Broker tips: Pennon, GB Group

by | Mar 1, 2021

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Pennon rallied on Monday after Barclays upgraded the stock to ‘overweight’ from ‘equalweight’ following a de-rating.
The bank, which kept its price target on the shares at 1,060.0p, noted that UK regulated utilities have had weak share price performance through a combination of market focus away from defensives into cyclicals and recovery stocks; fears of reflation and rising yields; and tough regulatory reviews.

Barclays said there is “significant value” in UK regulated utilities.

“1) We believe all utilities will appeal Ofgem’s RIIO-2 review by 3 March, which could see returns rise. 2) There is limited impact from bond yields, and a positive inflation impact on UK utilities,” it said.

It noted that Pennon has been de-rated due to optically high multiples, and its ejection from the FTSE 100.

“It now trades at a 6% premium to regulatory asset base and, if the 570p cash on its balance sheet is removed, it trades at an attractive circa 10x price-to-earnings, 7% dividend yield.”

Analysts at Canaccord Genuity downgraded software and services outfit GB Group from ‘buy’ to ‘hold’ on Monday, stating it was now “moving to the sidelines” on the stock.

Canaccord said it had expected GB to exceed “too-conservative” 2021 full-year consensus expectations, but assumed it would be announced around the “usual” post-close time in mid-April.

The Canadian bank, which dropped its target price on the stock from 1,085.0p to 860.0p, stated last Thursday’s pre-release from GB implied a “strong” second-half performance, with organic revenue growth likely clocking in around 7-9% and a more than 30% operating profit beat as adjusted underlying earning margins were expected to be roughly 24.5%, broadly in line with last year.

However, going into the 2022 trading year, Canaccord pointed to “multiple headwinds”, such as a likely reversal of the £14.0m one-off benefit from the US PPP stimulus program, foreign exchange headwinds from a weakening US dollar and its recent MarServices disposal.

In Canaccord’s view, these headwinds will lead to only broadly flat sales and earnings per share this year.

“Even assuming 10% organic underlying growth, we believe these factors are likely to mute revenue and EPS expansion this year,” said Canaccord, which did acknowledge that M&A could be “the wild card” in its scenario, but stated it would “cross that bridge when we come to it”.

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