Broker tips: National Express, Drax, BAE Systems

Investec has upgraded National Express to 'buy' from 'hold' and hiked the price target to 385p from 335p.

The brokerage said it is turning positive to reflect higher expectations from Alsa, increasing capital allocation to more attractive international markets, particularly North America and Germany, and FX tailwinds.

Investec said it had previously failed to reflect the consistent level of acquisitions in its valuation and the scope to redeploy capital from the challenging UK market.

It said the company's full-year 2016 results were better than it expected at almost every level, due mostly to the outperformance of Alsa, acquisitions and FX.

"Specifically, we had anticipated that Alsa would lose market share in Spain and that the routes that were retained would see margin erosion. This has not materialised, with routes retained at attractive margins, resulting in a margin of 14.2% compared to our 13.2%."

The performance in North America was also better than Investec expected, mostly thanks to FX but also as eight acquisitions added 1,110 school buses and 450 transit vehicles.

Drax

Power generation company Drax was under the cosh after Morgan Stanley downgraded its stance on the stock to 'underweight' from 'equalweight', saying there are more attractive opportunities elsewhere.

MS said that although the company's transformation away from merchant generation is progressing and the acquisition of Opus Energy should breathe new life into it, Drax remains geared to commodity price moves.

The bank pointed out the stock is exposed to the UK power and gas price with around 15 terawatt-hours per annum of power price exposure.

MS said high operational leverage means a £5/Megawatt hour move in power impacts its discounted cash flow valuation by 20% and there is still a high correlation to the oil price.

It said the retail business has grown impressively over the last few years, but even there growth pales in comparison to a big commodity price move.

In addition, MS said that with management talk of further growth plans, it is hard to envisage a dividend upside surprise.

The bank sees better opportunities elsewhere in the UK and highlighted SSE as offering a lower risk and attractive yield.

MS upped its price target on Drax to 325p from 310p.

BAE Systems

Analysts at Credit Suisse bumped up their target price for BAE Systems to incorporate the firm´s recently-releases 2016 full-year numbers and its latest financial guidance.

As regards the defence contractors's 2016 financials, earnings per share were 2.0% ahead of analysts' estimates and at 1.54bn pounds net debt was below those same forecasts as the company churned out more cash than anticipated.

The Farnborough-based aerospace and defence group also guided towards a rise in underlying earnings per share in 2017 of between 5.0% and 10.0%, which was roughly in-line with the consensus figure.

Assuming a pound-US dollar exchange rate of 1.25 against 1.30 before and lower financial costs, operating income in 2017 would be largely unchanged from Credit Suisse's prior estimate, but the 2018 figure would be 1.0% higher and 4.0% more in both 2019 and 2020, the Swiss broker said.

On the basis of the above, and using a sum-of-the-parts methodology, Oliver Brochet raised his target price from 520.0p to 610.0p.

Brochet also factored in a higher enterprise value-to-earnings before interest and tax (EV/EBIT) multiple of 11.8, versus 10.5 before.

That increased multiple was a reflection of the more favourable prospects for the US business and in-line with that of its US peers.

BAE shares were then trading at a 27.0% discount to its US rivals in terms of its 2018 price-to earnings (P/E) multiple, in comparison to an average discount between 2009 and 2016 of 24.0%.