Broker snap: Deutsche Bank upgrades Petrofac after underperformance

6th Jan 2014 09:09

Deutsche Bank has lifted its recommendation for oilfield services group Petrofac from 'hold' to 'buy', saying that the stock's current price is overly discounting risks.The bank has raised its target price for the shares by 5.3% from 1,425p to 1,500p, which represents 30% potential upside to the current price.It explained that Petrofac has underperformed the wider EuroStoxx benchmark by nearly 40% over the past 12 months. This has been due to a combination of downgrades after onshore project re-phasings and a de-rating as cash-flow dynamics have worsened. The latter was due to the roll-out of new, more capital-intensive strategies, the bank said."Sentiment around these points has arguably bottomed and with a return to good growth likely to become more visible in 2014, trading on 8.5 times estimated fiscal year 2015 earnings, we upgrade to 'buy'," said Research Analyst Sebastian Yoshida."Having taken a cautious stance through 2013 we now see much reduced expectations and an undemanding multiple as overly discounting ongoing earnings risk," Yoshida added.Along with an expected return to better medium-term earnings growth, the analyst said that a key catalyst for a re-rating will be the market's confidence in better cash-flow dynamics and returns post 2014. "Re-appraising the outlook for cashflow in Integrated Energy Services [Petrofac division], we are left with the impression that consensus is materially underestimating 2015E [earnings] and, by extension, better underlying cash generation."The stock was 1.12% higher at 1,234.68p by 10:26 on Monday.BC