Broker tips: Aggreko, Keywords Studios, Contour Global
Most of Aggreko's problems are cyclical rather than strategic, HSBC said on Tuesday as it upgraded the generator hire company to 'buy'.
Many investors think Aggreko's troubles are caused by structural issues such as changing technology, new competition and overcapacity. But a resources sector slowdown has aggravated a decline in demand for temporary power since 2014, HSBC said.
"We think that much of Aggreko's woes are of a cyclical nature, rather than structural," the analysts said. "The supply chain is supportive of expecting such a recovery, bar the risks from a trade war led disruption."
The under-use of Aggreko's assets is also an opportunity because its equipment often lasts longer than the accounts assume, HSBC said.
"Under such a backdrop, the cost savings plan and improving resources sector demand make the revised strategic target of mid-teen ROIC (earlier 20% target, set in 2015) feasible," the analysts said.
Upgrading to 'buy' from 'hold' and raising their target price to 1,050p from 740p the HSBC analysts said: "If Aggreko moves from its current unloved status to the 'new management turnaround of a fallen angel' story, we expect the upside to be attractive."
Key risks to HSBC’s assumptions are trade wars that could hamper growth and receivables collection and contract churn driven by underinvestment.
Berenberg upped its price target on Keywords Studios to 2,150p from 2,060p on Tuesday, as it reiterated its 'buy' rating following the company's announced acquisition of Gobo Ltd and Electric Square, together Gobo, for £26m.
With Gobo expected to deliver around 15% organic growth and maintain high-20% EBIT margins, versus the Keywords group of circa 16%, Berenberg upped its earnings per share estimates by 1.0%- 6.5% for FY 2018-20 respectively.
Berenberg said the Gobo deal adds 170 developers to Keywords’ staff. Combined with the company's previous acquisitions of d3t, Sperasoft and GameSim, this grows its co-development staff by 38% to 610.
As a result, Keywords is establishing itself as a leading co-development player, despite entering the vertical only in May 2017, the bank said, adding that it expects M&A to continue to have a slight co-development and engineering focus in the near-term for two reasons.
"Firstly, we believe capacity those areas is relatively light versus the larger market opportunity, compared to the other verticals. Secondly, a core part of Keywords’ growth approach is to develop strategic outsource partnerships with its clients where it is embedded across multiple stages of, or the entire, game development cycle, providing a number of services.
Analysts at RBC Capital Markets believe Contour Global's strong operational asset base and its potential for value accretive M&A made investment in the firm a very appealing prospect.
RBC called Contour Global's investment case "compelling" on Tuesday, noting that the firm's current share price attributed minimal value to its development pipeline even as it upped its target price on the firm's shares from 310p to 325p.
The Canadian broker applauded Contour Global's recent acquisition of 250 megawatts of concentrated solar power assets in Spain. RBC felt the purchase was "significant in de-risking the Contour Global investment case", with operational assets now accounting for roughly 75% of its total enterprise value, which was up from 55% before than transaction.
Contour Global would now rely less on M&A transactions to achieve its 2022 EBITDA target, according to RBC, adding "more certainty" to the group's future earnings.
RBC was adamant that there was "limited downside" in its valuation, stating that the market had attributed "minimal value" to Contour Global's development pipeline or potentially value accretive acquisitions.
The analysts also reiterated their 'outperform' rating on the stock.