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Grafton Group's outlook improving but Liberum prefers Travis Perkins

Published: 07:03 30 Aug 2013 EDT

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Liberum Capital has softened its bearish outlook on builders merchant and DIY group Grafton Group (LON:GFTU) but still prefers sector peer Travis Perkins (LON:TPK).

The group, which has focused on growing its UK business while the Irish housing market is in a slump, released interims on Wednesday that showed a sharp rise in profit before tax to €60.5mln from €15l.8mln the year before, prompting Liberum to revisit the investment case.

“The recovery is playing out with UK margins growing as the market strengthens and Irish profitability is benefitting from market stabilisation. The outlook is also improving (in UK and Ireland),” the broker notes.

“With improving fundamentals we now acknowledge that exuberance is unlikely to unwind soon, and so we upgrade from Sell to Hold,” it added.

The equivocal stance on the share’s investment appeal is because Liberum still sees the valuation as being stretched, but the broker seems to have given up trying to convince the market.

“Our sell recommendation has not been successful,” Liberum’s Charlie Campbell admits.

“We believe that a price target of €6.00 (up from €3.80) strikes the right balance between pricing in recovery and leaving some upside risk,” Campbell adds, while asserting that he still thinks Travis Perkins (rated ‘buy’) is a better investment at these prices.

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