Broker tips: Severn Trent, IQE, Tekmar

By Iain Gilbert

Date: Tuesday 18 Feb 2020

Broker tips: Severn Trent, IQE, Tekmar

(Sharecast News) - JP Morgan upgraded its price targets for UK water companies and its recommendation on Severn Trent after the regulator approved five-year plans and December's election removed the threat of nationalisation.
The investment bank upped its rating on Severn Trent to 'neutral' from 'underweight' and increased its price target to 2,550p a share from 2,000p.

JP Morgan's analysts said regulator Ofwat's acceptance of five-year plans for the sector that provided more certainty on dividends. The Tories' success at December's general election also set aside concerns about nationalisation under a Labour government, Chistopher Laybutt and his team said.

"With political and regulatory headwinds now behind us, we are also moving our valuation grid higher: removing nationalisation discounts, increasing asset multiples and lowering discount rates," Laybutt wrote in a note to clients. "We are upgrading Severn Trent to neutral ... as we see sector valuations continuing to benefit from improved cash flow profile, dividend security and M&A speculation."

Analysts at Canaccord Genuity stood by their 'speculative buy' recommendation and 65.0p target price for shares of Apple supplier IQE despite the former's overnight warning on first-quarter revenues.

Coming as it did on the heels of three major downgrade cycles in late 2018 due to weak demand for iPhones and the ban on Huawei, "this third instance of a negative external factor may yet again test investors' patience," they said.

The length and depth of the hit to the company remained in question, but for now, they estimated that IQE's sales would take a mid-single-digit percentage point hit to revenues and that its adjusted earnings before interest and taxes would be impacted by 5.0-20.0%.

There was a silver lining, however, because the bulk of the impact came from the supply side and not demand, as in late 2018.

"Furthermore, once iPhone production normalises again later this year, we expect IQE to benefit from content gains in the lower-end SE2 (Face ID) and iPhone 12 (5G + world-/rear-facing 3D sensing camera)," they said.

"Android OEMs are also finally ramping up their adoption of 3D sensing. Overall, despite short-term estimate risk, our view remains unchanged that 2019 was the trough for sales and earnings at IQE, and we maintain our Speculative Buy rating."

Analysts at Berenberg lowered their target price on subsea cables provider Tekmar on Tuesday after the group warned that it had been by the Wuhan coronavirus outbreak.

Tekmar reduced its full-year 2020 guidance on Tuesday but left its 2021 expectations unchanged - for now. The outbreak of the coronavirus, subsequent factory shutdowns and heightened travel restrictions in China affected the group's ability to manufacture components and also made the import and export of goods in the region more difficult.

"The company could source replacement components from Europe but the cost would be an order of magnitude higher and with just six weeks left before year-end, shipments may still fall into FY 2021," said Berenberg.

The German bank also noted that Tekmar had expected to generate roughly 10% of its forecast 2020 sales from Chinese offshore wind projects in the fourth quarter. However, these projects have also experienced delays.

While Berenberg pointed out that near-term risks were "certainly elevated", the analysts maintained that Tekmar's longer-term thesis remained "attractive".

"Tekmar remains the global market leader in offshore wind cable protection. Market growth forecasts are attractive, supported by a number of structural drivers, and Tekmar's products are critical at a cost that is insignificant to project capex."

Although Berenberg lowered its price target on the group from 180p to 165p, the analysts kept their 'buy' rating on Tekmar.


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