Broker tips: Ultra Electronics, Wolseley, Standard Chartered

Ultra Electronics was left with a ‘buy’ rating but had its target price lowered to 2,000p from 2,100p by Berenberg on Tuesday.

Berenberg raised the earnings per share forecast for fiscal years 2017 and 2018 by 2% to reflect the company’s positive half year interims and an improving organic growth outlook. The revised price target "places the stock in line with the sector", the broker said.

The company - which supplies electronic products to the defence, security, transport and energy industries – reported in August a pick up in first half organic revenue performance to a decline of 2.5% from a drop of 11.9% the same period a year ago.

Ultra said US defence spending had increased along with the order book. The group’s acquisition of electronic warfare business Herley also contributed to growth. As a result, the company narrowed its organic revenue growth guidance range for 2016 from -2% to +3%, to -1% to +1%.

“Following severe organic decline over the past four years driven by both demand weakness from the US Army for high margin radios during the Iraq and Afghanistan retrenchment (a loss of £40m of EBIT peaking in 2011 to today) and the 2014 cancellation of the Oman IT Services contract, 2016 guidance of -1% to +1% organic growth primarily reflects confidence in US award momentum with the expectation that the allocated budget will be spent this election year,” said Berenberg.

Berenberg said the Herley acquisition has enhanced Ultra’s capability offering in electronic warfare, which is a prioritised area of spend in the US defence budget.

“It also raised Ultra’s group revenue exposure to the Department of Defense (DoD) customer to 30% which we consider to be positive given the geo-political macro backdrop and our thesis that the defence cycle has turned.”

However, Berenberg anticipates a pause in acquisitive activity after buying Herley in 2015 for $265m and the disposing of the ID Cards business in the second half for £22m.

“We are supportive of this approach, particularly against the backdrop of post Brexit currency volatility."

Canaccord Genuity on Tuesday reiterated a ‘hold’ rating on Wolseley but raised the target price to 4,340p from 4,150p ahead of its full year results.

“With relatively low UK exposure and a strong balance sheet, Wolseley looks relatively attractive,” said Canaccord analysts Aynsley Lammin and Matthew Walker.

“But, after a strong run in the share price, we struggle to get too excited ahead of its results (27 September).”

Canaccord said the valuation now looks relatively full and there remain risks around the group’s outlook on like-for-like sales growth.

The broker expects the building materials distribution company to meet consensus expectations for the fiscal year 2016. Canaccord predicts operating profit of £933m driven by a good performance in the US.

However, Canaccord believes the focus will be on the outlook for fiscal year 2017, particularly for the US.

"While our fiscal year 2017forecasts look reasonable to us at this point, the key risk for the shares remains US like-for-like growth for 2017 and particularly how any potential US interest rate hike may affect this.

"Despite potentially higher US interest rates remaining a risk, the outlook for the US continues to look relatively healthy, albeit with the rate of growth likely to slow as the cycle matures."

The analysts believe Wolseley should benefit from a positive currency boost in 2017 and should continue to take market share in the US.

While the UK business is likely to continue to be challenging, the group is restructuring this business, Canaccord added.

The broker believes the balance sheet looks “well positioned” to support another £250 to £300m capital return to shareholders.

Barclays downgraded Standard Chartered to ‘underweight’ from ‘equalweight’ as it said the stock’s valuation is overshooting its earnings power, but lifted the price target to 520p from 500p.

Barclays said management actions have stabilised the business with revenues appearing to have bottomed out and provisions now relatively steady at still elevated levels but significantly better than 2015.

“There has also been early progress on restructuring although this is likely to be a lengthy process with the initial target of an 8% return on equity by 2018 now pushed back.

“While we see the macro outlook as relatively supportive and expect earnings to continue improving, we believe that the valuation has now significantly disconnected from the medium-term earnings potential of the business.”

Barclays said that both a fundamental analysis and return-adjusted peer comparison suggest the shares are overvalued by 20%.

Barclays maintained its ‘equalweight’ rating onHSBC but upped the price target to 550p from 525p.

It said the bank’s restructuring is going broadly according to plan although a weaker interest rate environment has led management to push back RoE expectations and revise dividend guidance.

“However, a lack of growth prospects combined with business disposals has allowed the company to announce a $2.5bn share buyback in 2016 and we estimate up to a further $3.5bn in 2017.

“We see this ability to return capital to shareholders as offsetting the weaker earnings outlook and rate the shares equalweight.”