Broker tips: Aggreko, Hikma, Croda

Morgan Stanley upgraded power generator company Aggreko from ‘underweight’ to ‘equal weight’ and bumped up its target price from 850p to 900p, despite orders for diesel products falling.

“We retain our concerns over long-term pressures on the International power Projects (IPP) business model. However, we upgrade as the shares now trade almost two standard deviations below mid-cycle multiples, 2017 consensus estimates look supported, and we see signs that underlying trading and returns should improve in 2017,” Morgan Stanley said.

Returns are falling due to lower utilisation in diesel, contract loss,and pricing and return on capital employed (ROCE) is below its target range.

The analysts however feel returns could bounce back in 2017 due to cost savings and the recent fall in share price discounts.

If the relationship between Warstilla solutions and IPP orders holds performance can improve from current levels after orders dropped in 2015. Trading profit for 2017 also suggests consensus of £279m should be supported.

Shares have fallen by 40% since the peak in July and now trade at 10.4 times price earnings and earnings before interest tax and amortisation of 8.6 times so valuation looks fair even thought out long term structural concerns on IPP persist.

Numis on Friday upgraded its rating on Hikma Pharmaceutical to ‘buy’ from ‘hold’ but cut its target price to 2,350p from 2,660p.

Hikma’s shares have fallen 35% over the past three months and significantly underperformed UK Mid-Cap Healthcare and Global Specialty Pharma, Numis highlighted.

“The key risk to the investment case following the downgrades in August to fiscal year 2016 forecasts are margin expectations from Generics that have disappointed since the acquisition of Roxane, which completed in early 2016,” the broker said.

“A third quarter update is expected next week and in the short term, a reduction to group revenue expectations for fiscal year 2016 would be a disappointment, but in the absence of competition for Glycopyrrolate, view this as unlikely.”

Numis said a further reduction in margins for generic medicines in 2016 is “entirely possible” but argued this is now reflected in the price.

However, Numis is taking a “more cautious stance” on margins for generics into 2017, and reduced its earnings per share forecasts by 13% to $1.36.

The key drivers of 2017 include the relaunch of Bedford's injectable products, the maintenance of Injectables margins, the approval of a generic version of asthma treatment Advair and operating leverage in the generics business.

For 2016, Numis sees profit before tax falling to $315.5m after an “exceptional” year in 2015 at $355m. The broker expects to see a return to profit growth in 2017 with pre-tax profit of $413.6m.

However, the expected EPS of $1.36 in 2017 would compare to $1.42 in 2015. In 2016 EPS is forecast to fall to $1.11.

“The shares now trade on 16x our downgraded 2017 EPS forecast and offer 23% EPS growth, with peers trading on >21x for 20% growth.”

Credit Suisse downgraded Croda International to ‘neutral’ from ‘outperform’ on valuation grounds, keeping the price target at 3,500p.

“We believe Croda now represents fair value trading on an average of specialty chemicals and staples customers multiples,” the bank said.

“Croda has re-rated from around 9x to 15x EV/EBITDA over the last two years as management have restored earnings growth – we believe this now represents fair value with a neutral risk reward bias.”

It expects near-term earnings headwinds in 2017/18 from upfront investment costs, product trimming and price pressure in Omega-3.

For Industrial Chemicals, CS cut its forecast earnings before interest and taxes from £6m to breakeven in 2016, given the ongoing weakness in by-product markets and continued organic sales declines in the third quarter.

In Performance Technologies, it factors in £3m headwind from ramp costs at the new Atlas Point facility plus an additional £1m of depreciation expense as the plant comes online in the fourth quarter of next year.

For Consumer Care, Credit Suisse factors in £1m headwind from ramp costs at the new Atlas Point facility and an additional £0.5m of depreciation expense as the plant comes online.

In addition, CS reckons Croda's competitive position in Personal Care is under pressure from new entrants at both the value end and in their premium portfolio.