Broker tips: Diageo, Abcam, Petrofac
Analysts at RBC Capital Markets downgraded drinks maker Diageo from 'outperform' to 'sector perform' on Monday, stating it was no longer "appropriate" to assume the firm's margins would grow faster than other consumer staples companies'.
RBC said in common with the rest of the European consumer staples sector, it assumes that the cost to compete for Diageo will increase as it spends to boost resilience in case of future shocks once it recovers from the coronavirus pandemic.
"We expect them to spend quite a lot of time thinking about the best ways to safeguard the resilience of their businesses," said RBC.
The Canadian broker said that was going to necessitate additional expenditure to ensure that operations incorporate "more deliberate duplication and redundancy than has been the case".
"We expect Diageo to be as caught up in this trend as anyone else," added RBC, which also lowered its target price for the firm's shares to 2,400.0p from 3,000.0p.
The analysts also said that they now expect the group's underlying earnings margin will decline by ten basis points per year from 2023-2030, the same as for other stocks in its coverage.
Still at RBC, analysts upgraded their rating on Abcam from 'sector perform' to ‘outperform’, despite the life sciences specialist warning on revenues.
The AIM-listed firm said on Monday that revenues for the year to 30 June 2020 would be between £14m and £16m lower than predicted, after the coronavirus pandemic hit markets and closed labs across Europe. The antibodies specialist did, however, say it had ramped up its supply chain to meet higher demand for products that are being used to research the virus.
RBC said the trading statement was in line with its expectations and that the update on increased customer activity was “reassuring”.
It continued:“Covid-19 has catalysed consensus forecast adjustments we had been awaiting, and we upgrade to ‘outperform’ based on the sustainable acceleration in revenue growth that we believe is achievable.
“Today’s trading update implies that most updated forecasts are in the right ballpark for 2020, in our view. Commentary around recovering demand, coupled with the company’s strong liquidity, should mean that most investors will look to the second half of 2021, or even the 2022 full year, for full recovery, with qualitative operational and strategic progress sufficient until then.
“Therefore, while we believe that most forecasts still fail to adjust for the ramp in underlying costs, this has become irrelevant in light of the much larger Covid-related adjustments that distort near-term numbers.”
The bank maintained its 1,300p one-year price target on Abcam, but added: “We believe that there is 100% implied upside over the three years.”
Analysts at JP Morgan stuck to their 'neutral' recommendation for shares of Petrofac, despite news that the Abu Dhabi National Oil Corporation had cancelled its $1.5bn engineering, procurement and construction contract for the Dalma Gas Development Project.
That work had been awarded to Petrofac Emirates, the company's joint-venture with Sapura Energy, just over two months before.
"It is rare that multi-billion contracts are terminated, and given this is Abu Dhabi, traditionally one of the most competitively priced markets for EPC, highlights the extreme stress the industry is facing."
Such news wasn't good under any circumstances, but especially now given the recent drop in its backlog, they said.
"Overall, we are incrementally more cautious on PFC post the Dalma cancellation, but valuation is low and the [balance sheet] offers support, so we maintain our [neutral] rating," they added.
The analysts conceded that the loss of Dalma meant that their revenue estimates for 2021 and 2022 now had less cover and cut their target price for Petrofac's shares by 27% to 300p.