Broker tips: UK engineers, EnQuest, IG Group

The bank cut Rotork to ‘reduce’ from ‘hold’ and trimmed the target price to 180p from 200p, pointing to poor visibility and margin pressures.

It said the company faces further margin pressure in its key oil and gas exposed business division.

It said while the recent rise in oil prices lowers the risk for Rotork’s high oil and gas exposure, high exposure to mid/downstream activities will only see the positive impact in the longer term.

HSBC downgraded Spectris to ‘reduce’ from ‘buy’ and cut the price target to 1,700p from 2,000p, saying the stock has reached the top of its valuation trading range since its recent strong rally – it’s up 29% since the 2015 results on 16 February.

In addition, it said weak trading patterns could persist in the near term while acquisition activity to fuel growth may be limited.

Still, HSBC said it continues to believe Spectris will be a beneficiary of growing global productivity demand, coupled with acquisition potential to enhance earnings in the long term.

Finally, the bank downgraded Halma to ‘hold’ from ‘buy’ saying the valuation now looks too rich, but lifted the price target to 1,050p from 975p.

HSBC said Halma has proved resilient through the economic cycle with demand driven by increasing health, safety and environmental legislation.

It also highlighted the group’s compelling track record and noted it has delivered double-digit earnings compound annual growth rate over the last 20 years with at least a 5% dividend increase every year for the last 36 years.

Canaccord Genuity cut its rating on Enquest to ‘hold’ from ‘buy’ and lowered its price target to 32p from 50p on Tuesday.

The oil and gas company on Monday said it is in talks to farm out a 20% working interest in the Kraken development to Delek Group.

The deal would reduce Enquest’s ownership of Kraken from 70.5% to 50.5%, and in exchange Delek will share the project capital expenditure from 1 January 2016.

“In terms of balance sheet management, we think this deal - if it completes - makes good sense,” said Canaccord.

“However, with no upfront entry costs for Delek, the terms have a negative impact on our asset valuation.”

Canaccord believes a deal could help reduce net debt. EnQuest has about $2.1bn total debt facilities.

The broker said without the farm-out it thinks the company would be “very close to exceeding its debt capacity, a risk that would naturally increase if the project were to suffer delays from the current mid 2017 target for first oil and/or oil prices were lower than our assumption”.

“Consequently, while the Delek transaction does not look to be an appealing value proposition for EnQuest, it does provide some much needed balance sheet buffer room in the short term.”

Canaccord sees a good chance that a deal will be completed given the differing attractions to both parties. “For now, pending more detail and announcement that the farm-out is binding, we reduce our target price to 32p/share (from 50p) and we reduce our rating to ‘hold’ from ‘buy’.”

Liberum upgraded IG Group to ‘buy’ from ‘hold’ and lifted the price target to 986p from 770p.

The brokerage said IG’s full-year 2016 results surprised on the upside, not with the modest earnings per share beat but with the “incredibly strong” growth in new accounts opened. As a result, it has upped its EPS forecasts for 2017 and 2018 by 6% and 12%, respectively.

Liberum pointed out that the number of new accounts opened was up 42% year-on-year and 21% ahead of expectations. It said this bodes well and gives it cause to suggest IG is returning to growth after a three year period of broadly flat active client and EPS growth.

“Trading remains highly correlated to market volatility but the underlying growth opportunity looks promising. After a strong run there is no need to rush but the investment case merits further attention.

“We have not changed our view that IG’s trading remains deeply correlated to market volatility and thus investors may wish to carefully choose their point of entry. However, we have more comfort in the underlying growth story than we have had for over four years.”