Broker tips: Ultra Electronics, Synthomer
Shares of Ultra Electronics hit a fresh 52-week high after analysts at Credit Suisse bumped up their target price on the shares of the defence electronic outfit in the wake of its latest half-year numbers.
The Swiss broker raised its target from 1,900.0p to 2,250.0p following what it said had been a "robust" first six months of 2019 for Ultra, with underlying operating profits and cash conversion both printing ahead of analysts' forecasts.
Driving the higher target, they raised their estimates for the company's earnings before interest and taxes for 2019-21 by 2.0%, 3.0% and 3.0%, respectively, putting then 7.0%, 9.0% and 11.0% ahead of the Refinitiv consensus.
Yet the key fundamental driver was the company's late-cycle exposure to the US Department of Defence with Ultra "typically" lagging US outlay increases by 18-24 months, leading the broker to reiterate its view that the firm was capable of generating "robust" organic revenues over the next three years.
Credit Suisse also highlighted Ultra's order book, which was then already at an all-time peak.
Furthermore, the analysts said: "we also believe that EBIT margins can remain at industry leading mid-teen levels, as operational leverage compensates for further R&D investment. Lastly, we assert that cash conversion can increase in 2020 and 2021, particularly as unbilled receivables are increasingly invoiced in line with US defence growth."
Credit Suisse remained at 'outperform' on the shares.
Analysts at Berenberg reiterated their 'buy' rating on speciality chemicals maker Synthomer on Thursday following the group's "robust" second-quarter results.
Berenberg praised Synthomer for its "pleasingly uneventful" first-half results in what it labelled a "difficult period" for the chemicals sector.
"Shares are now well into their fifth year of continued improvement in PBT, and the valuation would imply a magnitude of downgrades that are simply not materialising," said Berenberg.
The German bank said Synthomer's adjusted pre-tax profits of £70.0m appeared to have been "broadly in line with expectations" and highlighted that "robust margins" in nitrile latex seemed to have offset the impact of recent insolvencies in the paper industry, a key user of styrene-butadiene.
However, the broker lowered its target price on the group's shares to 360.0p from its previous 470.0p mark on the back of Synthomer's recently announced rights issue, higher pensions liability and lower estimates for its core business.
Their lower estimates for the company's sales and earnings mainly reflected the purchase of Omnova and assumed a 1 December transaction close.
The analysts "substantially" reduced their margin and volume estimates for Synthomer's styrene-butadiene rubber latex business to reflect the ongoing weakness in the paper industry and also trimmed their volumes forecasts for the coatings-orientated functional solutions segment, with the net underlying downgrade equating to roughly 4% of underlying earnings.
"This pales into insignificance compared with some of the cuts to heftier estimates for industrial chemicals and is clearly at odds with robust, synergy-driven earnings growth and a single-digit P/E."