Broker tips: Wood Group, Petrofac, Ashmore, Debenhams

Raymond James initiated coverage of Wood Group at ‘outperform’ with a 900p price target.

It said Wood was in the frontline to take advantage of the oil market recovery it expects.

Raymond James said management has weathered the downturn well, preserving the strong balance sheet.

“Wood’s direct exposure to US shale activity, which is one of the earliest beneficiaries in the upturn, is a differentiator within the large European oil service players. The healthy free cash flow generation underpins the steady dividend growth and the bolt-on M&A strategy.”

It said the recently-announced reorganisation may lead to more efficiency, adding that the valuation looks compelling, particularly relative to Amec.

Raymond James started Petrofac at ‘strong buy’ with a 1,200p price target.

It pointed to the many opportunities that exist in the group’s core strengths in onshore engineering and construction activities in the Middle East and North Africa, where it is bidding heavily and stands out among the best-in-class contractors.

“As capex is set to drop, we expect free cash flow to grow materially, pointing to rapid deleveraging and continued generous distribution to shareholders. With a 5.9% dividend yield and sound prospects, valuation looks very attractive to us.”

Numis has raised its rating on Ashmore Group to ‘reduce’ from ‘sell’, citing long-term prospects and foreign exchange (FX) tailwinds.

The broker also lifted its forecasts for earnings per share in fiscal years 2017, 2018 and 2019 by 8%, 3% and 2% respectively, as it expects the company to benefit from FX movements.

“We continue to think Ashmore is a good company with good long term prospects, but its share price is ahead of fundamentals today, albeit given the FX driven gains in the short term, our negative recommendation moderates from ‘sell’ to ‘reduce’,” said Numis.

Numis noted that Ashmore’s first quarter update reiterated a lag between an improvement in sentiment and flows. The broker also highlighted the company's apparent acceptance at the September analyst meeting that revenue margin declines will likely be an ongoing problem.

“This highlights that even if we did see bigger net flows returning, the net impact on revenue may be smaller than one might think,” Numis said.

Numis reiterated a target price of 315p.

Morgan Stanley downgraded Debenhams to ‘equalweight’ from ‘overweight’ and cut the price target to 70p from 95p on pension deficit concerns.

“When Debenhams reports its prelims next Thursday, we expect the operating results to be routine. We are concerned, however, that these may be overshadowed by the emergence of a material pension deficit,” the bank said.

It pointed to a pension deficit of more than £200m on a scheme that was in surplus this time last year. MS said that in the context of a company whose market capitalisation has fallen to less than £700m, this would be very significant.

“Factoring in a £250m pension deficit into our valuation work reduces our estimate of fair value from circa 95p to circa 70p per share, highlighting how geared Debenhams' equity value has become to even small changes in assumptions.”

MS said that while the new price target still implies 25% upside potential, this is not sufficient to keep the ‘overweight’ stance.

The bank said it prefers overweight-rated Marks & Spencer and B&M, both of which have more potential upside to Morgan Stanley’s base case with far less downside risk.

MS said its rating and price target are heavily dependent on the assumption of £250m deficit.

“Given the lack of visibility on the underlying assets in the pension scheme, this assumption may turn out to be wide of the mark when the company reports next week.”