Deutsche Bank downgrades Babcock on lack of upside
Deutsche Bank downgraded support services company Babcock International to ‘hold’ from ‘buy’ and cut the price target to 1,020p from 1,100p.
Babcock International Group
510.50p
16:35 26/04/24
FTSE 100
8,139.83
17:09 26/04/24
FTSE 350
4,470.09
16:59 26/04/24
FTSE All-Share
4,423.59
17:14 26/04/24
Support Services
10,641.76
16:59 26/04/24
The bank said that while it likes Babcock's unique market position and high barriers to entry, there is not enough upside at the moment.
“The stock is not expensive, leaving room for some price recovery on e.g. contract news, but in our view investors will need to see repeated strong reporting for a material and sustainable re-rating,” Deutsche said.
In addition, it argued that although cash generation has been good, certain drags mean the valuation on cash metrics looks less attractive than on earnings multiples.
It said organic growth should improve next year, but DB remains cautious on UK outsourcing as a whole and said it is not prepared to assume a return to previously seen growth levels.
Babcock’s first-half organic revenue growth of 4% disappointed the market and guidance was for 4% again in the second half. What was more disappointing, however, according to DB, was the modest provision release which inflated the margin (+20bps) and reduced operating cash.
The bank made no changes to its organic growth assumptions for full-year 2016/17 but upped its FY17/18 estimate from a cautious 4% to 5.3% given contract news flow, and as it updates for FX.
At 0910 GMT, the shares were down 2.9% to 912.32p.