Questor share tip: Weir a hold as SocGen upgrades

Weir Group
£26.77
Questor says HOLD

Weir Group [LON:WEIR], the engineering firm which provides pumps and valves to the mining and oil industries, has been upgraded by one of the largest investment houses.

Alasdair Leslie, analyst at Societe General, said the upgrade was due to the prospect of stronger earnings momentum in Weir’s oil and gas division, spurred on by the boom in shale in North America where We is well positioned.Weir’s oil & gas business makes up 40pc of the group’s total sales, of which 75pc are focused in North America. Weir considers itself in the top spot in the US to provide pumps to the fracking industry.Therefore,any further growth in the North American shale sector will benefit Weir.

The Glasgow-based company specializes in making pumps used to extract gas from fracking sites. The process, also known as hydraulic fracturing, requires powerful pumping equipment to work in horizontal well holes under high pressures..

Mr Leslie said that rig operators in the US were now drilling non-stop over a seven-day week to hit their targets.

This increase in activity would benefit Weir as the relentless schedule can wear out the pumps up tothree times faster than normal.Replacing such equipment accounts for roughly 70pc of Weir’s after market business.

Mr Leslie said it was likely that capacity shortages could begin to emerge from the start of 2015, requiring more rigs to increase production further beyond the end of the year,creating even more demand for new equipment.

“We believe a new-build cycle is increasingly within reach with the equipment suppliers such as Weir amongst the key beneficiaries,” Mr Leslie said.

Mr Leslie has raised his rating on the group to'hold’ from 'sell’ and lifted the price target on the shares to £26 from £23.

“Based on the upside risks emerging in oil & gas and the attractive long-term structural growth potential, we accept a negative stance is no longer justified and we upgrade from Sell to Hold,” he said.

The Scottish engineering business has also benefited from the decision to walk away from a deal to buy rival Metso, Mr Leslie said.

Last month Weir made a second bid of £3.66bn for rival Metso, which was rejected by the Finnish company’s board., Weir said it believed the proposal was compelling and was not prepared to stretch itself further financially, and would not be pursuing the company further “at this time”.

Mr Leslie backs the decision to walk away from the Metso deal, claiming it would have diluted Weir’s most profitable business.

However, the difference between the takeover codes in Finland and theUK means Weir could still return with a revised offer should it change its mind in the near term.

Weir also has exposure to mining, where companies have been reining in spending, which has threatened the company’s earnings from the sector.

However, Mr Leslie said Weir’s “execution through 2013 was undeniably strong” in this sector, with orders declining just 1pc organically, and while new orders may have dropped, he added that “aftermarket growth should remain positive”.

With shares trading on 18.1 times forecasts earnings and offering a forecast dividend yield of 1.4pc in the year ending December 2014, there still appears little value in these shares.

The shares are already up nearly 25pc this year and Questor agrees with ScoGen and would maintain a 'hold’.