Broker snap: Westhouse cuts Babcock due to limited upside

3rd Apr 2013 10:30

The share price of Babcock International, the UK engineering supports services organisation, was relatively subdued on Wednesday morning despite an in-line trading statement, as Westhouse Securities downgraded the stock from 'add' to 'neutral'.The company said that it has traded "well" throughout the 2012/2013 financial year (ended March 31st) with full-year results expected to show "strong progress" with market conditions remaining positive.The order book has remained stable at £12bn but the pipeline has increase to £15.5bn from £14bn at the end of January. Net debt approached 1.5 times earnings before interest, tax, depreciation and amortisation (EBITDA) by the year end, as expected.Analyst Michael Donnelly from Westhouse said that the shares are now trading at the 10- and 15-year high enterprise value-to-EBITDA level of 12.2 on consensus estimates (a price-to-earnings ratio of 15.3)."They have risen by 14% since our initiation of coverage, and our discounted cash flow-based target price of 1,142p now shows only 4.0% upside to fair value, hence we downgrade our recommendation to 'neutral'. "This leaves us 'neutral' on the major outsourcers, with only Capita being, in our view, materially overvalued, showing some 27% downside to our target price of 661p."The stock was down 0.73% at 1,095p by 10:41.BC