Broker snap: Babcock hit by downgrades from Numis, Panmure Gordon

25th Nov 2013 09:51

Numis Securities has downgraded its rating for Babcock from 'buy' to 'hold' after the company confirmed speculation that it is in discussions with aviation services group Avincis.Nevertheless, the broker reiterated its long-term positive view on the stock, saying that it "looks capable of maintaining a premium rating" to the sector as the business continues to deliver decent growth and good returns.The target price for the shares has been left at 1,417p.As for Avincis, Babcock said it is in talks regarding a "joint venture", which is rumoured to either be a partial or full buy-out of the company from its private-equity owners.Press reports have suggested that Avincis' enterprise value is worth £1.6bn, which equates to around 19 times earnings before interest, tax and amortisation (EBITA). This "looks expensive", according to Numis."H1 figures from Avincis to June this year reported EBITDA 7% lower suggesting a full-year EBITA of less than €100m or c.£83m. Babcock will need to justify such a high valuation although synergies could lower this figure 1and the strategic justification is strong."Numis believes that an acquisition of Avincis would expand Babcock's expertise and broaden its geographical footprint, given that around 70% of Avincis' revenues are sourced from outside the UK, compared with Babcock's 84% UK exposure."Providing the deal is agreed on attractive terms, we believe the Babcock share price would re-act favourably. Babcock remains a core holding for us due to the longevity of existing business, the high competitive advantages and the prospect of strong organic growth."Panmure Gordon also downgraded its rating for Babcock on Monday from 'buy' to 'hold', saying that it now sees "limited upside" to its target price of 1,350p following its recent strong share-price performance."We [...] believe management has an excellent track record of extracting synergies from acquisitions, which could provide a further platform for growth. However, [...] concrete earnings upgrades are now required to further advance the shares from here in our view," the broker said.The stock was down 1.93% at 1,299.39p by 10:29 on Monday.BC