Petrofac shares rally on Nomura upgrade to 'buy'

Petrofac shares rose 3.2% on Thursday after Nomura upgraded the stock to ‘buy’ from ‘neutral’ and raised the price target to 1,130p from 765p.

It said the valuation was undemanding in the context of an incrementally positive Middle East outlook and improved risk/reward of Integrated Energy Solutions.

“We believe the downside risk of more charges in Integrated Energy Solutions (IES) is less than $15m-20m. Moreover, we think the receivables that are outstanding are manageable and the risks to the balance sheet are limited,” said Nomura.

The Japanese broker also pointed to the potential for a cash return of $1.9bn to shareholders through a harvesting of IES over the next 6 to 12 months.

In addition, the Japanese bank said that its Middle East oil tour points to impressive capex growth in 2016/17 that Petrofac is best placed to benefit from.

“Middle East Engineering, Construction, Operations & Maintenance (ECOM) is poised to grow further on renewed contract momentum in 2H15 and 2016,” said the bank. “Although we forecast net margins to fall to 7-9% from 9-11% over the medium term, we model impressive revenue growth in ECOM, which helps drive our 2016/17 expected earnings per share higher by 13%/37%, leaving us 4%/7% above consensus,” it added.