Broker tips: Pets at Home, Wood Group, Astrazeneca

12th Sep 2016 11:03

(ShareCast News) - Citigroup initiated coverage of Pets at Home at 'buy' with a 275p price target, given its expectation of the medium-term margin upside opportunity and cash returns.The bank reckons that over the next 10 years, the vet business could generate an incremental £40m earnings before interest, tax, depreciation and amortisation on a full-year 2016 group EBITDA base of £125m and account for more than 35% of group EBITDA. It also reckons 225m of cash could be returned in dividends over the next three years.Citi said its investment thesis was structured on five main factors, the first being that merchandise will continue to drive the top line through store growth and LFL, although headwinds will limit EBITDA growth.It said services were the key driver of EBITDA growth through expansion and maturity.Citi said that while online competition was a concern, it was unlikely to be as disruptive as expected. It also said that against an uncertain UK demand outlook, Pet Care looks more resilient.Finally, it said the company will soon start to return excess cash to shareholders. "We expect surplus cash to be returned to shareholders via a special dividend, driving our expectation of a FY17 5% dividend yield (including a specialdividend)." Jefferies upgraded AstraZeneca to 'buy' from 'hold' and lifted the price target to 5,800p from 5,400p saying it sees a much higher probability of success and larger market opportunity from the MYSTIC study than consensus implies.The MYSTIC study is a global, phase 3 study of the combination of the anti-PD-L1 drug durvalumab and anti CTLA-4 drug tremelimumab in first-line lung cancer."We see positive asymmetry on the outcome of MYSTIC, which we expect any time from February 2017. We see around 39% upside if MYSTIC meets our expectations against 10% downside if the entire durva/ treme opportunity in non-small cell lung cancer (NSCLC) is removed."We strongly challenge the consensus that AZN should hold only 6% of the PD-1/ L1 market by 2020E."Jefferies pointed out the market is bearish on the probability and potential of MYSTIC with just $1.2bn for durvalumab versus the banks' consensus of $3.3bn and $368m for tremelimumab in consensus by 2020E versus its estimate of $1.7bn."We estimate that MYSTIC could drive a combined peak revenue opportunity for durvalumab and tremelimumab of around $7.9bn in NSCLC, with additional revenues potentially coming later from other combinations as well as adjuvant NSCLC treatment." Exane BNP Paribas upgraded Wood Group to 'outperform' from 'neutral' and raised the price target to 815p from 695p.It noted the shares have lagged more operationally-geared peers year-to-date."Wood offers relatively low-risk exposure to a number of areas of early-cycle spending growth, with a differentiated outlook in upstream engineering, and screens attractively versus the sector on free cash flow yield and embedded value-based metrics."Given the compression in relative dividend yield between AMEC and Wood Group, we think the latter should be particularly attractive for income hunters in the sector."The bank said that when it downgraded the stock last Autumn, one of its concerns was the potential for structural impacts to its revenue line to continue to impede the overall revenue recovery in the business. It estimated that the structural impact could be around 30% of the upstream/subsea engineering business.Although Exane still thinks this holds, it said that in several business lines, the cyclical slowdown has overwhelmed the revenue recovery impact, with around 50% of the business now at or around the trough.Upstream Engineering is down around 45% from the peak and Exane reckons this would be more than 50% were it not for Wood's entry into Saudi Arabia.It said Subsea engineering will likely be down about 50% from the peak in 2017, while North Sea revenues are already down about 60% from the peak.The bank said Wood Group's first-half results revealed a promising pipeline in Upstream engineering, for the first time in at least three years, thanks to secured contracts for projects such as Tengiz and Leviathan."In fact, we think the outlook is perhaps even more promising when looking out around 12 months."