Broker tips: Brewin Dolphin, GKN, Drax

RBC Capital Markets upgraded Brewin Dolphin Holdings to an ‘outperform’ rating from ‘sector perform’ on Wednesday after the company reported its third quarter interims.

The investment management and financial planning firm said total income rose 1% to £71.3m in the third quarter, bringing total income for the nine months ended 30 June to £208.5m.

“In the first nine months of its fiscal year, Brewin earned 75% of our full year 2016 total income forecast of £278.6n,” said RBC.

“We are confident that our 2016 forecasts are achievable despite the market backdrop.”

Total funds under management rose 2.1% to £33.5bn in the quarter.

Brewin’s core discretionary business delivered funds under management in the third quarter of £26.8bn, up 3.5%, which chief executive David Nicol said demonstrated its resilience in the face of uncertain market conditions.

“A decent IMS from Brewin, one that we could even characterise as very decent given the market backdrop,” RBC said.

“Brewin is a financial company that we believe should not experience downgrades, and small upgrades are a possibility, but with an uncertain market and flow outlook, we retain our forecasts.”

RBC added that Brewin’s share price has fallen 24% so far in fiscal year 2016. However the broker said it believes the underperformance is overdone and recovery in the share price is warranted.

“We reiterate our 275p price target, but because of Brewin's share price underperformance, and given its 12x calendar year 2017 price to earnings multiple, 5%+ dividend yield and over-capitalised balance sheet, we upgrade to ‘outperform’.”

GKN shares fell on Wednesday as Citi downgraded the stock to ‘neutral’ from ‘buy’ and left its target price unchanged at 315p after the company reported a first half trading update.

The maker of parts for automotive and aerospace sectors on Tuesday said pre-tax profit fell 14% to £182m in the six months ended 30 June, on sales of £4.24bn, up 17% from the same period last year.

Earnings per share fell 4% to 9.5p but the company lifted its interim dividend to 2.95p per share from 2.90p. Operating profit increased 13% to £390m.

The company said it expects 2016 to be “another year of growth”, helped by currency translation and Fokker Technologies, a division of its Aerospace business.

GKN Aerospace's 2016 organic sales are expected to be slightly up on last year, driven by Fokker. The group added that fixed cost reductions of £30m will benefit 2017.

“GKN beat consensus expectations for trading profit by 7%, with an improved 2016 outlook for Aerospace and signs that the pace of decline in Land Systems is now slowing,” said Citi.

“While newly announced cost savings (in addition to the previously announced synergies from Fokker) should support earnings into 2017, we have lowered our mid-term (2017-2019) growth outlook in Aerospace to 3% on wide-body growth uncertainty, which combined with a higher pension deficit leaves our target price unchanged at 315p.”

Exane BNP Paribas downgraded Drax to ‘neutral’ from ‘outperform’ following a strong share price performance.

The bank noted the stock has performed strongly over the past three months and particularly since the Brexit vote. The shares dropped 11% in the first two trading days after the vote but have rebounded 20% since then, slightly outperforming the broad utilities sector.

It also pointed out that consensus momentum is turning negative.

“There is considerable uncertainty around a number of key issues affecting the stock – the CfD approval timing and result, the UK government’s forthcoming consultation on coal and its attitude to supporting further biomass conversions,” Exane said.

It argued that it needed some clarity on the outlook for these issues before it could become more positive on the stock, adding that it sees more attractive risk-return elsewhere within the sector.

As far as the first-half results are concerned, it said the numbers were line at the EBITA level but FX gains on the interest line put them modestly ahead of expectations at the pre-tax profit and earnings level.

On Tuesday, Drax reported a drop in underlying earnings for the first half of the year amid weak commodity markets and following the removal of the climate change levy exemption.

In the six months ended 30 June, underlying earnings came in at £17m from £41m in the first half of last year, while earnings before interest, taxes, depreciation and amortisation slumped to £70m from £120m.

Exane has a 340p price target on the stock.