Broker tips: Soco International, M&S, UK industrials

Soco International was under pressure on Thursday after UBS downgraded the stock to ‘sell’ from ‘neutral’, keeping the price target at 150p.

It said that with the stock having rallied strongly over recent days it is now trading at 1.24x commercial net asset value and on an implied long-term oil price of $112 a barrel, which is well above the forward curve at $65 a barrel.

“This leaves risk-reward looking skewed to the downside,” said UBS.

Still, the bank said it has been quite consistent in its view that Soco’s TGT field in Vietnam is a solid asset, adding that delivery of $21 a barrel of post-tax cash flow during the first half underlines its high-margin, low cost attributes.

UBS said that while TGT is a high-quality asset, 2015 is something of a transition year with lower oil prices coinciding with relatively high capex on the new H5 fault platform.

It said free cash flow will likely be relatively low as a result, meaning next year's dividend will be lower.

Peel Hunt downgraded Marks & Spencer to ‘sell’ from ‘hold’ and cut the price target to 450p from 530p.

“Underlying trading conditions have been infinitely better this year than last but we fear that yet again M&S has failed to read the script,” it said.

The brokerage explained that despite a very easy comparative, it’s concerned that like-for-like sales for General Merchandise remain in negative territory. It said this was “a quite breathtaking indictment of its ranges this season”.

Peel Hunt said even if the cost savings and sourcing gains come through on track, and Food stays in positive territory - neither of which is certain – that won’t hold back the tide.

“An H2 LFL bounce-back is unlikely: for us the bottom line is that without General Merchandise sales growth, the shares are likely to struggle.”

Peel added how bulls point to the strong cash generation as a reason to hold the shares but that will soon come under pressure if forecasts continue to fall and more still if extra capex is required to refresh the stores again.

It added that a 15x price-to-earnings ratio is not ridiculous but isn’t much of a discount to the sector and with no confidence in the true level of earnings per share, it’s too risky to stay with a ‘hold’.

Investec took a look at the UK industrials space, upgrading IMI to ‘buy’ from ‘hold’, while cutting Spectris to ‘hold’ from ‘buy’ and both Vesuvius and Weir to ‘sell’ from ‘hold’.

Investec said that for most companies, trading in September will have been weak, not terrible, just weaker than consensus expectations.

“This will be confirmed by the upcoming trading update season, but has been previewed by the slew of broad-based profit warnings globally and recent conversations we’ve had.”

On IMI, it said investors still generally buy into chief executive Mark Selway’s s strategy and plans even if the doubling of profit target to 2018 looks a challenge.

“We view IMI as being at the better quality end of the UK industrials universe and the operational actions being delivered will only enhance this medium-term. While short-term earnings momentum is negative (although probably not as bad as currently assumed) we see cash generation, the balance sheet and dividend yield as attractive and the valuation as undemanding.”

As far as Vesuvius is concerned, the brokerage said management has continued to improve the operational performance in recent years, but multiple end market headwinds will overshadow these efforts for the time being.

“We downgrade our EPS expectations for Vesuvius more than for almost any other company we cover as trading in both divisions continues to deteriorate. We are well below consensus and comfortable being so.”

Finally, it said Weir looks vulnerable to profit revisions greater than consensus expectations reflect.

“The impact of copper and gold will be felt in terms of lower volumes and pricing, particularly in FY16E, we believe.”

Investec said this outturn is not factored into current guidance or consensus estimates.

It added that the share share price has fallen significantly since the beginning of August and therefore some of the news is probably priced in, but not all.