Broker tips: Cobham, Atkins, Inchcape

13th Apr 2016 13:30

(ShareCast News) - Aerospace and defence firm Cobham got a boost on Wednesday as Barclays upgraded the stock to 'overweight' from 'equalweight' in light of the recent performance.It noted the stock has significantly de-rated since a small profit warning in the third quarter and lacklustre full year results, and is now trading at an increasingly attractive dividend yield."We think some investors discount the yield on fears that management may be required to cut the dividend in order to avoid breaching covenants due to the stretched balance sheet."But Barclays said the dividend cut was a low probability event."We calculate a 20% EBIT miss would be needed in 2016 to breach covenants and given over 80% of revenues are generated in stable or growing end markets, this seems unlikely. Moreover, after 45 years of paying a progressive dividend management is acutely aware of how a policy change would be received, in our view."Barclays added that given Cobham's earnings outlook, future dividend growth will likely be low to mid-single digits rather than the double-digit levels delivered historically.The bank cut its price target on the stock to 255p from 270p. Numis left WS Atkins at a 'buy' rating on Wednesday after the engineering company reported an in-line fourth quarter trading update.Atkins said it traded well through the fourth quarter and expects underlying results for the year to the end of March to be in line with views.The FTSE 250 group said its UK and Europe business is expected to show good margin progress in the second half as it continues to benefit from the UK government's ongoing commitment to infrastructure spending.As far as North America is concerned, the business continues to operate within stable infrastructure markets.Atkins said certain parts of its business with a greater reliance on federal funding still face project award delays, but it expects to deliver an improved second half performance after the first half was hit by bidding costs on major projects.The firm said its financial position remains strong and it expects to report net funds of around £190m at 31 March, prior to the funding cost of the PP&T acquisition."Atkins's trading update notes a good fourth quarter, with full year results in line with management expectations," Numis said."We do not expect any forecast changes either for full year 2016 or beyond based on this update. We continue to believe that the shares are very good longer term value."Numis gave Atkins a target price of 1,575p. Inchcape raced ahead after JP Morgan Cazenove reiterated its 'overweight' stance on the stock and added it to its European Analyst Focus List as one of its highest conviction OW calls.JPM said the recent de-rating of the stock was unjustified as it pointed to the fundamentally attractive business model, high levels of cash generation and compelling trading multiples.In the past 12 months, Inchcape has re-rated from 14x to 12x one-year forward price-to-earnings despite delivering on 2015 market estimates and guiding to another "solid constant currency performance" in 2016.JPM said the automotive distributor and retailer has proven to be more resilient in its emerging markets businesses than many expected.It has suffered from association with UK retail sector, but is fundamentally an international business with limited exposure to the British consumer, the bank said."Its focus on premium and luxury vehicles confers a competitive advantage both in emerging and in more mature markets. Its strong OEM partnerships are a key asset," said JPM, adding that the company is well diversified by geography and revenue source.The bank has a price target of 890p on the stock.