Broker tips: Wood Group, Aggreko, St James's Place, IAG

In a review of the European oil services sector, Exane analysts said they have "had some concerns over Wood’s accounting for some time" and the magnitude of these concerns increased after the acquisition of Amec Foster Wheeler, a company that presented the analysts with similar struggles.

The analysts, which cut their rating on Wood to 'neutral' from 'outperform', said its concerns included the treatment of adjustments from the Amec deal as well as exceptional costs and questioned the presentation of exceptional items.

"Although we doubt there are any major challenges given the diversified nature of the portfolio, we also note that contract balances increased in H1, with advances from clients decreasing counter-cyclically but unbilled revenues increasing."

Overall, the sector's major producers are expected to provide a “steady as she goes” outlook on capital expenditure.

Exane suggested US shale producers may suffer and that recent announcements suggest first-half 2019 activity may fall 10-20%.

Aggreko ran out of power on Tuesday after Peel Hunt downgraded its stance on the stock to 'reduce' from 'hold' and cut the price target to 700p from 800p as it argued that challenges remain "significant".

The broker said management at the temporary power provider is performing well across "tricky" markets, with the third-quarter update providing some reassurance that Aggreko remains on course, but the "ever-shifting challenges" remain significant.

Peel Hunt said challenges are significant given the utility business appears to be in structural decline, the cycle exposures, working capital pressures and the growing competition from 'generalists' who continue to invest and expand.

"We are wary that the fragile global macro-economic backdrop is likely to lead to customer hesitancy and greater off-hire risk," said analyst Andrew Nussey.

"Although self-help will mitigate some earnings pressure and support an improving return on capital employed profile, the pace of ROCE recovery looks to be under increasing external pressure."

Analysts at Credit Suisse downgraded wealth management outfit St James's Place to 'neutral' on Tuesday, citing slower growth in assets under administration as a result of negative near-term market volatility as a major concern moving forward.

The Swiss bank also lowered its target price on the FTSE 100 resident to 965p from 1,150p, saying it believed the group's current stock price was "fair value given the challenging asset gathering environment".

Credit Suisse noted that St James's had benefited from pensions freedom legislation across the UK which allow individuals to stay invested in equity/bond markets rather than converting pension pots into an annuity and, in turn, extending the period of time client's money remains with the firm.

However, CS believes these flows will come under pressure as rising bond yields and increased market volatility are likely to lead to clients delaying the consolidation of existing DC pension pots with SJP given the impact of its high fee structure during a market downturn.

Credit Suisse also highlighted risks coming from changes in the UK pensions legislation and tax rules that could limit or improve individual savings, lower transfers from defined benefit schemes, creating medium-term headwinds to inflows, lower flows from defined contribution pension pot consolidation and SJP's lower existing asset base due to negative fourth-quarter equity returns.

"Over the past five years, SJP has outperformed both UK Life insurers and UK asset managers by 34ppts and 23ppts respectively."

"However, over the past year the stock has delivered a -19% total shareholder return, similar to UK Life and asset managers as both sectors de-rated following concerns over high credit risk (UK Life) and negative netflows (UK asset managers)."

Morgan Stanley has downgraded European airline group IAG, citing uncertainties about its post-Brexit ownership structure and US expansion plans.

In a note on European airlines, the bank has reduced its rating to ‘underweight’ from ‘equal-weight’, giving the Anglo-Spanish group – which owns British Airways, Iberia and Aer Lingus – the lowest ranking of all the European airlines it covers. The price target has been cut to €6.50 from €7.

The bank said: “We think there are developing risks on both the topline and costs/capex that may present headwinds to margins in the coming quarters.”

In particular, Morgan Stanley pointed to recent comments by US carrier Delta Airlines, which said there had been some “cautionary signs” in the March quarter. The bank said: “As IAG is growing its Atlantic seat capacity at over two times the rate of US peers, we think the RASK (revenue per available seat kilometre) risks could be more pronounced that consensus currently forecasts.”

Other concerns include ongoing negotiations with British Airways’ three main unions, which could be “a source of cost pressure relative to the labour trends the group has enjoyed the past few years”, and Brexit.

“IAG has to still resolve its position on post-Brexit ownership rules and compliance with EU law on foreign ownership,” noted the analysts. “We await updates from IAG directly on their position on this issue at the upcoming full-year results on February 28.”