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17 Mar 2021 | 14:55

Broker tips: Rolls-Royce, TI Fluid Systems, Ferguson, Standard Chartered

(Sharecast News) - Rolls-Royce rallied on Wednesday as JPMorgan Cazenove upgraded shares of the engine maker to 'neutral' from 'underweight', highlighting four reasons behind the change, despite "major challenges". JPM, which also hiked its price target on the shares to 105.0p from 45.0p, said the approval of multiple vaccines means many investors are willing to value the stock on its medium-term ambitions.

In addition, it noted the shares are now rising despite bad news such as the recent cash flow warnings in December and January and the large 2020 earnings miss.

"Whilst international airline capacity is still down circa 75% versus 2019, it is unlikely to get worse and so the direction of travel will most probably be one of slow improvement," JPM said.

"RR's shares have significantly underperformed peers since 2018 and this is attracting investors."

TI Fluid Systems was under the cosh on Wednesday as Deutsche Bank downgraded the stock to 'hold' from 'buy' on valuation grounds, noting its strong run into 2021.

DB said the company reported a decent second half and delivered in line with market expectations. Guidance also met market expectations and the bank said it does not see any need for consensus moves on the back of the release.

"Moreover the company has made decent progress on moving into EV platforms with close to 50% of 2020 business wins being for electrified vehicles and also being present in the majority of key BEV launches in 2020-2022.

"As the ability to move to alternative drivetrains was always a key discussion point on the stock, we see the company's disclosure as encouraging, highlighting successful efforts to gain share in platforms of the future."

DB added that it expects more on this at the capital markets day in April, which will likely be welcomed by the market.

Analysts at Canaccord Genuity raised their target price on plumbing and heating products distributor Ferguson from 8,900.0p to 9,100.0p on Wednesday, stating it now saw signs of more top-line life going into the second half of the trading year.

Canaccord said Ferguson had delivered a "good" first-half performance, with good profit growth, and while the first six months of the year demonstrated how well it managed its cost base and outperformed the wider US market, the other key point the analysts pointed out was the company's strong balance sheet.

Looking to the second half of the year, Canaccord expects US residential markets to remain "strong" and commercial and industrial markets to improve, with comparatives starting to ease into the third quarter.

The Canadian bank also expects recent commodity price inflation in finished goods to be "increasingly supportive" of the firm's top line and while it acknowledged that more costs will come back into the business into the fourth-quarter, a good rate of profit drop-through should still be expected.

"The group is now fully focussed on North American markets and we believe it has huge potential to continue to consolidate its markets, outperform the wider market and see incremental margin expansion over the medium term," said Canaccord, which retained its 'hold' rating on the stock.

HSBC upgraded shares of Standard Chartered on Wednesday to 'buy' from 'hold' and lifted its price target to 550.0p from 430.0p as the bank said it was increasingly optimistic on future revenue growth.

It said margin stability and improving loan trends underpin its view. The company's new 7%+ return on tangible equity 2023 target looks achievable, HSBC said, with upside thereafter, as it lifted its 2021 and 2022 earnings per share estimates by 5.5% and 8.4%, respectively.

HSBC also noted that after a weak 2020, the stock was again one of the worst performers in its European banking universe in 2021 year-to-date, hurt by lower US rates, geopolitical tensions and better investment stories elsewhere, but said it was "getting more optimistic" on the operational outlook.
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