Broker tips: Shire, GKN, IG Group
By Renae Dyer
Date: Wednesday 07 Dec 2016
(ShareCast News) - UBS downgraded Shire to 'neutral' from 'buy' and cut the price target to 5,000p from 5,600p saying a tougher environment for expensive orphan drugs was likely to constrain performance.
This, and other issues such as low return on invested capital and the 2023 Vyvanse patent expiry, offset around 11% non-GAAP earnings per share compound annual growth rate from 2016 to 2021, impressive rare disease research and development and the great launch of the dry eye drug, Xiidra.
In addition, the bank said Shire's hemophilia business faces potential competition, which may have two effects.
The company's established drugs may be slowly out-competed by news drugs, and the new drugs may destabilise the current oligopoly, prompting more price competition between established drugs.
"Shire looks cheap on a medium-term price-to-earnings growth basis, but, in our hands, expensive-to-fair on a discount cash flow basis even if we lower beta to bring weighted average cost of capital closer to the sector average."
GKN got a boost as Bank of America Merrill Lynch upgraded its stance on the stock to 'buy' from 'neutral' and upped the price target to 365p from 350p.
"As we move into 2017, we believe GKN provides one of the strongest earnings growth profiles in the sector, through both organic improvement and restructuring," Merrill said, adding that the valuation has been weighed on by deteriorating sentiment in aerospace & autos end markets.
However, the bank said the stock's discount to peers has grown too wide and is now attractive. It noted the shares are now trading a 33% discount to the benchmark Stoxx 600 index 12 months forward versus its 10-year average discount of 14%.
"We think this valuation discount is extreme, and is an attractive entry point in the context of the strong earnings growth we expect relative to the rest of the sector."
BofA ML said it sees top-line deceleration but bottom line acceleration. It said organic growth in Aerospace should remain low single digit organic 2017-18, as military improves and civil deteriorates. However, it sees a stronger earnings profit as the company continues to improve profitability on A350XWB and Fokker margins.
"Despite slower IHS' production outlook, Driveline should continue to outperform the market, in our view, and earnings should benefit from the group-wide restructuring programme and non-repeat of exceptional cost."
Citigroup downgraded IG Group to 'neutral' from 'buy' and chopped the price target to 470p from 950p after the Financial Conduct Authority announced plans on Tuesday to tighten the rules around contract for difference products.
"We see the move by the FCA as having put the introduction of leverage limits on the regulatory table. We do not believe this was something being considered by other regulators: rather, we have seen other EU regulators use their powers to ban specific firms where they deem appropriate, rather than make sweeping changes to the whole industry."
Citi said the 38 % drop in the IG share price on the back of the news was justified as it noted that key proposals include leverage limits, restrictions on financial promotions and enhanced disclosure requirements.
The bank pointed out that spreadbetting and contracts for difference accounted for 51% of group revenue in FY16. It cut its full-year 2018 earnings per share estimate to 37p from 55.5p to reflect a drop of around 30% in UK revenue year-on-year from FY17 to FY18.
Citi said the introduction of leverage limits will lead to reduced trading activity, at least in the short term.
"We think it unlikely that clients will seek to place more margin in order to still gain the same nominal exposure, but will rather accept a lower exposure for the same amount of margin placed," it said.
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