Broker tips: Meggitt, Tullett Prebon, Housebuilders

Meggitt’s shares plunged last week after warning that full-year profits will miss its £369m forecast, due to fewer contracts and increasing programme deferrals.

“Rarely do we find A&D companies which are simply too cheap, but post last week’s warning Meggitt is firmly in that bracket,” Barclays analysts Phil Buller and James Zaremba wrote in a note to investors on Tuesday.

“At 10x FY16 P/E, 9x EV/EBITA with a comfortably affordable dividend yielding circa 4.5%, the shares trade at a 25% discount to their own historical averages vs. the sector in spite of a 6% EPS CAGR and unmatched cash progression.”

The analysts added they were concerned about the near-term visibility and capital deployment discipline but it seemed more than in the price.

They lowered Meggitt’s price target to 420p from 610p.

“In short, we see this as a compelling entry point with limited further downside. 420p price target implies 19% upside.”

Shares in Tullett Prebon fell sharply after Barclays downgraded the stock to ‘underweight’ from ‘equalweight’ and slashed the price target to 310p from 385p on valuation concerns.

The bank pointed to a deteriorating volume outlook for inter-dealer broker markets in 2015 and a relative lack of progress on electronic/post-trade services expansion.

It noted the stock has strongly outperformed year to date, up 22% versus the FTSE All Shares which is down 1%.

It said there have been upwards earnings per share revisions but only from January to April. Since then, energy volumes – to which the new CEO's strategy appears heavily geared – have weakened.

Barclays said this has resulted in the share trading at 10-11x 2016E price-to-earnings, which is a significant premium to its through-the-cycle average of around 8.5x.

Housebuilders were under pressure after Liberum downgraded its stance on Barratt Developments, Persimmon and Taylor Wimpey to ‘sell’ from ‘hold’.

“We believe the largest housebuilders’ valuations are too optimistic to withstand the gross margin pressure that we expect in the coming years as house price inflation is suppressed by a more vigilant regulator and build cost inflation returns.”

Liberum said these three stocks are especially vulnerable to falling gross margins as managements have turned their backs on volume growth.

The brokerage sees better value in some of the builders who can grow profits by raising output, such as ‘buy’ rated Bellway and Gleeson, which are its top picks.

As far as Barratt is concerned, Liberum said it has the most scope to continue to grow volumes to potentially offset gross margin pressure, but its high valuation assumes a setback-free outlook.

Liberum said that while Persimmon is rightly admired for the quality of its land bank and how well it managed the downturn, its valuation appears to assume continued growth in margins and returns.

Taylor Wimpey is the most improved housebuilder in the UK, making excellent use of strategic land to keep land costs under control as well as repositioning itself away from secondary locations.

However, its valuation has become very demanding and may not accommodate the threat of margin pressure, Liberum said.