UBS stays positive on UK engineers, recent sell-off overdone

28th Oct 2014 10:03

The recent sell-off in the UK engineering sector has been overdone, according to UBS, which predicts that trading should improve in the near term.As part of its review of the sector, UBS has upgraded Rotork from 'neutral' to 'buy' and named Bodycote, Fenner and Spirax-Sarco as other top picks."Our UK engineering coverage has seen a 13% share price decline over two months on the back of economic fears. However, while the outlook is somewhat more tepid, we do not see it as that different to the last one-two years," said analysts Mark Fielding and Robbie Capp.UBS has trimmed its target prices for stocks across the sector on the back of a lower growth outlook, but has only cut its earnings per share (EPS) forecasts by an average 1%. It still reckons that companies will grow organically by 4.3% in 2015, albeit down from its previously 5.6% estimate, but broadly flat on the 4.1% growth estimated for 2014."With valuations at the lower end of the post credit crunch range versus the UK market and the global peers we see the group as attractive. Steady trading over the next three-six months should drive outperformance," Fielding and Capp said.The price-to-earnings multiple premium of the UK engineering sector relative to the FTSE All-Share index has dropped from 27% to around 7% in 2014, and stocks now stand at an 8% discount to their European peers."This is for a group that has delivered EPS growth two times the rate of the UK market and the European industrial peers over the last decade, and where many of the companies could have significant attractions as M&A targets," the analysts said.UBS' UK engineering sector ratings:'Buy': Bodycote, Domino Printing, Fenner, IMI, Oxford Instruments, Rotork, Spirax-Sarco, Tyman, Vesuvius and Weir.'Neutral': Halma, Hellermann Tyton, Morgan Advanced, Melrose, Renishaw, Spectris and Xaar.'Sell': Smiths Group