Broker tips: BP, UDG, Spectris

The latter, they said, should come as some comfort for shareholders following 14 straight quarters with an unchanged payout.

The drivers of their higher discounted cash flow-based target price were the company's updated guidance on tax, costs and depreciation from the day before. Citi also stated that Over the medium-term, the outfit's cash returns, at 4.2%, should catch-up with those of its peers.

"Cash returns (CROCI) of 4.2% still lag peers by 170 bps, but delivery on forward plans should see BP catch up by 2020," they explained.

"The debate, if there is one on BP, is as the business improves to a point of generating post-dividend free cash flow, does that money go back to shareholders? Forward capex guidance looks to embed a lot of sustained efficiency."

Expectations for UDG Healthcare's earnings in 2018 and 2019 are too gloomy, Liberum said as the broker upgraded the healthcare industry service provider to ‘buy’.

The FTSE 250 company’s guidance is for organic revenue growth of 0-3% in 2018 and analysts’ consensus is at the bottom of the range, but UDG will do better, Liberum analyst Graham Doyle wrote in a note. He upped his rating from ‘hold’ and maintained a price target of 884p a share.

In further evidence of market pessimism, UDG shares have lost more than a fifth of their value since November and the percentage of analysts with a ‘buy’ rating has dropped from 90% to 40% in the past year, Doyle said. Now is the time to take advantage of an “attractive entry point” for the shares, he said.

Doyle wrote: “Consensus earnings expectations are too pessimistic, lying at the bottom-end of a 2018 guidance range (implying zero organic growth) that we expect management to beat. With UDG set to enter another upgrade cycle and [with] the shares off 22% from their November peak, we upgrade to ‘buy’.”

Analysts are also underestimating UDG’s potential performance in 2019 after 18 months of underperformance. Organic growth will be 4% in 2018 and 13% in 2019 when UDG will regain its “darling status” with investors, he said. UDG has the financial strength to make acquisitions that would add to earnings, he added.

A lacklustre share price performance in 2017 for precision instruments supplier Spectris, while partly driven by a lack of earnings growth relative to the sector, was mainly due to the sluggish organic growth seen from the firm early in the year, however, with growth picking up throughout the second half of the year, analysts at JPMorgan Cazenove tapped the group as a solid candidate to have ended the year on a positive note.

JPMorgan upped its rating on Spectris to 'overweight' from its previous 'neutral' stance, saying the benefits of cost-cutting exercises, an organic growth of at least 2.5% and boosts afforded to the group by way of acquisitions throughout the year, should help improve operating profit by around 25% between 2017 and 2019.

Spectris was forecast to post flat operating profits for the year, despite further revenue growth, but come twelve months later, JP Morgan estimated operating profits to move ahead no less than 14% and predicted and operating profit growth of 12% in 2019.

The analysts said, "Over the past 18 months, Spectris has completed five acquisitions, the most significant of which were Millbrook and Concept Life Science which deliver testing services to the auto and pharma industries, respectively. We expect the annual number of new model launches by the auto industry in Europe to rise by almost 50% between 2017 and 2020."

"Overall, we expect this to trigger a re-rating of the group. With the shares trading at a discount to the sector and with 16% upside potential our revised Dec-18 price target of 2,900p (was 2,800p)," they concluded.

With growth picking up throughout the second half of the year, analysts at JPMorgan Cazenove tapped Spectris as a solid candidate to have ended the year on a positive note and forecast stronger profit growth going forward, which led the analysts to raise their recommendation for the shares from 'neutral' to 'overweight'.

JPMorgan said the benefits of cost-cutting, organic growth of at least 2.5% and boosts from acquisitions throughout the year should help improve operating profit by around 25% between 2017 and 2019.

Spectris was forecast to post flat operating profits for the year, despite further revenue growth, but come twelve months later, JP Morgan estimated operating profits to move ahead no less than 14% and predicted operating profit growth of 12% in 2019.

The analysts said, "Over the past 18 months, Spectris has completed five acquisitions, the most significant of which were Millbrook and Concept Life Science which deliver testing services to the auto and pharma industries, respectively. We expect the annual number of new model launches by the auto industry in Europe to rise by almost 50% between 2017 and 2020."

"Overall, we expect this to trigger a re-rating of the group. With the shares trading at a discount to the sector and with 16% upside potential our revised Dec-18 price target of 2,900p (was 2,800p)," they concluded.