Broker snap: Babcock remains top pick in the sector, says JPMorgan

10th Sep 2013 10:50

Engineering support services group Babcock was making gains on Tuesday after JPMorgan Chase said that the stock remains its top pick in the sector.The bank reiterated its 'overweight' rating on the stock, saying that its valuation - the stock is trading at 15.2 times estimated earnings (for the year ending March 2014) - is at a slight discount to the European business services sector-average multiple of 15.6. JPMorgan thinks that Babcock represents the best earnings upside potential in the sector with 60% upside to its blue-sky scenario to March 2016."Babcock's shares have been rather range-bound since peaking in July, we think due to the lack of news flow since the Q1 trading statement. However, we believe that the investor seminar on September 27th could act as a catalyst and may also be accompanied by commentary on H1 trading."Since the first-quarter update in July, the only main news has been that Babcock acquired Brazilian facilities services company Conbras for £22m. While this is only a small bolt-on purchase, JPMorgan said it suggests that "acquisitions are now back on the agenda after a period when Babcock paid down the debt it acquired through the VT acquisition" (the defence and services company it bought in 2010)."We believe that Babcock has considerable scope for more acquisitions [...] In our blue sky scenario we model £150m per annum of acquisition spending in each of the next three years."A 1,380p target price for the stock was maintained.The shares were up 2.34% at 1,183p by 11:32.BC