Broker tips: Grafton, TT Electronics

Analysts at Canaccord Genuity downgraded business services firm Grafton from 'buy' to 'hold' on Thursday, stating there was now a "less compelling" risk/reward scenario as a result of the group's share price approaching record highs.

While Canaccord acknowledged Grafton was enjoying "very good trading" with additional earnings upside risk, a very robust balance sheet, and an ongoing strategic review of its less attractive businesses, it also said its share price had enjoyed "a very strong run" and was now reaching all-time highs.

"Despite its obvious attractions, we downgrade to a 'hold' rating (from 'buy') on valuation as the share price reaches all-time highs and, in our view, there is now a less compelling risk/reward ratio," said Canaccord.

The Canadian bank did increase its profit estimates and while it said momentum looked set to carry over into the second half and remain supportive, it also said the risk, or even likelihood, remained that profits in currently very strong areas such as Irish Retail and Selco would see a normalisation into next year, especially if economies continue to open up.

"We continue to see an attractive medium-term outlook for the group, boosted by the potential to redeploy capital from its traditional merchanting businesses into higher return and faster-growing businesses," added the analysts, who also raised their target price on the stock to 1,235.0p from 1,155.0p.

Analysts at Berenberg raised their target price on electronic resistors manufacturer TT Electronics from 230.0p to 285.0p, stating cash was "king".

Berenberg acknowledged that it had "long told the story" of TT Electronics' improving growth and margin profile, but noted that the third facet of its investment case was now emerging - cash.

"With an inflection in cash generation next year, we forecast a 5.2% free cash flow yield, well ahead of TT's closest peers like discoverIE," said Berenberg, which also highlighted that upside risks were attached assuming a successful buyout of the firm's pension scheme.

Considering that TT "should sustainably deliver 3-5% organic growth and 10%-plus margins on a two- to three-year view", the German bank thinks the stock's valuation remained "compelling" and said it considers the group's Virolens Covid-19 testing device "a free option at these levels".

"On an organic basis, our group expectations are largely unchanged, but updated FX and higher tax rate assumptions drive a 5-7% downgrade to our 2021 and 2022 EPS. Our FY 2023 EPS is unchanged," said Berenberg, which also reiterated its 'buy' rating on the stock.