Spectris rallies as Deutsche Bank upgrades to 'buy'

Shares in Spectris gained on Wednesday after Deutsche Bank raised its recommendation on the stock to ‘buy’ from ‘hold’ and lifted the target price to 2,795p from 2,184p.

Deutsche Bank said the FTSE 250-listed supplier of precision instrumentation and controls has the potential to “perform better” and make further cost savings under the company’s productivity improvement programme Project Uplift.

The bank said indirect engineering and selling, general and administration costs account for about 45% of revenue and offer a “significant opportunity” for ‘self-help’ savings.

There is also scope for better-than-expected organic growth in 2017, Deutsche Bank said.

Across fiscal years 2013 to 2016, Spectris has delivered “average” organic growth below the sector median. Its earnings before interest, tax, depreciation, and amortisation (EBITDA) margin has fallen 380 basis points and the price-earnings ratio (PE) has de-rated by 8% versus the wider UK capital goods and instrumentation sector.

“Increasing complexity within the group (accentuated by bolt-on mergers and acquisitions), rising costs and end market weakness have all been contributory factors to the lower growth,” Deutsche Bank said.

“Management have realised that change to the organisation is needed and are acting to address this through three inter related initiatives of solution selling, lean and Project Uplift.”

The bank said opportunities for cost reduction lie in both direct and indirect production. It estimates gross savings of £21m, at bear, to £55m, at bull, with the base case at £37m.

“Spectris trades at a discount on both 2017 enterprise value/EBITA and PE at 14.4x vs. the sector on 15.1x and 18.1x vs. 19x respectively,” Deutsche Bank concluded.

Shares rose 2.62% to 2,471p at 1112 GMT.