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Broker tips: BAE Systems, Forterra, G4S
Expecting major news flow from BAE Systems in the coming months, JP Morgan upped its target price on the defence, security, and aerospace giant to 600p on Wednesday.
Increasing its earnings per share estimates for 2018-20 by 1%/5%/6% to reflect a "better USD/GBP rate, a better-than-expected 2018 US defence budget and a slightly less cautious view of the margin dip in its air division over the next three years, JP Morgan saw fit to move its price target up from 550p.
However, the bank kept BAE at 'underweight', saying that it considered the contractor's valuation to be "quite full", with a lot of potentially good news already discounted.
"BAE might win large new contracts in the US, Middle East and Australia. Mostly these would impact sales in the 2020s but clearly contract wins are good news," the broker said.
"We believe the share price rally of the last three months has to some extent discounted the potential wins," JP Morgan added.
With Forterra's risk-reward prospects looking "less compelling", analysts at Citi chose to downgrade their stance on the heavy building materials supplier to 'neutral' from 'buy' on Wednesday.
Forterra's recent trading update "looked reassuring" to Citi, despite difficult weather and the group's plan to increase brick capacity around 16% by 2022-23 convinced the bank that medium-term volume growth, along with a reduction in operating costs from its new, larger facility, would support and drive further margin improvement.
However, Citi said that capacity constraints would likely limit near-term growth prospects, hence the downgrade. The bank said it reckoned earnings momentum over the next three years would be "less exciting".
As Forterra's stock was up more than 28% over the last year, Citi pointed to "limited gains" given the prospect of sluggish earnings growth in the near term.
Despite the downgrade, Citi upped its target price on the stock to 350p from 342p.
Credit Suisse reiterated its 'outperform' stance and 330p price target on security firm G4S on Wednesday, highlighting five reasons to be positive.
The bank pointed to accelerating organic growth, rising EBITA margins, improving working capital over time, expanding return on invested capital and incremental growth opportunities from the company's CASH 360 product.
"We do not think that the combination of these factors is fully reflected in the share price," CS said.
It expects organic growth to rise from a decline of 2% in the first quarter to a 4% jump in the second, and 5.9% in the second half of 2018 as comparables ease and the combined Indian/Middle East markets return to growth.
As far as margins are concerned, the bank forecasts a 64 basis points improvement from 2017 to 2020, driven by cost reduction programmes. "We expect circa 60% of operational efficiency programs to drop through to EBITA with the remainder reinvested into the business."
In addition, it noted that G4S has a strong position in a large and evolving end market. It expects EBITA in the US to more than double from 2017 to 2020 as new contracts are added and said "material" opportunities exist in the rest of the world and potentially in a tangible expansion of its currently small bank office outsourcing services.
"On a relative basis, GFS is trading near levels only seen during period of financial stress, severe operational weakness or during a significant cyclical rally. None of those environments is present today. As growth accelerates and ROIC rises we see potential for the multiples to re-rate."