Broker tips: GSK, Breedon

(Sharecast News) - Citi has upgraded its rating on vaccines and drugs blue chip GSK to 'buy' while also boosting its earnings estimates, basing its decision on "compelling" data about Blenrep, the group's novel treatment for multiple myeloma, as well as a range of other positive indicators. The bank, which upped its price target on the stock from 1,700.0p to 2,100.0p, increased its earnings per share forecasts by 50%, reflecting the reinstatement of peak Blenrep revenues of around £2.5bn, noting it had been "teetering on the edge" of upgrading GSK for several months.

"The compelling data with Blenrep in myeloma is the missing piece that pushes us over the line after the last seven years without a positive recommendation," said Citi.

"Our upgrade is based not only on Blenrep's under-appreciated revenue potential but also the cumulative impact of the multiple incremental positives ranging from Zantac liability outlook, RSV/Shingrix, astute business development and [the] increasingly positive ViiV outlook post dolutegravir loss of exclusivity.

Citi added that GSK's recent commercial and pipeline wins put it in "a stronger position" to attract both external talent and pipeline assets.

RBC Capital Markets initiated coverage on construction materials group Breedon on Tuesday with an 'outperform' rating and 575.0p price target, stating the company had "quickly assembled" a market-leading position in the UK heavy building materials sector.

"Mission accomplished, and in a nod to The Matrix, it is deciding its next move, take the blue pill and become a cash cow or take the red pill and seek transformational growth, said RBC, which noted the value of neither pill was reflected in the current price of the shares, which therefore offers an attractive entry point.

RBC said Breedon's acquisition strategy has been so successful and the barriers to entry it constructed were so high that the competition authorities were unlikely to allow it to make further transformational acquisitions in the UK or Ireland.

"It could now focus on generating cash and returning cash to shareholders," it said. "If Breedon takes the 'Blue pill' we believe the dividend per share could be more than doubled as the EBIT margin reaches the higher end of the 12-15% target range and with fewer cashflow calls it could increase the payout ratio from 40% to 60%".

On the other hand, if it opts to take the red pill for growth, RBC said Breedon has successfully built two commanding platforms - one in Great Britain and the other in the Republic of Ireland - and could seek to replicate its existing success and build a third platform.

"It has done its research, it knows what taking the red pill means (expanding into the US), but the outcome is more uncertain," the bank said. "In the note, we assume that Breedon has an initial war chest of £400.0m, which could add circa £40.0m of EBITDA (+16%,) but this is just a first step in a new journey. If, over the long run, any US EBITDA grew to match the £250.0m of the current group, based on current peer group multiples, it creates a US business worth £4.0bn."

RBC said the red pill and the blue pill options offer attractions for different investor bases, blue for income, red for growth and the value of the shares have been treading water as investors wait for Breedon to choose which pill to swallow and which investors to attract.