ShoreCap hails Weir Group's decision to sell oil and gas unit, upgrades to 'hold'

Analysts at ShoreCap raised their recommendation for shares of Weir Group from 'sell' to 'hold' following the company's announcement that it was looking to divest its Oil and Gas unit.

Weir's other main businesses, aside from Oil & Gas, are its Mining division and its ESCO unit, the world leader in ground engaging tools.

In a research note sent to clients, they said: "Given our concerns over the cyclicality of O&G and now managements addressing the issue with the 'intention to maximise value', we believe now taking a long-term/neutral view is justified."

They also revised their target price for the shares from 1,320.0p to 1,500.0p, using a range for the shares' price-to-earnings ratio of 14.5-16.5 based on their estimates for the company's adjusted 2021 earnings per share.

That included a 10% mark down of its 2020 EPS estimates for the group from 93.9p to 84.1p given the "more challenging O&G market than previously expected", including the impact of the COVID'-19 virus, whereas Weir's guidance had assumed that "underlying demand does not change".

"The O&G tangible asset value of £435m provides a starting point for valuation of the business, but we note that this is based current market conditions," they added.

Alongside its full-year numbers published on 27 February, Weir had announced a £546m impairment charge, worth roughly 43% of the O&G unit's 2018 asset value.

"Given the current limited visibility in O&G, we expect Weir to follow a medium to long-term disposal plan awaiting improvement in market conditions for the business, thus likely to deliver an acceptable valuation to facilitate the Group’s future development and deleverage."