Canaccord cuts Weir to 'sell' from 'hold' after first half results

Weir Group’s shares fell on Friday as Canaccord Genuity cut its rating on the stock to ‘sell’ from ‘hold’ and lowered the target price to 1,250p from 1,325p.

The downgrade came as the engineering giant announced that chief executive Keith Cochane is stepping down and reported a drop in first half pre-tax profit.

Cochrane, who leaves the company after 10 years on the board, will be replaced by group finance director Jon Stanton on 1 October 2016.

The firm posted a 25% fall in pre-tax profit to £82m in the six month to 30 June 2016 on a reported and constant currency basis. Revenue declined 12% on a reported basis and dipped 13% at constant currency to £866m as weak oil prices hurt the Oil & Gas business. Earnings per share was down at a reported 23% to 29.6p.

“The departure was perhaps the most significant event of otherwise very solid 1H results, with Weir reporting a c.20% drop in earnings (around 9% ahead of consensus) on lower-than-expected losses in the Oil & Gas operations and better-than-expected earnings in the larger Minerals division,” said Canaccord analyst Alex Brooks.

“Importantly, management is realistic on the outlook, eschewing any increase in the guidance for this year, despite better-than-expected 1H results.”

The analyst said Weir has had an impressive run over the past six months and stands to benefit from a weaker pound, like other UK exporters. Brooks said it is also “impressive” that the company has managed to hold losses in its Oil & Gas operations to such a low level and that the the Minerals division has a robust market position that “even in a softer end market will likely deliver decent results”.

However, Brooks added: “On our estimates the forward price to earnings ratio is now as high as at any time in the past 10 years, there remains the distinct risk that the underlying markets do not recover at anything like the rate that our forecasts assume that they will, and at current levels of profitability the balance sheet is far less rosy than would have been thought only two years ago.”

Shares fell 2.00% to 1,423p at 1021 BST.