Broker tips: Rolls-Royce, International Power, Weir

16th Feb 2011 11:18

UBS is no longer a seller of engine maker Rolls-Royce, but still sees little scope for the group to materially beat expectations.The broker upgrades Rolls-Royce to a 'neutral' recommendation following its 2010 results, saying that "assuming [it's] premium valuation will persist, then there is less reason to remain a seller of the stock and we upgrade our rating."However, "Rolls's Total Care Accounting means that civil after market growth for 2011 has already been largely predetermined through the number of engines/pounds of thrust sold in the prior year."The broker says that there is little upside risk to its 10% after market growth assumption for the current year, and notes that a re-rating from here seems less likely, particularly if its view on a limited earnings per share upside is correct.With the market determined to value Rolls-Royce at a premium to the sector persists UBS has raised its target price to 660p, from 500p.Nomura has reinstated its coverage on electricity generator International Power (IPR) with a 'buy', saying that the valuation of the new and improved grouplooks attractive, even without considering future growth assets. "The new IPR, incorporating the international energy assets of GDF Suez, is the only European utility with a true global reach. It does not suffer from the woes facing the rest of the sector (over capacity, low growth, and political risk)," the Japanese broker says. From an expected earnings per share (EPS) base of 22.9p, the broker estimates an EPS of 35.3p by 2014. This growth comes from contracted assets already under construction, and does not include any new projects beyond those already announced. While the group has a strong balance sheet and cash flows, the broker notes that its target price of 410p does not even include a reinvestment of surplus cash - "were IPR to invest £1.5bn growth capex [capital expenditure] per annum, we estimate we could add 60p to our fair value."Royal Bank of Scotland (RBS) upgrades Scottish engineer Weir Group from a 'hold' to a 'buy' and ups its forecasts as it believes 2011/12 consensus upgrades are possible from improved pricing/demand in the mining/oil sectors."Weir is, in our view, a quality name in the UK Capital Goods sector and is faced with a number of attractive end-market exposures. In line with our more positive sector stance on the EU mining equipment names, we upgrade our Weir forecasts," the broker says.RBS upgrades 2011 and 2012 earnings per share estimates by 6% and 9%, respectively, "taking into account the three acquisitions made in the fourth quarter of 2010, from upping its Minerals/Oils division assumptions, and including the benefit of improving pricing."The broker expects a good set of FY2010 results when Weir reports on 3 March, and increases the target price from 1,660p to 1,915p.