Broker tips: Inmarsat, Halma, Taylor Wimpey

Credit Suisse reiterated its 'outperform' rating on Inmarsat while downgrading rival Eutelsat to 'neutral' after its substantial profit warning.

The Swiss bank admitted its positive view over the past 18 months on the outlook for global satellite revenue growth has proved overly optimistic, mainly due an underestimated impact of a weakening global economy on certain regions such as Latin America and Africa and rising competition from Intelsat in LatAm.

"While we still see positive growth trends in certain segments, particularly 4KTV and US government spend, we acknowledge that these trends are coming through slower than we had imagined 18 months ago."

"Having capacity in the right place increasingly important. Going forward exposure to different end users and the allocation of future satellite capacity to different geographies will increasingly drive our satellite stock views, rather than a one size fits all approach."

Eutelsat now looks increasingly exposed to Latam and Africa and applications such as global data services and professional video that are increasingly under pressure.

The more positive rating on Inmarsat was maintained but Credit Suisse analysts cut their target price to 1,060p from 1,186p to reflect the delay to the introduction of key GlobalXpress products and ongoing economic headwinds in maritime.

After a weak quarter, the FTSE 100 group recently cut its 2016 revenue guidance by $50m but maintained its 2018 revenue outlook. Growth concerns have been raised in the market due to tough conditions in maritime that outweigh the pleasing return to growth in government revenue.

Inmarsat also notified of larger agreed Ligado payments out to 2018, now expecting to receive $337m over the three-year period that is around $35-40m per year above consensus.

Third rival SES was also maintained at 'outperform' and its target price also reduced to €25 from €29 as it is seen as having similar revenue exposure to Eutelsat in Latam and Africa, though its exposure to commoditised point-to-point data services is lower than Eutelsat in both regions.

UBS has downgraded Halma to 'sell' from 'neutral' with the health and safety technology group's shares tottering at 25-year highs and at a 49% premium to the engineering sector.

"If the world is better than expected Halma will likely underperform versus the group as it is less cyclical and if the economic outlook weakens we still see absolute downside risks," UBS said.

Acknowledging the FTSE 250 group's strong organic growth track record amid a declining sector, the Swiss bank noted that Halma has previously endured organic sales weakness in recessionary phases as its niche portfolio reduces its risks but does not completely remove them.

Consensus forecasts point to a 6% per annum ongoing sales growth, meaning that the risk of organic growth exceeding that "looks very limited" and acquisitions have generally fallen short of matching organic growth.

With deal sizes appearing on the rise, UBS stressed that striving for more
acquired growth increases the risks.

Analysts set a price target of 785p based on discounted cash flow, reasoning that even if management targets to grow at 15% per annum via organic and acquisitions are delivered, it would still only see 2020 expected EPS rise by 25% and Halma's EV/EBITA ratio in year-five back in line with its 20 year average.

"Looking at it another way, the share is pricing in stable margins and perpetuity growth of 3.5-4% per annum", which is 1.5-2 times the rate of perpetuity growth priced in for most of the other stocks covered by the same analysts.

Canaccord Genuity reiterated a ‘buy’ rating and target price of 210p for Taylor Wimpey on Tuesday after the housebuilder announced enhancements to its dividend policy.

Taylor Wimpey has increased its ordinary dividend to around 5% of net assets to be paid through the cycle from 2017 and announced a special dividend of £300m to be paid in July 2017.

The group also raised its guidance on operating profit margins to 22% between 2016 and 2018, compared to 20.3% in 2015.

Last month the company said its trading had not been affecting by uncertainty surrounding the 23 June European Union referendum.

Canaccord said: “Comments on current trading are consistent with what we recently heard from the group. Overall core principles of the group's strategy remain, with the group committed to driving further operational improvement.

“Over the next 14 months the shares offer dividends per share of c.22.5p - which implies a c.12% yield.”