Broker tips: Meggitt, Lloyds, Petra Diamonds

28th Oct 2015 13:32

(ShareCast News) - Meggitt was left reeling in the third quarter by a sharp decline in energy revenues, a worsening 'business-mix' and lower aftermarket sales for civilian and military spares, Investec said.That led the broker to place its recommendation and target price for the shares of the global engineering group 'under review'.The firm, which describes itself as a specialist in extreme environment components and sub-systems for aerospace, defence and energy markets.As regards energy, the 16% drop in the unit´s revenues suggests "weakness is no longer limited to to Heatric, but has spread to other businesses", analyst Rami Meyrson said.The business-mix worsened across all of the firm´s end markets, shifting towards higher original equipment and lower after market sales, including in the civil and military aftermarkets. Analysts were not particularly bothered by Lloyds´s weaker than expected third quarter profits, but the lender´s guidance might be another matter.A 17% drop in 'other operating income' led to a 6% miss on underlying pre-tax profits. Nevertheless, that was compensated for by a leaner cost structure than had been anticipated.Assets also performed better than markets had discounted."Impairments picked up slightly, likely driven by fewer write backs, but remained (at 15 bps) at a very low level," Goldman Sachs pointed out in a research note e-mailed to clients.At £500m PPI provisions were also in-line with management´s guidance for about £1bn in claims by year-end, assuming a stable claims volume.However, financial guidance for 2015 was mixed, Goldman´s Martin Leitgeb and Nick Baker said. Investors in Petra Diamonds lack confidence, leaving the share price exposed should worries about Chinese demand persist.The Asian giant represents only about 16% of market demand but expectations were for growth in the mid-teens going forward, making it an "important" growth market, broker SP Angel said in a research note sent to clients.Nevertheless, the company maintained its guidance for the full-year on expectations for a better mix of stones in the second half of the fiscal year.Furthermore, the drop in prices was partially offset by a 13% depreciation in the rand over the company´s fiscal first quarter."We continue to maintain that patient investors will be rewarded but may need to wait till better news flow in the second half."SP Angel reiterated its recommendation to 'buy' and target price of 156p. RBC Capital Markets slashed its price target on Meggitt to 420p from 580p following the company's profit warning.The bank, which kept its 'outperform' rating on the stock, noted that the warning was due to an abrupt slowdown in both the aerospace and defence after-markets and said it expects this to continue into the fourth quarter."Just when it seemed that Meggitt was getting it together, and reporting results similar to other aerospace suppliers, we lurch back into a sub-par performance," said RBC. "If it were not for the typical UK market freak-out sell-off today, we would be looking to downgrade."However, with the stock down around 20%, a 2016 price-to-earnings ratio of 11.5x and a dividend yield of 3%, the bank said it was reluctant to capitulate here.