Worries about Wood may be overdone
Feb 8 2010 Share Watch with Andrew Miller, The Journal
MARKETS’ concerns over Wood Group’s exposure to the US and the slowdown of its engineering activities have led the shares to underperform the energy sector by 12% over the past three months.
While these worries were justified, we believe they are now more than priced in. The latest trading statement has shown the resilience of the other activities and the effectiveness of the group’s cost saving measures.
We also believe spending in US natural gas projects have reached a trough and expect profits to recover gradually. We think the current discount that the shares are currently trading at versus peers is unjustified.
Our new fair value points towards a total potential return of 30%. We have therefore upgraded Wood Group to buy from neutral.
We are upgrading our recommendation on Reckitt Benckiser to a buy and moving our forecasts on a year enables us to revise its fair value to 3,797p.
We believe concern over generic competition for the group’s opiate suboxone drug have overshadowed the strength of the core businesses of late and we think the ongoing absence of such competition should result in further earning upgrades.
Having successfully integrated two OTC businesses over the last five year and paid down its debt, Reckitts is now in a strong position to re-leverage the balance sheet and make further acquisitions in this space.
In addition, we are of the view that the group has considerable scope to incrementally grow profit by increasing its exposure in the emerging markets.
Our fair value estimate is derived by applying the groups long term average PE to 2011 consensus earning forecasts.
We are upgrading our recommendation on Aviva to outperform and raising our fair value to 550p.
Aviva shares have underperformed the FTSE Life Insurance sector over the past 12 months, largely on fears over its capital position and UK focus.
As markets recover, and capital concerns abate, we think that the deep value offered by the shares can be realised. Aviva is a composite insurer, and as such is well diversified both by geography and business line.
Although the growth outlook for its key regions – the UK and Europe – remains muted, we think this is factored into the share price and the group has growing divisions both in the US and Asia.
There is a risk that the underwriting cycle in general insurance is turning negative in the UK, but motor rates are on the rise and the division provides a defensive earnings stream should conditions deteriorate.
Finally, the company profile fits well with our strategic theme of shifting into mid cycle companies, which have lagged the recent rally. The valuation is undemanding and, following the cut to the dividend, we think there is potential for increases.
Andrew Miller is Newcastle office head at Barclays Wealth
