.4% to 780p and Travis Perkins was flat at 1,423p.