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(Sharecast News) - RBC Capital Markets downgraded B&Q and Castorama owner Kingfisher on Monday to 'sector perform' from 'outperform'.
The bank said Kingfisher continues to work on improving its offer, and has the opportunity to transfer best practice in areas like trade and digital from the UK to other markets.
However, RBC said it was relatively cautious on the outlook for France and consensus earnings near term, and that it currently sees more valuation upside potential for some other UK retailers such as B&M European Value Retail.
RBC said that in an environment of lower overall inflation, it reckons it will be more challenging this year for some retailers to offset further inflation in staffing, their biggest cost line.
It noted that the minimum wage is rising by 9.8% this year in the UK and 21% in Poland.
"We expect KGF to drive labour and productivity initiatives, such that its wage impact will be less than this. However, with another likely subdued year for housing activity and LFL sales, we're not expecting KGF to see meaningful profit growth until 2025," it said.
RBC also pointed out that the French home improvement market, where KGF has a number two position, has been soft in recent quarters, and said it thinks it will take time for consumer concern over macro factors to ease.
"Castorama in our view remains somewhat stuck between more experiential and more convenient offers, and we expect it to accelerate pro and digital initiatives e.g., marketplace," it said. "Brico Depot looks better positioned long term with its discount heritage, and should benefit now from an increased focus on in-store availability and marketing."
RBC maintained its 235p price target on Kingfisher.
Jefferies upgraded testing, inspection and certification group Intertek to 'buy' from 'hold' and hiked the price target to 5,300p from 4,300p.
In a broader note on the sector, Jefferies said that after a multi-year period of earnings and share price underperformance, it sees the testing names as moving through an inflection point in 2024.
"We are increasingly optimistic on growth and believe margins have troughed, with increasing confidence on recovery," it said.
"Valuations currently sit at the bottom of historic ranges suggesting an attractive risk reward.
"We upgrade Intertek to buy and reiterate our buy on Bureau Veritas as preferred ways to play the sector."
Jefferies said its new price target for Intertek suggests more than 20% upside and where it sees the business as best exposed to key themes around assurance, ESG and consumer recovery.
Jefferies said it has updated EPS forecasts for FY24-25 by 2-4%, driven by increased confidence on both the growth outlook and margin recovery at Intertek.
"As discussed in this note, recovery in consumer products, incremental growth in sustainability/ESG assurance as well as exposure to ongoing industrial investment and electrification we think can support a stronger outlook for growth over the next 3+ years," it said.
"We update for FX which looks likely to remain a headwind in FY24 based on current rates. We see improved traction on management cost initiatives as well as positive mix benefits which we think can support margins, and we now forecast 90bp improvement over FY24-25e to 17.3%. Our new EPS estimates now sit 2-4% above consensus."
Berenberg upgraded its rating for engineering group IMI from 'hold' to 'buy', but named peer Rotork as its top pick in the sector.
Both IMI and Rotork should be considered "some of the highest-quality businesses in the UK industrials sector, as seen by their margins and returns," Berenberg said in a note.
However, both stocks have delivered underwhelming performances over the last decade, driven by minimal-to-negative organic growth, the broker said. Over the decade to 2022, Rotork's organic growth averaged out at -0.4% per annum, while IMI grew by just 0.2% per annum - significantly underperforming the wider sector.
"Fortunately, we believe this prolonged period of underperformance has passed, and that both IMI and Rotork finally look set to deliver a consistent period of top-line growth while maintaining their sector-leading margin and returns profiles."
The broker said that both companies should benefit from a combination of "supportive cyclical tailwinds" like improving global energy markets, trends like automation, electrification and investments into emission reductions, as well as significantly improved business mixes versus their recent history.
"We believe that the outlook has finally improved. The oil and gas market is set for a significant catchup investment period after years of undersupply. Both companies have improved their weighting to higher-growth end-markets, while increasingly benefiting from automation and electrification trends. We believe that both will deliver mid-single-digit organic growth over our forecast period, with Rotork potentially ahead of this level."
Rotork currently trades at 20 times earnings, while IMI trades at just 13 times.
Berenberg raised its target price for IMI from 1,605p to 1,950p but cut its target for Rotork's shares from 420p to 370p.
