Broker tips: Centrica, IWG, Spectris, IMI

British Gas owner Centrica got a boost on Tuesday as Goldman Sachs upped the stock to 'buy' from 'sell' and lifted the price target to 176p from 174p saying the underperformance is overdone given the commodity outlook and the fact that the worst of UK regulatory risk is behind us.

GS noted that the shares have fallen around 40% over the last two years, weighed down by rising competition and increased political regulatory scrutiny within UK energy supply.

"What we believe is being overlooked is the impact of higher commodity prices. Year to date, gas and power prices have rallied 40% and 35%, respectively," the bank said. "Even taking a further £50m reduction in UK energy supply, we believe that the higher commodity prices add 26% earnings per share growth out to FY2020. This allows for the company to deliver a free cash flow yield (post total capex, pre dividends) of greater than 10% and cover its 8.4% 2021E dividend yield (27% premium to peers).

"With the stock trading at 9x 2021E price-to-earnings (a 20% discount to peers), we believe that Centrica offers good value at these levels."

Goldman said its EPS estimates are 14% and 23% ahead of Reuters consensus for FY2019 and FY2020.

The bank also noted Ofgem's recent price caps, which were in line with consensus. "We believe this event reduced sizeable downside risk and is before any potential moderation that could occur in the coming months."

IWG, formerly Regus, tumbled on Tuesday as Credit Suisse cut the stock to 'underperform' from 'neutral' and chopped the price target to 200p from 245p.

"We see risks to near- and mid-term reported numbers as growth accelerates, earnings per share vulnerability as and when the current cycle comes to an end, tangible pressure on reported earnings numbers from the implementation of IFRS16, and the potential loss of operational momentum following the departure of the CFO/COO."

IWG announced earlier this month that chief financial officer and chief operating officer Dominik de Daniel was leaving the group to pursue other opportunities, with Eric Hageman appointed as CFO.

CS said the implementation of the IFRS16 accounting standards won’t change the economics of the business but will lead to an 18% reduction in 2019 reported EPS due to the phasing of office centre growth.

"Accelerating network growth will, we think, also put pressure on earnings and, while we see the strategic value of building the network in the longer term in what remains a structurally growing market, this will compound negative earnings momentum."

Exane BNP Paribas upgraded Spectris but downgraded IMI on Tuesday as it took a look at the UK capital goods sector.

Spectris was lifted to 'outperform' from 'neutral', with the target price bumped up to 2,700p from 2,550p as Exane said recent weakness was overdone. "Spectris’ end markets have grown, but the shares have continued to underperform," it said.

Exane noted that Spectris has underperformed the UK industrials sector over the past six months, mainly due to a sector relative de-rating on worries around an EU short-cycle growth deceleration and an underwhelming first-half trading performance.

In addition, the bank said superior return on capital employed and growth outlook at the Materials Analysis segment is underappreciated.

"At the same time, Spectris screens as an attractive takeout candidate for private equity, acting as a free option for SXS shareholders."

Exane cut IMI to 'underperform' from 'neutral' and reduced the target price to 1,000 from 1,150p, highlighting structural issues at all three of its divisions, which it said will limit IMI’s ability to grow with the sector.

It also said the firm's Critical Engineering division had significant exposure to fossil power markets, Precision Engineering lacked the scale to be truly competitive and noted that Hydronic Engineering had struggled to grow for years.