Broker tips: Chemring, Imperial Brands

Analysts at Berenberg hiked their target price on aerospace and defence firm Chemring from 200p to 235p on Wednesday, stating the group's recent full-year results had provided further evidence of the "improving quality and momentum" of the business.

• Berenberg said the strong growth in underlying revenues and profits, as well as solid operating cash generation, bode well for the firm's medium-term outlook - supported by a strong order book and upside from US programs of record.

The German bank highlighted that the "strong financial performance" had "rightly" driven a re-rating of shares, which were up by 22% over the past three months and outperforming the pan-European defence sector average of 6%.

"Shares now trade on 17x 2021 P/E, which is a 20% premium to the pan-European defence sector. We view this valuation as relatively full, preventing us from turning buyers, but would use any pullback as an opportunity," said Berenberg, which kept its 'hold' rating on Chemring unchanged.

Berenberg also trimmed its earnings estimates by 1-6% over its forecast period to reflect updated sales forecasts and a 40-50 basis point cut to operating margin due to mix and higher central costs.

The analysts' cash flow estimates were also lower due to higher capex given some underspending in 2019, which together with the recognition of £7m of finance lease liabilities related to IFRS 16 meant its net debt estimate rose to £83m in 2020 versus its previous estimates of £67m-76m for 2019.

Analysts at RBC Capital Markets upgraded their recommendation for shares of Imperial Brands from 'underperform' to 'sector outperform', hailing the tobacco manufacturer's multiple moves to "restore" credibility with investors, and bumped up their target price.

Such measures, the Canadian broker said, were some of the few levers left for management to pull.

Thus, Imperial's guidance for low single-digit sales and earnings per share growth in 2020 was now "realistic", unlike in previous years.

And the decision to exclude profits from disposals, pension credits and asset revaluations from its adjusted earnings before interest and taxes was a "good" thing, as was the promise to consider how to most appropriately treat restructuring past 2020.

On the flip-side, the company had yet to reset its dividend payout.

The analysts also remained "very wary" regarding the medium to long-term prospects for the tobacco industry, especially due to the uncertain regulatory environment, globally, for vaping.

The outlook for Imperial Brands was particularly fraught on that front, given the "underwhelming" performance of its own Next Generation Products, which includes vaping.

Nonetheless, all of those negatives were now reflected in its share price - too much so.

"We think that the share price sensibly captures our expectation of subdued revenue growth and declining margins for the foreseeable future," RBC said.

"Indeed, having updated our currency assumptions and trimmed our capital expenditure assumptions we increase our Adjusted Present Value derived target price to £18.0 from £16.0."