Broker tips: Melrose Industries, John Wood Group
Analysts at RBC Capital Markets stood by their 'top pick' rating on London-based turnaround specialist Melrose Industries on Friday, stating that "self-help" was set to remain the key driver of the group's value enhancement.
RBC expects Melrose's first-half figures to be in line with expectations, with a 6% decline in auto sales to be somewhat offset by cost savings, and noted that the second half of the group's trading year held plenty of upside potential as auto comparatives became easier.
The Canadian broker also pointed out that it did not see forecasts in automotive at Melrose needing "a significant pick up" in the run rate of auto production, but more simply just a stabilisation at lower levels.
With Melrose's aerospace unit acting as "a continued buffer", with strong sales growth having been reported across the peer group in the first half, RBC forecast a 2% increase in the unit's organic sales, with first-half margins at 8.4%.
Overall, RBC expected first-half group sales of £6.1bn from Melrose, underlying earnings of £500m and headline earnings per share of 6.2p.
Looking forward, although RBC pointed out that Melrose's management tends to allow a bit of leeway in their outlook comments, it still saw ample potential upside in the second half.
"We continue to see Melrose as an attractive self-help story and believe that markets worries around automotive risks are overdone creating a highly attractive valuation."
Over at Berenberg, analysts lowered their target price on shares of energy services company John Wood Group from 590p to 540p on Friday, but said the company's underlying progress over the first half of 2019 was "sound".
Berenberg, which reiterated its 'buy' rating on the firm's shares, noted that after a sharp rally at the start of June, helped by a "positive" pre-close trading update, Wood had now given up all its gains and was trading at a decade low.
Wood's first-half results were "mixed", with revenues being weaker than expected but adjusted earnings before interest, tax, depreciation and amortisation and earnings per share coming in "slightly ahead" of consensus on the back of improved margins.
However, the German broker said that while Wood's first-half results were "light", particularly on revenue, with the solid progress being made on margins and its full-year targets remaining "within reach", it felt confident of the group's future, assuming a stable macro environment.
In Berenberg's view, underlying cash generation in the first six months of the year was "solid" and the group's valuation had since become compelling, with the stock trading on 5.4 times' its estimated 2020 enterprise value/EBITDA, with a 7.9% covered dividend yield.
Looking forwards, Berenberg said the main changes to its estimates were below the line, with higher tax and interest charges.
"Given the nature of the business and a half-year reporting structure, there are limited positive catalysts to drive the shares in the near term, but we see the stock as being too cheap."