Berenberg drops Spectris to 'sell' and warns of 'trouble ahead'

The German broker said recent events had increased the downside risk to both earnings and valuation for Spectris, noting that in the near term, there was a combination of increased macro risk, lower-than-expected self-help savings, limited order visibility and a high, albeit "not unusual", second-half weighting (of 70.0%) to earnings before interest and taxes.

But Berenberg's concerns didn't end there, over the longer term, it now expects a "slower and more-complex turnaround" than previously thought.

"In our view, Spectris' valuation ignores these heightened risks," it said.

"Management's target of an 18% operating margin looks increasingly difficult to achieve, particularly without significant changes to the portfolio. Selling assets in this environment will be tough, particularly at valuations at or above Spectris’s trading multiple."

Berenberg, which also cut its target price on the firm's shares down to 2,050p from 2,440p, said it found "few positives" in Spectris' first-half statement.

The analysts also highlighted the fact that Spectris' organic growth of just 1% suggested "a material slowdown" in May and June, while pointing out that the firm's adjusted EBIT had been supported by around £3.5m of higher capitalised development costs and a £1.0m IFRS 16 benefit - meaning margins actually declined 20 basis points on a like-for-like basis.

By end 2019, growth was set to have slowed in eight out of nine of the company's markets, up from five in the first half.

And the EBIT headwind from the US-China trade war could outpace forecasts, they added, a fact made worse by the low visibility on orders and because the fourth quarter was set to be the biggest contributor to earnings.

Furthermore, cost inflation was eating away at the savings from the restructuring of the business, further disruption from the three ongoing mergers was also possible and Berenberg's confidence in management's ability to hit its long-term targets had also waned.

"Finally, we question the potential shape of the pro-forma business, with higher margins potentially coming at the expense of greater cyclicality."