Broker tips: Smiths Group, Meggitt, Coca Cola Hellenic

After US activist investor ValueAct built a near-5% stake in Smiths Group, Credit Suisse calculated a 1,500p-per-share break-up value for the aerospace engineer.

According to reports, ValueAct, an $18bn activist fund which has previously influenced the direction of US companies including Microsoft, Valeant Pharmaceuticals and Motorola, built the stake on Monday, less than a week after its 5.5% stake in Rolls-Royce came to light.

Credit Suisse pointed out that ValueAct becomes the third activist on the Smiths shareholder register, which already includes Harris Associate, with a 7.4% stake, and RWC, with 1.4%, making a likely combined holding of over 10% by activists.

Given the conglomerate corporate structure of Smiths Group, the Swiss bank felt a potential break-up valuation scenario was appropriate, calculating the sum of the parts of the organisation.

"In this scenario, we value all divisions except John Crane at peer average multiples plus a 20% premium while John Crane is valued at an average UK Industrials multiple," analysts wrote, adding the view that a John Crane disposal was unlikely given its asbestos liabilities.

Also within the break-up scenario, it was assumed that £800m of the disposal proceeds would be contributed into the pension fund as a remediation on top of an assumed circa-£800m of net debt and £150m John Crane asbestos liability.

The multiples implied for the divisions in this scenario are 17.8 times 2016 EV/EBITA for the medical arm, which is consistent with recent take-out multiples of Covidien and CareFusion, 16.1 times for the Detection business, 13.4 times for Interconnect and 13.8 times for Flex Tek.

Taking the above scenario and assuming current balance sheet value for pension deficit "would increase valuation to circa 17,500p per share".

Charles Stanley upgraded Meggitt to ‘accumulate’ from ‘hold’, citing recent share price weakness.

“Following share price underperformance year-to-date, the valuation looks more realistic and Meggitt offers an above sector average dividend yield supported by improving free cash flow,” analysts said in a note on Tuesday.

The brokerage noted that Meggitt’s share price was down 8.2% over the last year, having lost 12.3% in the last three months.

Analysts said the company’s first-half results were slightly ahead of expectations and organic sales growth of 3% reflect good growth in the civil aerospace division and a better-than-expected performance in its military arm, partially offset by ongoing challenges in the energy market.

“Reassuringly, Meggitt remains on course to achieve low to mid-single digit organic sales growth in 2015,” said Charles Stanley.

It said that although Meggitt continues to face near-term headwinds, investors are likely to be relieved that the group remains on track to deliver full-year guidance, underpinned by the benefits of self-help initiatives, a supportive share buyback programme and early signs of a stabilisation in defence budgets.

Shore Capital said it expected Coca Cola Hellenic to report solid volumes but be hit by foreign exchange headwinds when it delivers its first half results next week.

The brokerage has a ‘sell’ rating on the drinks producer and a price target of 1,306p, but warned it could reduce this based on the economic environment in a number of its markets.

Shore Capital said it expected group volumes to lift by 7% to 1037.7m units from 970.2m units.

Earnings before interest and tax were expected to decline compared with the first half of 2014 to €155.4m from €164.1m.

Analyst Phil Carroll said Coca Cola’s second largest market by volume, Italy, would deliver low single-digital volume growth, aided by additional selling days.

“The big unknowns for us are how the group is coping with the adverse impact of FX rates, which continue to present a significant headwind on both a transactional and translational basis, how much benefit is coming through from lower input costs and the level of efficiency gains management is driving through the business,” Carroll said.

Emerging markets in particular offered limited visibility as foreign exchange markets had been adverse, especially in Russia and Nigeria.

The analyst said its negative stance was softened to some extent by surprising results from several consumer companies and Coca Cola’s first quarter results.