Broker tips: Babcock, ITM Power, Hammerson

(Sharecast News) - Babcock surged on Tuesday after Berenberg initiated coverage of the stock at 'buy' with a 425.0p price target, saying it was an "unanchored value proposition". Berenberg stated Babcock was the second-largest supplier to the UK Ministry of Defence and holds a leading position in the UK maritime defence sector.

"The group is in the early stages of a major turnaround following several turbulent years, led by an experienced management team which is refocusing the company on its traditional strengths: as a critical supplier of defence equipment and services to the UK and its international allies," it said.

Berenberg pointed out the turnaround was being led by chief executive David Lockwood and chief financial officer David Mellors, who together successfully led the turnaround at Cobham and said it was confident they will do the same at Babcock.

Berenberg also said that despite its majority - and growing - defence exposure, Babcock continues to be "misunderstood and overlooked".

It noted that the shares have underperformed UK defence peers by 45% year to date and trade on just 7.3x 2023 price-to-earnings, which is a 45% discount to UK defence peers.

Citigroup downgraded ITM Power on Tuesday to 'neutral/high risk' from 'buy/high risk' as it took a look at European electrical equipment.

"While hydrogen offers an attractive long-term theme, supported by policy in the US and Europe, recent news flow and earnings commentary have indicated that timelines for some projects have been shifted to the right, particularly in the very near term," Citi said.

"We have revised our hydrogen electrolyser model, lowering our 2030 ex-China installed base estimate by around 10% to 197GW, although we still see a new additions 2022-30 CAGR of approximately 75%; this is driven by slower project pipeline conversion in the near term."

The bank added that buy-rated Ceres Power, with its nascent business in solid oxide electrolysis cells electrolysers, was its preferred pick in Europe.

Liberum upgraded Hammerson to 'hold' from 'sell' on Tuesday and lifted its price target on the stock to 20.0p from 15.0p as it pointed to a more balanced risk/reward profile.

The broker said Hammerson has benefited from a return to normality as lockdown restrictions eased, but that it expects yield shifts to continue to negatively impact the company's property valuations.

"We raise our FY23 rental growth expectations, and while we think there is still a high risk of valuation declines leading to a potential covenant breach, this is not our base case," Liberum said.

Liberum said it sees three resolutions potentially reducing the risk of a covenant breach: accelerated disposals, an equity raise/takeout offer, and/or renegotiations of covenants. This could result in upside potential of more than 50%, the broker said.

Key catalysts for the shares include the rate at which Bicester debt is refinanced; an FY22 trading update that may give clearer guidance on FY22 valuations; and post-Covid trading and the impact of increased footfall driving ERV growth and reducing vacancies, Liberum concluded.