Analysts at Credit Suisse have today raised their target price on Weir to 1850p from 1750p before, while keeping their overweight rating unchanged. That for three reasons:
Firstly, the company´s estimated 2013 earnings per share (EPS) forecasts have declined 17% year-to-date better reflecting pressure pumping weakness with management now actioning self-help initiatives (cutting capex, 25% reduction in SPM operating costs by year end) to offset upstream oil & gas headwinds.
Secondly, as visibility improves and estimated 2013 consensus forecasts become more realistic the stock should start to re-rate towards its peer group earnings multiple from its current discount (especially as EPS growth returns in 2014).
Thirdly, a full 58% of the group´s earnings before interest, taxes and amortizations is generated from a combination of Power & Industrial and Minerals with both posting a book-to-bill greater than 1 in the first half of 2012.
Lastly, Credit Suisse points out that: “Weir is trading at 11.3 times Credit Suisse´s 2012 estimated earnings representing a 4% sector discount. Historically it has traded at a 10-15% premium. While a lack of earnings momentum will prevent this premium being regained for now we see the spread as overly discounting pressure pumping headwinds.”
The group reported strong trading at both its Minerals and Power & Industrial divisions. Order input for the Minerals business grew by 11%, while order input for its Power & Industrial business increased by 22%. Conditions across the mining and oil sands markets are expected to remain generally positive in the second half. Full year revenues, profits and margins are expected to be ahead of the board's previous expectations. Group aftermarket sales remained solid. Aftermarket orders were up 17% (11% higher like for like) with strong production trends across mining markets and good service activity in global power and oil and gas markets. Aftermarket represented 55% of total orders (2011: 51%) in the period. Orders from emerging markets were 17% higher at £494 million, representing 38% of total input. Management noted that "acquisition integrations were progressing well, with trading in line with expectations." A progressive dividend policy continues to be pursued. The half year dividend payment was increased by 11% compared to that paid for H1 2011. The shares are occasionally subject to speculative takeover rumour.
Uncertainties for the outlook have been expressed. Order input on a like for like basis was 1% lower when excluding recent acquisitions. Original equipment orders were 2% lower (13% lower on a like for like basis). Order input at its Oil & Gas business declined by 7%. Largely thanks to acquisitions, group net debt has risen from £673 million as of the end of 2011 to £844 million. The group focuses on business sectors which are highly dependent on economic growth. The economic outlook remains uncertain, with concerns over Europe prominent. The Gulf of Mexico oil spill and nuclear power station difficulties in Japan have raised some uncertainties.
Order input 8% higher on a constant currency basis to £1.31 billion. Order input on a like for like basis was 1% lower when excluding recent acquisitions. Revenue grew by 29% to £1.33 billion. Profit before tax from continuing operations before exceptional items and intangibles amortisation increased by 27% to £226 million. An interim dividend of 8.0 pence was announced, an 11% increase from H1 2011. Full year profit before tax, amortisation and exceptional items is expected to be between £440m-£460m with the low end of the range reflecting no improvement on Q2 in upstream Oil & Gas.
Half year results: The update broadly disappointed investors, with the share price down by over 5% in early trading. Whilst the performance during the period proved to be generally in line with expectations, uncertainties over the outlook increased. Although management anticipates some improvement for its important Oil & Gas upstream pressure pumping aftermarket, it also highlighted the uncertain timing of any improvement. Frac pump overcapacity was expected to lead to minimal original equipment orders well into 2013. In all, a better performance for its Mineral and divisions could potentially be more than offset by a worse than previously expected performance for its Oil & Gas division. On balance, the group's position in supporting major resource companies combined with expected long term demand for resources weighs against current concerns for the global economic outlook,
In 1872, two brothers, George and James Weir, founded the engineering firm of G & J Weir. Over the past 15 years the company has turned itself from a basic pumps maker into a more broadly based "infrastructure equipment" supplier, with 2,000 products including valves and specialised actuators as well as pumps. Approximately one third of Weir’s staff of slightly more than 12,000 are engineers – with 90% of the total being based outside the UK, particularly in India, Australia and Brazil. The group is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.
In spite of the poor market reaction to Weir's interim figures on Tuesday, Investec has retained its 'buy' recommendation for the Scottish engineering group, saying that the results 'should be taken positively'.
The broker uses Weir's international peers to derive its price target (currently trading at 12.5 times next year's earnings), which is lifted from 1,770p to 1,850p.
Galvan Research and Trading has labelled engineering group Weir as a 'buy', saying that there is 'rebound potential' in the shares.
"The underperformance from Weir Group's oil and gas division earlier in the year was taken literally by the markets as a signal to sell the stock, with the 25% profits gain for the previous year also ignored," said Galvan's head of research Andrew Gibson.
"But the reiteration of full-year guidance and Jefferies's positive appraisal has caught the markets on the hop, and in the view of the Galvan Research team merits a 'buy' rating for Weir Group at current levels," he said.
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