Broker tips: Meggitt, StanChart, Booker

Panmure downgraded its stance on defence and aerospace engineer Meggitt to ‘sell’’ from ‘hold’ and cut its price target to 325p from 363p.

It noted the shares have recovered 15% since the profit warning last October and management has boosted the rate of investment to counter the profit decline.

However, Panmure expects further profit warnings and reckons the two main sources of expected profit growth – advanced composites and aircraft braking systems – will fall short.

The brokerage said its research has shown that exceptionally high pro-forma margins of the acquired advanced composites businesses could prove illusory, given the lack of clear differentiation and volatility in the supply chain.

“What we do know is that despite strong sales growth, profitability in the complex and secondary composite products is poor and highly volatile.

“Ultimately, there is a trade-off between low capital/low margin and high capital/high margin business. We believe that Meggitt will go down the low capital/low margin route, given the balance sheet constraints.”

In addition, competition from recycling is also impacting sole source platforms in aftermarkets.

Panmure cut its earnings per share estimate for 2016 to 30.4p from 32.6p and its 2017 EPS forecast to 30.9p from 37.2p. These new forecasts are now 8% and 14% below consensus.

Standard Chartered’s shares fell on Wednesday after Jefferies cut its target price to 330p from 400p and reiterated an ‘underperform’ rating on the Asia-focused bank.

Jefferies said it has reduced its revenue expectations for 2016-2018 by 9.5% on “both idiosyncratic and macro induced headwinds” amid a slowdown in China. The broker also lowered its guidance on earnings per share during the period by 48% on average.

“Downward revisions to gross domestic product (GDP) in various countries and last week's weak Hong Kong GDP growth print (+0.8% year-on-year versus expectations for 1.5%) further confirms our view that there will be little recovery in Standard Chartered’s revenue base over the next two years,” according to Jefferies analysts.

“If anything, there is potentially further downside risk given the idiosyncratic headwinds of STAN's de-risking as well as our view that credit expansion (measured as private sector credit/GDP) has topped out in Stan's key markets.”

Jefferies now sees revenue reaching $13.96bn in 2016, down from a previous estimate of $15.57bn. EPS is forecast to come in at $0.23 for the year, compared to the prior forecast of $0.15.

Looking further ahead, revenue estimates for 2017 were cut to $14.03bn from $15.51bn and 2018 was slashed to $14.19bn from $15.54bn. Guidance on EPS for fiscal years 2017 and 2018 was $0.34 and $0.49, respectively, down from previous estimates of $0.69 and $0.80.

In April, Standard Chartered's chief executive Bill Winters said he expected erratic swings in global markets to continue at least for the rest of the year. His remarks came as the bank reported a 64% fall in pre-tax profit to $539m in the first quarter although losses on bad loans dropped 1% to $471m and its common equity Tier 1 capital ratio rose to 13.1% from 12.6% the same quarter a year ago.

Food wholesale operator Booker got a boost after Goldman Sachs upgraded the stock to ‘buy’ from ‘neutral’ and lifted the price target to 198p from 171p ahead of the company’s full-year results on Thursday.

Goldman pointed out that Booker has been the worst performing stock in its coverage year-to-date, down 9% versus the pan-European food retail average up 6% despite small earnings upgrades.

“With its capital-light model, Booker is the most cash generative stock in our pan-European food retail coverage,” said GS.

“Importantly, it has a strong track record of capital allocation, either making acquisitions with short cash payback periods, or returning excess capital to shareholders via special dividends.”

The bank forecasts EBIT/EPS compound annual growth rate of 11% over the next three years, driven by the integration of the Londis/Budgens acquisition, continued growth of the Premier store customers, secular growth of the catering customer base and increased density of the delivery network.

This gives an average total shareholder return of around 19% over the next three years.

“Given the stock’s underperformance YTD, we see risks weighted to the upside. Beyond the results, we see any use of cash announcements as positive catalysts.”

Goldman upped its full-year 2016-2018 earnings per share estimates by 0% to 5%, mostly to reflect the continued shift to Premier sales and their positive impact on margins.