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Broker tips: Avon Rubber, Standard Life Aberdeen, CYBG

By Iain Gilbert

Date: Monday 19 Aug 2019

Broker tips: Avon Rubber, Standard Life Aberdeen, CYBG

(Sharecast News) - Analysts at Berenberg raised their target price on respiratory protection equipment maker Avon Rubber from 1,650p to 1,800p on Monday, stating that its acquisition of 3M's ballistic-protection business and rights to the Ceradyne brand had been the deal it was "waiting for".
Berenberg said the $91.0m deal, announced on 7 August, was a "quality acquisition" that surpassed its expectations both strategically and financially, hence the 20-34% upgrades to its earnings estimates for the company.

The German bank also said the acquisition multiple was "attractive", particularly when considering the expected cost synergies from systems integration and back-office functions.

"Delivering these synergies is forecast to cost $10m, representing a two-year payback," said Berenberg.

Although it noted that a deal of this size "clearly" carries integration risks, Berenberg said order visibility was good given the expected ramp-up in two major contracts.

While Berenberg expected Avon's shares to "pause in the near term", its analysts said that investors should continue to look further ahead.

"This is a high-quality, high-margin, cash-generative business that we believe can grow to a multiple of its current size through organic growth and M&A," said Berenberg, which also reiterated its 'buy' rating on the firm.

"We believe Avon's products will continue to drive organic opportunities with new military and law enforcement customers. New product launches should further support growth and margins, potentially also opening new avenues of growth such as in civilian applications."

Analysts at RBC Capital Markets slightly trimmed their target price for shares of insurer Standard Life Aberdeen from 210.0p to 205.0p on Monday, noting that institutional net flows tended to be driven by the firm's three-year track record, which remains weak.

RBC said Standard Life's one-year performance was improving, with 79% of the group's assets under management coming in ahead of its benchmark over the past year, but noted that over the latest three-year period just 20% was performing at pace.

The Canadian broker, which also reiterated its 'underperform' rating on the stock, increased its estimate for annual net outflows to £16.5bn from £10.4bn, stating the group had failed to stem outflows despite "another solid month" in July.

RBC also highlighted that its performance tracking differed to the performance statistic that forms one of Standard Life's key performance indicators and remuneration inputs, saying that although SLA picks up all asset classes including multi-asset, fixed income, cash, property and quant, it only tracks equities.

"The change in net outflows, market movements and including H1 2019 results act to reduce our EPS by 3%, 8% and 9% for 2019E, 2020E and 2021E, respectively. We are below consensus by 4%, 7% and 11% for 2019E, 2020E and 2021E, respectively," said RBC.

CYBG got a boost on Monday as UBS upgraded its rating on the shares to 'buy' from 'neutral', arguing that net interest margin is set to rise even in the current rates environment.

UBS noted that CYBG shares are down around 30% since the company's trading update at the end of July, underperforming the sector by about 20% and UK banks by 15%.

Over the same period, consensus earnings per share has fallen 16%, suggesting a 17% de-rating, with one-year forward consensus price-to-earnings falling to 5.3x and P/E discount to the sector and UK banks widening to 31% from 17% and 16% from 1%, respectively.

"This suggests that the sharp fall isn't entirely explained by Brexit and we think the market expects further EPS cuts on expectations that net interest margin will continue to shrink in 2020.

"We see this as unlikely and model a rising NIM from 2020e, with EPS rising from 2021e on expanding NIM and cost savings."

UBS said it sees "decent" upside potential when CYBG gives new NIM guidance in three months' time.

The bank cut its price target on the stock to 170p from 195p.


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