Broker tips: CRH, Amec Foster Wheeler, BAE

Societe Generale downgraded its recommendation on building materials group CRH to ‘hold’ from ‘buy’ following the stock’s outperformance.

The bank said CRH’s equity story is still attractive, but after the 31% year-to-date outperformance versus the broader market, the medium-term growth potential is already captured in the share price.

“We still like its value-creating M&A strategy and expect organic growth momentum to continue. But we believe the current stock price already factors in the medium term growth potential.

“In our view, management’s 2016 guidance is easily reachable. We forecast FY16 EBITDA at €3.2bn and expect net debt/EBITDA to be 1.9x at year-end.”

SocGen said the company reported a good set of numbers on Thursday, with earnings before interest, tax, depreciation and amortisation of €1.12bn, slightly ahead of the pre-trading update figure of €1.1bn in July.

The bank noted CRH has been one of the best-performing stocks in the building materials space, gaining 25.3% year-to-date versus the Stoxx Europe 600’s return of -5.7%.

The bank lifted its price target on the stock to 2,700p from 2,430p.

Morgan Stanley upgraded Amec Foster Wheeler to ‘overweight’ from ‘equalweight’ and bumped up the price target to 700p from 500p saying restructuring should outweigh disposals.

The bank attributed the price target lift to increased confidence that the new CEO will drive a better earnings and returns outlook through restructuring than it previously expected.

“The new savings cost plan, likely to be announced at the strategy update on November 15, should offer more than enough scope to offset the loss of approximately £80m earnings before interest, tax and amortisation associated with £500m of asset disposals."

The bank said it expects the new CEO to focus on monetising the significant cost savings potential it sees, in addition to the existing cost savings plan.

MS forecasts £100m of further annualised savings starting from the first half of next year, with full impact in 2019.

“We expect the stock to re-rate as the cost savings story develops and the cycle continues to improve,” it said.

In terms of downside risks, MS said balance sheet concerns may return if the planned £500m of asset disposals does not go ahead.

A further risk is that the cost savings potential is less than it assumes and the market begins to price this in.

Berenberg upgraded BAE Systems to ‘buy’ from ‘hold’ and lifted the price target to 580p from 520p.

The bank said it expects a material order book uplift, an improving cash profile in 2017 – with potential upside to guidance – and a secure progressive dividend across its forecast.

“We anticipate a material order intake, which could generate a 10-20% uplift to the £36.6bn order book (as at H1 FY 2016).”

Following the UK parliamentary vote in favour of funding the Successor programme, Berenberg expects an award in excess of £1bn, possibly as early as September, to reflect the commencement of the production phase for one year.

In addition, it anticipates the renewal of a five-year Saudi support contract, the total value of which it estimates at around £7bn, and an original equipment order for an additional 48 Typhoon aircraft, which it values at around £4bn.

The bank lifted its earnings per share estimates for 2016/17/18 by 5%/8%/8% respectively to reflect the first-half results, FX profit tailwinds from post-Brexit sterling weakness and a healthy US market where the book-to-bill ratio is strengthening.