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The Expert View: Rolls-Royce, Capita and Babcock
by Michelle McGagh on May 13, 2014 at 05:01
Our daily roundup of the best analyst commentary on shares, also including WS Atkins and Petrofac.
Downgraded Rolls-Royce to stay in the doldrums for two years
Barclays analysts have significantly downgraded Rolls-Royce (RR) as they warned the ‘pause in growth’ cited by management was expected to extend into 2016.
Analyst Nick Webster downgraded the stock from ‘overweight’ to ‘underweight’ and cut the target price 24% from £12.25 to 930p. Yesterday shares were trading down 2.6p, or 0.3%, at £10.04.
‘Following a detailed analysis of Rolls-Royce’s civil and defence aerospace businesses we conclude that the “pause in growth” cited by management for full-year 2014 will likely extend into 2015 and 2016,’ he said.
‘Whilst we recognise the significant order backlog of around £72 billion, we consider the short-to-medium term to be less attractive. Slow growth over the next two years, high exposure to a single yet-to-enter service aircraft, significant cash and margin headwinds, accounting concerns, and questions over capital allocation lead up to our 'underweight' rating.’
Webster predicted three years of ‘low-to-mid single digit’ earnings per share and no ‘compelling reason for the share to rerate to prior levels over the next 12 months’.
Babcock’s Network Rail deal fails to excite analysts
News that engineering support services company Babcock (BAB) has been appointed preferred bidder for Network Rail’s track works has done little to excite Peel Hunt analysts.
Analyst Christopher Bamberry retained a ‘buy’ recommendation and a target price of £13.53 despite the work being worth £200 million over five years. Shares yesterday shed 1.6p, or 0.1%, to £12.21.
‘The lots are worth £200 million over five years – April 2014 to March 2019,’ he said. ‘Network Rail’s conventional plain track renewals programme is worth £375 million in total. Therefore Babcock has gained a 53% market share,' he said.
‘At £40 million per annum, the work equates to 1.1% of March 2014 revenues. We are not changing our forecasts as the volumes are similar to the current frameworks.’
Atkins upgraded on potential to bid for Balfour arm
Design and engineering company WS Atkins (ATKW) is being tipped by Numis as a potential bidder for Balfour Beatty’s professional services division.
Analyst Will Wallis upgraded the company from ‘add’ to ‘buy’ and placed a target price of £16.50 on the shares, which jumped 80p, or 6.3%, to £13.47 yesterday.
‘We think the financials stack up for Atkins to buy Balfour Beatty’s professional services division,’ said Wallis. ‘Management will need to make a judgment on cultural fit, and obviously Atkins is not the only possible buyer. However, with the potential for a more geographically balanced business, and we estimate 10% to 15% earnings per share enhancement, we expect management to give it close scrutiny.’
Given the opportunity he said the current share price was ‘an attractive entry point’.
Petrofac share price fall is overdone, says Investec
Oilfield services company Petrofac (PFC) has issued a ‘gory profit warning’ leading Investec to cut its target price by 11%.
Analyst Neill Morton retained a ‘buy’ rating but cut the target price from £14.75 to £13.15. Shares yesterday rose 18.6p, or 1.6%, to £11.96 after tumbling in Friday’s trading on news that net income for 2014 had been cut 13% to $80 million (£47 million) and 2015 net income had been reduced by 5% to 6%.
‘Following relatively uneventful results, a degree of calm seemed to have returned to the euro oil services sector. However, Petrofac has now surfaced with a gory profit warning. The good news is that it looks company-specific with little obvious read-across, other than the hit to sentiment,' he said.
‘We have reduced our forecasts below company guidance and cut our target price by 11%. However, the share price fall looks overdone. We still see valuation upside, although we understand if investors choose to stay on the beach [for the time being].’
Capita’s good start is already factored into the price
Organic growth forecasts at outsourcing giant Capita (CPI) are already close to being hit but the good news has already been factored into the price, according to Liberum.
Analyst David Brockton retained a ‘hold’ recommendation and a target price of £11.00, despite a trading statement stating the company had already secured 7% organic growth, having forecast 8% for 2014. Shares were yesterday trading up 9.8p, or 0.9%, at £11.12.
Brockton said the ‘bid pipeline’ meant the same growth could be achieved next year. Capita has already made two significant acquisitions in the last quarter at a combined cost of £50 million.
‘Capita is well placed to deliver another year of good organic growth as a result of secured wins. However, this positive is already reflected in the valuation,’ he said.