Broker tips: Interserve, Shire, Man Group

Interserve said expectations for its UK construction division have taken a significant hit due to a further deterioration in its Glasgow energy from waste contract.

As a result of problems relating to the design, procurement and installation of the gasification plant, as well as challenges with the supply chain that will result in further cost overruns and delays, Interserve now anticipates a £70m exceptional contract provision to be taken in the first half of 2016. This will result in a similar level of cash outflow spread across 2016 and 2017.

The FTSE 250 support services and construction group said that taking full account of the cash impact of the contract provision, net debt is likely to be around £35m higher than previously guided at both the half year and the year end.

Yet Interserve said trading at the Support Services business remains robust and in line with expectations, Equipment Services continues to have good momentum and the International Construction business is performing as expected.

Numis said: “While disappointing, we believe the provisioning is prudent and will draw a line under these issues but clearly materially impacts 2016 estimates.

“The shares will clearly be weak today and we put our recommendation under review for now. However, all other divisions are trading in line with expectations and we regard this as project specific in the current year with no direct relevance to the remainder of the group.”

Liberum initiated coverage of Shire at ‘buy’ with a 4,700p price target.

It said the performance of the shares since August last year suggests investors are clearly worried Baxalta is not the right deal, with concerns focused on haemophilia and tax.

Shire is down 29% since the first deal announcement.

“We've done detailed work on Baxalta and conclude that, although we don't like the deal, even with our base case estimates accounting aggressively for the risks, Shire is still cheap,” the brokerage said, noting that downside risks are already fully priced and not relevant for another couple of years.

Liberum assumes a 75% hit to inhibitor sales, a 12% hit to haemophilia, an associated margin hit and below-consensus standalone Shire earnings.

Nevertheless, it stills gets to 9% compound annual growth rate core earnings per share growth to 2021, versus 8% for EU large cap peers.

Liberum reckons Shire should trade broadly in line with peers at 14.1x 2017 earnings, getting to a 4,700p price target even on its bearish, below-consensus numbers.

“With the current valuation supported on discounted cash flow, we think this is a classic value play with significant asymmetric upside risk,” Liberum said.

Analysts at Citi took a knife to their recommendation and estimates for shares of Man Group.

The -13% performance of the company's AHL fund since mid-February was described as "a particular disappointment".

As a result, the broker tore up its previous forecasts for Man's earnings per share in 2016 and 2017, cutting them by between 35% to 40% to stand between 31% and 38% below consensus forecasts.

Even after those revisions, Citi judged the shares to be "fully valued" given how they were trading at a price-to-earnings multiple 17.3 times the broker's profit forecast for 2016.

That P/E multiple compared unfavourably with the shares' 10-year average multiple of 14.3.

Without AHL, the fund manager's performance fee generation ability "looks challenged", Citi analysts Haley A. Tam and Owen E. Jones said in a research report sent to clients.

That was also the main driver behind their decision to slash their estimate for the company's profit before tax performance-fee forecast from $181, to $64m.

In turn, that revision drove their 2016 forecast for profits before tax down by 35% from $361m.

Man's best option for solving "fundamentally subdued" funds under management and improving its outlook for earnings growth at its main franchises was to pursue acquistions.

To that end, the company had about $500m of surplus capital on hand and no share buy-backs were planned for 2016.

"But we see execution as unlikely," the analysts added.

Citi double-downgraded the shares to a 'sell' (from 'buy') and placed a 120p target price on the shares, down from 182p beforehand.