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Broker tips: Weir, Rank, Esure
(WebFG News) - Following Weir's acquisition of US mining tools-maker ESCO, and the announcement of its intention to sell-off its Flow Control business, analysts at Credit Suisse approved of the course the deal had set the company on, in terms of revenue and market share expansion.
Regarding the ESCO deal, Credit Suisse expects Weir's revenues to grow 10% in 2019 and that, by 2020, the Scottish firm should have achieved two-thirds of its £21m of targeted cost synergies.
Credit Suisse highlighted a great deal of potential if Weir was able to utilise its service network to build up ESCO's position in Mexico and Africa; however, it noted this would require market share gains from its already high global level of 40%.
"Strategically, we like the deal as it increases the revenue share of Minerals, the highest multiple business, and for the opportunity to expand ESCO into regions where Weir has a strong service presence," the analysts added.
Elsewhere, Weir's message on pricing was unchanged at for "low single-digit increases for 2018".
Nevertheless, despite management highlighting that its year-to-date oil and gas mix had been weighted slightly more towards the original equipment side of things, which itself has slightly lower margins than the oil and gas aftermarket trade, Weir did reiterate guidance for mid-teens price increases on that side of the business.
Overall, Credit Suisse upped its target price on Weir to 2,300p from 2,200p while reiterating its 'neutral' stance on the shares.
It's been a tough year for Rank, said analysts at Canaccord Genuity on Friday, and with tighter regulations, some seriously strong competition for its London casinos and its chief executive jumping ship, the broker has slashed its target price on the shares.
Group revenues at Rank were flat in its first trading half, but began to head south in the three months leading to 31 March, as poor performances from its London Casinos helped drive group revenues down 2% year-on-year.
Grosvenor Casinos was down by 9% in its third quarter, impacted by lower admissions and a £1.5m hit from VIP players, something Canaccord said should even out, in the long run, but it was also clear to its analysts that Grosvenor was still under-performing in London, and pricey refurbishments at two of its major properties in the capital had yet to deliver the uplift in activity Rank had anticipated.
Rank's digital operations continued to perform well through its most recent trading quarter, revenues up by 17%, in line with Canaccord's expectations, and despite Mecca Bingo remaining soft, down by 2%, tight cost control has kept it "very much on track" in profit terms.
Overall, management expects full-year operating profits to be in the vicinity of £76m to £78m, versus Canaccord's previously forecast £82.5m figure, leading the broker to reiterate its 'hold' rating on Rank, but drop its price target on its stock from 255p to 200p.
"This is another disappointing trading update from Rank," wrote Canaccord analyst Simon Davies. "The backdrop for its land-based venues is challenging, with a weak consumer spending backdrop, tightening regulation, and in the case of London Casinos, some strong competition - Hippodrome, Aspers Stratford etc."
"And while the impact from weather/VIPs should be non-recurring, we think it is going to take time for the new management to drive an underlying recovery," Davies concluded.
Esure's low-risk footprint looks undervalued, Peel Hunt said on Friday as it bumped the stock up to 'buy' from 'add' and nudged the price target up to 300p from 295p.
"A growing footprint and surprisingly benign claims inflation should support margins," said Peel, noting that the shares already appear to be factoring in a softening of the UK motor rate cycle. In addition, it argued that the stock looks undervalued at around 9x 2019 price-to-earnings - compared to a sector average of 11x - and a 7% yield.
"While the UK Motor rate cycle is now plateauing, we believe as long as the market remains disciplined and prices track in line with claims inflation, Esure will have continued room to grow its market share and build excess capital," the brokerage said.
Peel noted that the company's outlook is driven by its footprint expansion strategy and said it assumes that the 3m policy target by 2020 can be reached. The brokerage is comfortable the expansion is not materially changing the company's risk profile, nor does it see any need for higher IT investment to generate growth.
Motor policy numbers are now 37% above 2013 levels, which was the year Esure last paused its expansion strategy as rates declined, Peel said.
"The only thing we believe that could bring Esure's growth strategy back to a halt is a softening cycle, albeit, Esure has proven in the past that it can protect its portfolio while sustaining a high dividend payout in lieu of earnings growth."