Broker tips: Elementis, Amec Foster, Pennon

Elementis shares were given a boost on Wednesday after Berenberg raised its rating on the stock to ‘buy’ from ‘hold’ and raised the target price to 270p from 200p.

The upgrade comes after the specialty chemicals company said in a trading update that it expects full year earnings to be in line with expectations after a third quarter 38% jump in personal care sales offset a 4% decline sales at both its chromium and oilfield drilling businesses.

“Since our downgrade to ‘hold’ in April, consensus 2016 and 2017 earnings estimates for Elementis have fallen by 20%, primarily on 700 basis point earnings before interest and tax margin compression in the chromium division," Berenberg said.

“Q3 results, with 38% growth in personal care and abovemarket growth in coatings additives, mark the turning point in this cycle of downgrades. Elementis will, in our view, generate the best organic growth of UK chemicals in 2017 (circa 5% versus circa1%).”

Berenberg also expects the chromium business to recover given that emerging market producers may run out of spare capacity in 2017 and an increase in oil prices is seeing a corresponding rise in the Russian Ruble and Kazakhstani Tenge against the dollar.

The broker also predicts reduced competition and a rise in chromite prices to boost EBIT margins by 180 basis points to 19.5% in 2017.

Berenberg estimates the personal care business will outperform the market with growth rates moving from 10% to “mid-to-high teens”.

Reflecting assumed improved sales growth in personal care, Berenberg raised its earnings per share estimates for fiscal years 2016 to 2018 by an average of 5%.

Macquarie upgraded Amec Foster Wheeler to ‘neutral’ from ‘underperform’ but cut the price target to 400p from 420p, with the stock now sufficiently de-rated after last month’s disappointing trading update.

“In our view, the time has come to close out underweight positions and we upgrade our recommendation to neutral.

“Near-term catalysts for underperformance are slim and the current multiple is far more reflective of the challenges that are faced in turning around the company,” it said.

Macquarie said it has better digested last month’s update and downgraded its Clean Energy revenue assumption for next year.

It now expects this to fall 24%, compared to 8% previously, and said this is “more in tune with commentary of a significant decline” in Solar revenues.

Overall, ex-Global Power Group, it reckons group revenues will decline by 9% in 2017.

Macquarie said it could not rule out a dividend cut.

Due to weakening FX, it expects that post disposals, Amec will still have net debt/EBTIDA of 2.4x, above the 2.0x it has historically said it is comfortable with.

“To get down to that level, net debt would need to fall by a further £130m and cutting the dividend would get them towards this (£85m annual saving),” it said.

Pennon bucked the downtrend on Wednesday as Credit Suisse lifted its rating on the stock to ‘neutral’ from ‘underperform’ and upped the price target to 800p from 790p.

“We upgrade to neutral, as we see a lack of immediate downside risks with near-term upside to consensus earnings per share.”

CS pointed out that Pennon has been the worst-performing UK utility year to date, as it noted recyclate prices have risen sharply and Pennon should benefit from sterling weakness.

Pennon has underperformed the MSCI European Utilities index by around 14%, UK regulated peers by around 11% and the FTSE 100 by approximately 15%.

“We see this driven by an increased awareness and focus on risks in the waste business. We see significant medium-term pricing risk in energy from waste, but this will take some time to materialise.

“Following recent underperformance and recyclate price improvement we now see upside risks to an underweight position on a 12-month view.”

Credit Suisse said it is not clear that Pennon will capture all of the upside associated with the recent rally in paper prices, given its risk sharing mechanisms in place with an increasing number of customer contracts.

However, given the currently low margins a small change in pricing can have a significant impact on profitability.