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Broker tips: Ashtead Technology, Spirax-Sarco, Petrofac, Tesco

By Iain Gilbert

Date: Friday 01 Dec 2023

Broker tips:  Ashtead Technology, Spirax-Sarco, Petrofac, Tesco

(Sharecast News) - Analysts at Canaccord Genuity downgraded subsea equipment rental group Ashtead Technology to 'hold' from 'buy' on Friday but hiked its target price on the stock from 475.0p to 615.0p following what it called "the big one".
Ashtead Technology announced on Thursday that its £53.5m acquisition of ACE Winches, a major mechanical rental business headquartered in Aberdeen, was at an attractive multiple of 3.9x 2023E enterprise value/underlying earnings, well below its own multiple, and unsurprisingly it has seen "a significant bounce" in shares following the transaction.

Canaccord Genuity noted that whilst the acquisition was being funded from an existing revolving credit facility, and debt ratings will remain conservative following the deal, it believes that any further transactions in the near term were likely to be "much smaller".

"We were previously top end of consensus and our updated numbers are now more in the middle of the range: we are moving earnings per share up 8%/16%/20% for 2023E/24E/25E, with the majority of that coming from the impact of the ACE acquisition. We note that our forecast net debt/EBITDA drops to 1.0x by end 2024, implying the group will be in a similar position in 12 months' time to today pre- the ACE acquisition," said the Canadian bank.

"We base our price target on 8.0-8.5x 2024E EV/EBITDA. At our new 615.0p price target the stock would trade at 12.1x/8.5x 2023E/24E EV/EBITDA and 21.1x/16.1x price-to-earnings, which we believe is appropriate given its attractive growth profile, robust balance sheet, potential for further accretive acquisitions later in 2024 and growing track record."

RBC Capital Markets has slashed its target price for Spirax-Sarco Engineering from 9,000.0p to 8,000.0p and reiterated an 'underperform' rating on the stock, saying the valuation still isn't cheap despite its underperformance this year.

"One of the most frequent investor questions we get at present is whether Spirax is now interesting give the share price weakness. Forecasts may be finding a bottom (after falling ~25% YTD), but we still see the valuation as relatively high for a business with some structural challenges," the broker said in a research note on Friday.

Earnings forecasts for Spirax had dropped as a result of a weaker backdrop in Biopharm, Semis and general industrial production. A rebound is expected next year, with the Watson-Marlow unit (which makes peristaltic pumps and associated fluid path technologies) being the key driver.

"The 20-year organic sales CAGR of Spirax has been twice the sector level. However, in the last decade the mix of this growth has become heavily weighted to Watson-Marlow, with the rest of the business only marginally outgrowing our wider coverage group," RBC said.

"With improved structural drivers across most of our wider coverage group over the next few years we forecast a growth rate for Spirax that is less differentiated from our coverage group, and ex Watson-Marlow it is in line."

Analysts at Berenberg placed oil and gas business Petrofac 'under review' on Friday, stating the group was now "precariously positioned".

Berenberg said Petrofac's equity was down by nearly 70% year-to-date and its bonds trade at a deep discount to par. The analysts noted that concerns were centred on liquidity, with financing facilities of roughly $250.0m due to mature in October 2024, and whether bond covenants have been met.

"We expect the company's trading statement on 20 December to address some of these concerns, but whether liquidity has materially improved remains highly uncertain," said the German bank, which also highlighted that the company may struggle to obtain the performance bonds required by clients for new awards, and clients may reduce future awards until these issues can be resolved.

"In a worst-case scenario, Petrofac may be forced to renegotiate its financing agreements, potentially leaving shareholders significantly diluted. Alternatively, if the company is able to overcome this liquidity crisis, we believe the outlook could be brighter and valuation would increase significantly," said the analysts.

Berenberg stated Petrofac's backlog was growing, core Middle Eastern markets were seeing high activity levels and margins should rebuild as legacy projects are finalised. However, given what it called "the inherent uncertainty about the outcome", it had opted to place Petrofac under review and remove its price target and rating on the stock.

JPMorgan Cazenove downgraded Tesco on Friday to 'underweight' from 'neutral' and cut the price target to 230.0p from 240.0p as it took a look at the European food retail sector, highlighting its cautious stance.

The bank noted that its concerns since it downgraded the sector back in September were based on disinflation triggering lower like-for-like sales, impacting margins and valuations. JPM said it sees this as recurring in 2024/25.

"We see Tesco's outperformance previously linked to executed self-help and macro tailwinds, therefore unlikely to be structural/sustainable over time without incremental investment," it said.

The bank noted that Tesco shares are up 25% year-to-date, versus its price target indicating 15% downside.

"Long positioning is crowded, whilst Tesco is now past peak positive newsflow/LFLs/margin/free cash flow/capital return cycle," it said.

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