Broker tips: Berendsen, Wood Group, Hunting, Schroders

Credit Suisse downgraded its stance on commercial laundry group Berendsen to 'underperform' from 'outperform' and slashed the price target to 700p from 1,200p as its 2017-19 earnings per share estimates fall 17% to 31%.

CS said a lack of investment into the business over a number of years means it now requires a meaningful injection of capital over the next few years alongside a re-vamping of operational and IT processes.

"The management team has a strategy to implement change but we think the cost of this investment will lead to negative free cash flow for the next three years.

"Higher depreciation and interest charges, resulting from the additional investment, combined with on-going wage inflation will, we think, more than offset the benefits from the productivity benefits of additional investment."

The bank had previously been positive on Berendsen's track record of apparent profit & loss stability, strong balance sheet and cash generation. However, it now reckons the group faces a period of rising leverage, lack of cash generation and sluggish operational performance.

Berendsen's shares were also hit on Tuesday after Barclays cut the stock to 'underweight' from 'equalweight', pointing to elevated levels of execution risk and questions over the merits of a meaningful step-up in growth capex.

Wood Group

Shares in Wood Group came under pressure on Wednesday following a downgrade on its stock by Jefferies on the risk to its “progressive dividend” due to the merger with Amec-Foster Wheeler.

Jefferies downgraded the FTSE 250 company to ‘underperform’ from ‘hold’ and slashed its price target to 650p from 800p as it sees the deal with Amec will just “transfer the pain” rather than alleviate the risk to its dividend.

The broker maintains that that the deal would be a positive for Ace shareholders, Wood Group’s track record in mergers and acquisitions and balance sheet management would be tested by the merger as it aims to turnaround the company.

For the deal, Jefferies expects Wood Group to reduce the net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio from 1.9 times in 2016 to within a range of 0.5 - 1.5 times, and both delever and pay a progressive dividend following from Wood Group’s 2016 dividend of 33.3 cents per share.

It also sees a similar dividend issue with Amec after the deal goes through with limited free cash flow.

Hunting

Hunting's exposure to the US shale oil industry and its repaired balance sheet saw Barclays upgrade its recommendation on the shares to 'overweight'.

Barclays, which kept its price target at 650p, said Hunting stood out from its European listed oil services rivals due to its roughly 45% exposure to the North American onshore oil and gas market.

Having repaired its balance sheet and seen its operations turn the corner, "the only questions for us are the speed of the recovery and relative valuation", the bank said.

"We believe the recovery will likely be sharp, albeit for half the business, but as we move towards full speed in the US, the remainder should also start to improve."

With improving revenue visibility, promising earnings momentum and no longer any balance sheet concerns, analysts now believe the stock deserves a higher rating.

Schroders

RBC Capital Markets downgraded Schroders to 'sector perform' from 'outperform' and cut the price target to 3,300p from 3,400p, as it said the share price was near fair value.

RBC said that while Schroders continues to offer diversification, a best-in-class balance sheet and an accomplished management team, upside potential is more limited after a period of outperformance.

Schroders’ share price outperformed the sector in the third and fourth quarters of last year, up 14% and 11% respectively, against the sector up 9% and 1%, respectively.

"Our downgrade to sector perform has nothing to do with Schroders’ outlook, business model or management team, but instead we believe that after a period of outperformance the upside potential, while still positive, is more limited and no longer warrants a more positive thesis."

The Canadian bank said its valuation methodology is unchanged and it continues to value Schroders at a one-turn premium to the longer-term sector average multiples.

"We believe this is justified by Schroders’ diversification and the strength of the company’s balance sheet."