Broker tips: Spectris, Ferrexpo
Analysts at Berenberg dropped precision instrumentation manufacturer Spectris' recommendation from 'hold' to 'sell' on Tuesday, telling clients that "there may be trouble ahead".
The German broker said recent events had increased the downside risk to both earnings and valuation for Spectris, noting that in the near term, there was a combination of increased macro risk, lower-than-expected self-help savings, limited order visibility and a high, albeit "not unusual", second-half weighting (of 70.0%) to earnings before interest and taxes.
But Berenberg's concerns didn't end there, over the longer term, it now expects a "slower and more-complex turnaround" than previously thought.
"In our view, Spectris' valuation ignores these heightened risks," it said.
"Management's target of an 18% operating margin looks increasingly difficult to achieve, particularly without significant changes to the portfolio. Selling assets in this environment will be tough, particularly at valuations at or above Spectris’s trading multiple."
Berenberg, which also cut its target price on the firm's shares down to 2,050p from 2,440p, said it found "few positives" in Spectris' first-half statement.
The analysts also highlighted the fact that Spectris' organic growth of just 1% suggested "a material slowdown" in May and June, while pointing out that the firm's adjusted EBIT had been supported by around £3.5m of higher capitalised development costs and a £1m IFRS 16 benefit - meaning margins actually declined 20 basis points on a like-for-like basis.
Over at Barclays, analysts downgraded their recommendation for shares of Ferrexpo to 'equalweight', citing a myriad of factors on both the demand and supply side.
They were projecting a 15.0% rebound in iron ore supplies from the major producers over the back half of 2019 after a disruption-ridden first six months of the year and with Samarco set to return, they added that the outlook for pellets in 2020 was fading.
Demand for pellets from its customers meanwhile was "fading", with Ferrexpo's inventories having building in the front half of the year by the most since the company's flotation in 2007.
There were also currency headwinds to contend with as the Ukrainian hryvnia appreciated on a local cost base that was rising at a pace of 9.0%.
Given the downside risks to iron ore and pellet premiums, they downgraded their recommendation for the stock and cut their target price from 350.0p to 245.0p.