Panmure upgrades Babcock after Avincis buy, Magnox contract

1st Apr 2014 10:01

Panmure Gordon has raised its recommendation for engineering group Babcock from 'hold' to 'buy' after the recent acquisition of Avincis and a potential nuclear decommissioning project.The broker has hiked its target price from 1,350p to 1,525p.Last week's £920m purchase of helicopter services provider Avincis "is clearly not a cheap acquisition" but will be earnings enhancing, Panmure said. The broker said it was comfortable that Avincis should be able to deliver organic growth of 15-20%, driven by its strong order book, and should be able to strengthen its margins. Potential revenue synergies with Babcock, however, will take time to come through, the broker explained to clients.Babcock also announced on Monday that its consortium had been selected as the preferred bidder to take ownership of Magnox Ltd. And Research Sites Restoration, the site-licence companies for 12 nuclear sites in the UK. Panmure said that Babcock has a 50% stake on the consortium, which should equate to revenues of £200m per annum once the contract gathers pace. The broker has not adjusted its estimates for the contract yet, but said it will lead to upgrades when the company gives further guidance."While the current valuation is at the upper end of its historic trading range, we believe Babcock is in a strong position to outperform our forecast assumptions given its enhanced margin structure and improving levels of visibility in a number of different areas," Panmure added.In separate news, Babcock said on Tuesday it has been named preferred bidder on a 21-year contract with the London Fire Brigade (LFB). The company successfully took over the management of the LFB's fleet of vehicles on an interim contract in November 2012 and the new long-term contract is expected to become operational on November 13th this year.The stock was 4.3% higher at 1,404.85p by 10:25.BC