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Broker tips: Ferguson, Paragon

13 Jun, 2019 15:01

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(Sharecast News) - Jefferies reiterated its 'buy' recommendation for shares of Ferguson on Thursday, highlighting the company's better-than-average growth prospects, inexpensive valuation and the possibility of higher returns to shareholders.

The broker expects the plumbers' merchant to "consistently deliver growth ahead of its peers" on the back of both volume growth and inflation.

While Jefferies noted that growth in the US was slowing down, it noted that had been well flagged by the company for some time now.

"Even after minor downgrades to revenue and trading profit, Ferguson's c.5-6% pa medium-term sales growth remains toward the upper end of its UK and US peers," they explained.

At 13.0 times' Jefferies's estimate for the company's profits over the next year, the shares were trading at a price-to-earnings discount of approximately 20-25% in comparison to their US rivals', despite the fact that many of its competitors served the same markets,

Jefferies also noted that with about half of its end markets being non-residential, Ferguson's client base was more diversified and defensive than rival's.

Even after factoring in the "surprise" third quarter $500m share buyback, the company's net debt was expected to remain below the lower end of Ferguson´s leverage target of 1.0-2.0 on a net debt-to-underlying earnings basis.

"[It is] our view that Ferguson's conservative leverage and robust cash generation underpin its ability to do both M&A and extra cash returns (the current financial year is set for an above-average level of M&A)."

Analysts at Canaccord Genuity on Thursday reiterated their 'buy' rating on attractions design and fit-out business Paragon, stating the group's interim results a day earlier demonstrated their "positive thesis in action".

Canaccord noted that despite Brexit-related uncertainty, especially during the second quarter, Paragon's net loan book grew 3.3% during the half, while net interest margin improvement, something the analysts had previously identified as "a key differentiating feature" for the group versus its peers was evident - reaching 224bps compared to the 221bps recorded for the whole of 2018.

"This was driven by growth in the higher margin commercial portfolio and helpful long-term dynamics within the mortgage book," pointed out Canaccord.

The Canadian broker said Paragon was "well-positioned for the medium-term" as it stood by its stance on the firm as a 'conviction buy' and upped its target price a touch to 500p.

"PAG trades at 1.0x FY19 P/BV, falling to 0.9x FY20 P/BV, for an average 12.3% ROE through our forecast horizon, which we would expect to continue to improve thereafter. We see this valuation as undemanding given PAG's positive attributes."

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