With many companies having seen significant falls in their share prices of late, City analysts have been revisiting their valuations and recommendations.
Upgrades this week for Royal Bank of Scotland (LSE: RBS), International Consolidated Airlines (LSE: IAG) and Petrofac (LSE: PFC) have particularly caught my eye.
Royal Bank of Scotland
Heavyweight Morgan Stanley has turned positive on Royal Bank of Scotland … for the first time in six years! MS had previously been concerned about the lack of visibility on the timeframe for recovery and the earnings power of the restructured bank.
However, analyst Chris Mannings now sees bright prospects beyond the transition phase: “As the final layers are peeled away, a slimmed down UK/Irish retail and commercial bank with top three position in its key markets should start to emerge by 2018”. He reckons investors are underestimating RBS, and that the bank can deliver a return on average equity of over 14% by that date. As such, MS has upgraded RBS to Overweight from Equalweight and hiked its price target to 400p from 345p.
Further upbeat commentary came from RBS super-bulls Jefferies International, who reiterated their Buy stance this week, albeit reducing their price target from an out-on-a-limb 510p to 482p.
RBS’s shares are trading at 335p, as I write, on a modest P/E of 11.8, based on current-year consensus earnings forecasts.
International Consolidated Airlines
International Consolidated Airlines — the owner of British Airways and Spanish flag carrier Iberia — has also just about completed its acquisition of Aer Lingus. Barclays has resumed coverage of IAG, with an Overweight stance and price target of 750p, and has named the stock its top pick in the entire European transport sector.
Barclays admires IAG’s “truly disciplined management team”, likes the group’s prospects for revenue growth and margin improvements, and said: “We believe this business really can generate cash through the cycle — something which is not nearly reflected in its current valuation”.
The great majority of other analysts are also bullish on IAG, including Nomura and Credit Suisse, who both reiterated their positive views of the stock last week, and share Barclays’ top-end price target of 750p.
IAG’s shares are trading at 547p, as I write, putting the company on an undemanding forward P/E of just 10.2.
Petrofac
M&A activity in the oil services sector continues apace. US giant Schlumberger this week announced a $14.8bn deal to acquire rig equipment manufacturer Cameron. The news was a cue for analysts at Societe Generale to upgrade Petrofac to Buy from Hold, albeit with a modestly reduced price target of 900p from 905p
SocGen’s analysts reckon this second big deal in the sector this year will force other players, including Petrofac, “to react if they don’t want to miss out on the potential rebound of the offshore market in 2017-18”. Petrofac consolidating its position or being taken over could be catalysts for share price action. SocGen likes a number of strong features of the company’s balance sheet, relative to its peers (including levels of pension deficit and goodwill).
There are several more bullish brokers than SocGen out there, with price targets of over 1,000p, Barclays’ being the king of the bulls by some distance with a target of 1,400p.
Petrofac’s shares are trading at 855p, as I write, putting the company on a forward P/E of 15.6, and with a consensus for a much improved earnings performance in 2016 bringing the P/E down substantially.