Broker tips: Aggreko, Easyjet, DCC

Aggreko’s shares fell on Monday after Deutsche Bank cut its recommendation on the stock to ‘hold’ from ‘buy’ and lowered the target price to 1,000p from 1,050p.

The supplier of temporary power generation equipment is expected to see trading profit return to growth in 2018 after a 40% decline across 2012 to 2016. Deutsche reiterated that it believes earnings will reach an inflection point in the next 12 to 18 months.

“At a 12-month forward price-earnings ratio of 16.5x, however, we believe much of this is now priced in. As such, we find it increasingly hard to argue with conviction that there is an incremental catalyst that is not priced in on a 12 month view. Hold.”

Deutsche predicts an average trading profit drop of 4% per year for fiscal years 2016 to 2017, followed by growth of 5% per year for 2018 to 2020. The bank believes a return to earnings growth in 2018 will be supportive of current valuation for longer. It also sees potential to grow dividends and make additional cash returns from 2018.

Ahead of Aggreko’s full year results on 7 March, Deutsche has forecast adjusted pre-tax profit of £221m, slightly below the consensus of £222m and management’s guidance of £225m.

“We expect the following discussion points to be in focus: 1) expectations for the Argentina standby contracts after they expire in February/March; 2) comments on the current trading environment, Power Solutions pipeline and 2017 consensus pre-tax profit which sits at £220m (Deutsche Bank forecast at £225m); 3) 2017 capital expenditure outlook (Deutsche Bank at £291m).”

On 16 January, Aggreko confirmed the Government of Argentina extended its fixed site contracts, equivalent to 174 mega watts (MW), until 31 December 2017. The FTSE 250 company said the original contracts amounted to 180MW, and initially had various expiry dates. Aggreko also confirmed that 56MW of the 270MW standby contracts was off-hired in 2016, leaving the balance at 214MW.

“We make minimal changes to earnings per share forecasts as we update our model for recent contract wins and updated Argentina assumptions post the 16 January update,” Deutsche said.

The bank has pencilled in EPS of 62.44p for 2016, up 0.4% from the previous estimate. It also upgraded its EPS forecast for 2017 by 1.3% to 63.33p and downgraded 2018 EPS by 1.6% to 67.75p.

“Risks include: the shape of Argentina profit drag, the macroeconomic environment, competition and pricing pressures, bad debts, equipment seizure and foreign exchange movements,” Deutsche concluded.

Budget airline Easyjet flew lower on Monday as Cantor Fitzgerald downgraded its stance on the stock to ‘hold’ from ‘buy’ saying it reckons the shares will trade in a fairly tight range for the next quarter.

The brokerage said EZJ reported a “generally upbeat” first quarter last week but also warned that rising fuel costs, the continuing impact of a weak pound and capacity growth in the market would crimp profitability.

To be prudent, Cantor cut its pre-tax profit forecast for full-year 2017 by 16% to £362m.

“We remain cautious on the outlook for unit revenues despite hints of some improvement from EZJ. Capacity build by EZJ and rival carriers, particularly on sunshine routes, is likely to continue to act as a drag on yields. Moreover, Easter moving into EZJ’s second half period, lowers near term visibility on earnings. The AGM in early February could be noisy with the main owner opposing fleet expansion, but we think it is unlikely that these plans will be shelved.”

Cantor noted forward bookings are slightly up on last year but said that capacity growth in the market, and the dampening effect this has on unit revenues, is unlikely to abate before the summer.

Still, Cantor said the stock’s valuation remains fairly attractive, trading on a calendar 2017e price-to-earnings of 11.4x versus a five-year average of 12.7x or a 10% discount. Its forecast dividend yield is 3.7%.

Goldman Sachs has upgraded DCC to ‘buy’ from ‘neutral’ and lifted the price target to 7,400p from 7,000p, saying recent underperformance provides an attractive entry point.

GS noted the shares have underperformed the Stoxx 600 by 15% since November 2016, mostly likely caught up in a broader sector rotation.

Its de-rating creates an attractive entry point for two reasons, the bank said. Firstly, it pointed to the fact that DCC is not a typical defensive stock, and secondly, it highlighted its significant M&A growth potential and superior returns profile, which it said warrant a premium valuation.

"For the last four reported years, consensus earnings per share estimates for DCC have been revised up by 13%, versus the Stoxx 600 down 18%. We believe M&A and consistent delivery of organic improvement will continue to drive these upgrades over time.”

Goldman reckons DCC has the financial headroom to spend close to £1bn on additional M&A over the next two years, based on debt and equity financing. It said that this, along with the pricing of its deals, could add 16% a year to earnings growth.

“At the same time, and owing to its operational efficiency and strong cash generation, we believe that DCC will continue to deliver cash returns significantly ahead of its business services and consumer staples peers.”