Broker tips: Pennon Group, Sophos
Pennon Group shares now look fair value, said Deutsche Bank on Tuesday, as it downgraded its stance on the stock to 'hold' from 'buy'.
It noted that the shares have risen strongly since early April and are now trading at the bank's 780p target price.
"With political risks around Brexit potentially culminating in the coming days, we downgrade to hold," it said, adding that the risk-reward trade-off for the stock is more balanced, with it trading roughly half way between DB's RAB nationalisation bear case and a bull case where political risks fade.
"Although it has a post review regulatory earnings yield slightly above the peer group average, it no longer stands out, in our view," the bank said.
The downgrade means that United Utilities is now Deutsche's only 'buy' rating in the UK water sector.
Analysts at Shore Capital downgraded IT security outfit Sophos to 'hold' on Tuesday, stating that the leap in billings seen a year ago looked more likely to be a limp this time around.
Shore Capital said the 22% growth in billings and 31% increase in cash EBITDA would not be repeated in its current trading year, with billings limping towards a 3% improvement and cash EBITDA on course for a 10% decline year-on-year.
With Sophos' management pointing to tough prior year comparatives for its lacklustre performance, Shore Cap said this was "only half the story" - with slower growth in customers, a moderating renewal rate and a significant ramp-up in operating expenditure throughout the first half having also impacted performance.
"In previous guidance, Sophos essentially misjudged these factors, in particular, what a normalised renewals rate should be, leading to the cuts to the FY19 outlook we’ve seen since July," said Shore Capital analyst Martin O'Sullivan.
The analysts said these issues had "undoubtedly" muddied the investment waters, and while noting that a case could be made for short-term share value being around 400p, based upon a 6% free cash flow yield for its current year, O'Sullivan said he did not "confidently expect this to be unlocked over the next 3-6 months".
"We see better value elsewhere in the sector with less risk of quarterly earnings volatility and associated downside surprise. We believe sustainable upside awaits evidence of a return to double-digit billings growth, which may not be seen before Spring/Summer 2019."
Shore Capital kept its 339p target price on the firm unchanged.