Weir shares seen at major discount to sector, says Liberum

Analysts at Liberum initiated coverage on engineer Weir Group on Thursday with a 'buy' rating as the performance of its European peers suggested that margins could grow quicker than expected.

Weir, which designs and manufactures highly engineered products and services for the mineral, oil and gas, and power industries, was forecast by Liberum to see its dividend grow at a compound annual growth rate of 15% over the next two years, more than twice as fast as the market expects.

Free cash flow margins are set to quintuple to over 10% this year and with the ratio of net debt to EBITDA falling from 2.4x to below 1.0x in 2019, this underpins analyst Ryan Gregory's view of dividend growth returning to its 15% average seen between 2006 and 2014, when Weir had similar cash generation and leverage ratios.

Having rerated sharply in 2016 after commodity prices began to recover, Weir shares derated just as quickly once its earnings upgrades came through and was now trading at or close to the cheapest relative multiples since 2009, and "one of the biggest discounts to the sector" this century.

Gregory pointed out that at the current stage of the cycle, one year into a potential multi-year recovery, and with its higher earnings estimates and stronger cash flow, Weir's valuation looked "very attractive" as it highlighted a 25% upside to the bank's 2,400p target price.

The analyst's 15% dividend per share growth is over twice the pace of consensus.

"Our assessment of pressure pumpers’ outlooks suggests further price recovery in oil & gas, in contrast to consensus, which drives our EPS 12% above consensus, and our cash analysis suggests a significant improvement in working capital," Gregory wrote.

As of 1400 GMT, shares had picked up 1.58% to 1,956.50p.