Broker tips: RS Group, Shell, Hammerson

Morgan Stanley initiated coverage of industrial and electric components distributor RS Group on Thursday with an 'equalweight' rating and 950.0p price target as is pointed to a strong track record of organic growth, improving margins and return on invested capital.

MS stated that while overall market growth was pegged to GDP growth, large players can outgrow the market by leveraging scale and pursuing M&A.

It said that own-brand penetration, which carries higher gross margin, is 13% and has room to grow, with peers averaging around 20%, "and this along with digital growth and operational gearing could deliver a mid-teens margin in the medium term".

However, MS also noted near-term risks from the cycle and pricing and said the shares were unlikely to perform until a new chief executive can be appointed.

"We like the long-term potential of the business and could become more positive if hard economic data continues to trend above the soft data, marking a change in the macro outlook," the bank said. "Our bull case is 1,300p. Conversely, an industrial recession and price deflation could squeeze volumes and gross margin, driving the shares towards our 720p bear case."

Analysts at Berenberg raised their target price on energy giant Shell from 2,900.0p to 3,000.0p on Thursday, stating the group's free cash flow generation remained "attractive".

Berenberg said Shell had delivered "a strong set" of fourth-quarter results on 2 February, driven by an "exceptional" integrated gas result, and distributed $26.0bn to shareholders in total in 2022, including $18.4bn in buybacks.

"While commodity prices are lower, we expect the company to be able to at least maintain a quarterly run rate of $4.0bn of buybacks through 2023 on top of the $7.5bn dividend," said the analysts.

The German bank noted that this would represent a payout ratio "well above the 20-30% range indicated", as was also the case in 2022, but thinks that this remains "comfortably achievable" given gearing now below 20% and continued strong capital discipline - enabling another year of double-digit cash returns to shareholders.

"Better operational performance in the integrated bas business could also help delivery in 2023," concluded Berenberg, which also reiterated its 'buy' rating on the stock.

Analysts at Liberum sounded a bullish note on the outlook for the the UK real estate investment trust space, telling clients that share prices now reflected the expected declines in direct property values.

Liberum expect those declines to slow "markedly" in the first three months of 2023 as yields stabilise, with the sector now offering "selective value".

In the case of Hammerson, one of its 'top picks' in the sector, the broker upgraded its recommendation on the stock from 'hold' to 'buy'.

Liberum also expressed a preference for REITs in the sector that offered strong and growing cash flows, lower loan-to-value ratios with balance sheets able to support "opportunistic" acquisitions and with a high ratio of fixed interest repayments.