Broker snap: UBS slashes targets for Petrofac but stays upbeat

19th Nov 2013 10:37

UBS has slashed its target price for oilfield services group Petrofac by almost a quarter after the company warned on Monday that contract delays could hamper growth in 2014 and possibly beyond.However, the bank maintained its positive 'buy' recommendation for the stock, saying that its new target of 1,400p (down from 1,850p) is set at 12 times 2014 earnings, below the five-year average forward multiple of 12.3. This is still well above current levels, especially after Monday's sharp decline.Petrofac's share price was down nearly 17% before the close of trade at 1,200p after the company predicted "flat to modest growth" in net income next year. On UBS' new estimates and after Monday's sell-off, the stock is now trading at just 10.3 times 2014 earnings, a "16% discount to the European oil service sector versus its five-year average discount of 2%", the bank said.The company, which designs, builds and operates oil and gas infrastructure, said that its new guidance reflects the rephasing of both the Upper Zakum project in Abu Dhabi and the second stage of the Berentai project in Malaysia. Meanwhile, it also said that targets for 2015 were dependent on the timing of certain contracts during 2014."Although Petrofac's lowered 2014 guidance reflects project phasing rather than execution issues (and so should support 2015 earnings), the lower base now implies ~30% growth in 2015 after two years of 'modest' growth," UBS said.The bank said that the Capital Markets Day on December 5th in London should be a chance for the company to give some clarity on the longer-term strategy."The shares have been poor performers this year, down 26% in the year-to-date. While this undoubtedly reflects the downgrades to 2013 and 2014 numbers, we think it also reflects some uncertainty around the company's longer term strategy (e.g. move into offshore construction, growth of IES). "We think some illumination around these topics could be helpful to the shares: our analysis suggests that the IES business does deliver shareholder value."The stock was 2.9% lower at 1,165.22p by 11:00 on Tuesday.BC