Broker tips: Cobham, Worldpay, Rolls-Royce

Exane BNP Paribas downgraded Cobham to ‘underperform’ from ‘neutral’ and cut the price target to 140p from 143p, highlighting lingering doubts following the company’s first-half results last week.

The bank said sales and trading profit in H1 were broadly in line with consensus.

“Cobham will continue to face difficulties in H2 and the H1 results did not inspire more confidence,” it said.

Exane said that despite something of a recovery in the last three months, the stock has underperformed the sector by around 32% year to date, making it the weakest performer in its coverage.

“After the stock’s bounce in the last three months, Cobham trades at a valuation premium versus other defence companies and looks unattractive versus more resilient defence plays (BAE Systems) or more compelling civil value cases (Airbus Group, Dassault Aviation).”

The FTSE 250 aerospace and defence group is struggling in military activities, especially its CAES division, which suffers from technical and supplier quality issues, but also from the end of production on certain mature programmes, Exane said.

“Cobham is likely to struggle to generate organic growth in 2016e and perhaps even in 2017e. We do not expect organic growth and margin to recover until 2018e.”

Goldman Sachs has reiterated a ‘buy’ rating on Worldpay and raised its target price to 400p from 350p after the company reported its first half results.

Worldpay on Tuesday said pre-tax profit rose to £168.6m in the first half from £0.3 the same period a year ago, as revenue jumped 10% to £2.14bn.

Net revenue was up 16% to £539.7m thanks to the expansion of business with existing customers, the roll-out of enhanced capabilities and innovation, and new customer wins. Meanwhile, underlying earnings before interest, tax, depreciation and amortisation were 19% higher at £217.9m.

The payments processor declared a maiden interim dividend of 0.65p per share.

Goldman raised its earnings per share forecasts for fiscal years 2016 to 2020 by 4-7% to reflect the better-than-expected results.

“The results continue to underscore our thesis that Worldpay offers exposure to above-market structural growth in the global payments market via its strong positioning in the UK (+12%) and Global e-commerce (+21%) which is driving share gains.”

The bank added: “We expect Worldpay to continue to announce new customer wins and partnerships that should underpin growth well ahead of the market.”

Rolls-Royce got a boost on Wednesday as Morgan Stanley upgraded the stock to ‘equalweight’ from ‘underweight’ due to increased confidence on cash, and lifted the price target to 780p from 655p.

In its note on the company back in June, MS had pointed out that there wasn’t much room to manoeuvre before Rolls might be at risk of a further credit rating downgrade by Standard & Poor’s.

However, the bank said that following better-than-expected first-half results, underpinned by XWB engines sold as spares at a cash profit, it sees an improved outlook for free cash and is no longer as concerned.

“Further, having spent a reasonable amount of time with the company post H1, it is clear management has a better handle on the levers that can be pulled for cash to improve going forward.”

Morgan Stanley said the trading cash outflow from Civil Aerospace in 2016 now seems unlikely to be as severe as it previously expected.

“The main change for us comes on the XWB programme where we hadn’t appreciated the proportion of engines that will be sold as spares at a cash profit in the early years of the ramp-up, thus part offsetting the impact from engines sold on wing at a cash loss.”

As a result, the bank now expects Civil trading cash outflow of £87m versus a previous estimate of £180m, followed by an £11m inflow in 2017, versus a previous estimate of a £20m outflow.

This has contributed to an improvement in group free cash flow to an outflow of only £112m in 2016 versus expectations of £250m previously, meaning MS is now at the upper end of the group’s guidance for an outflow of £100-300m, and to an inflow of £104m in 2017.