Broker tips: Rolls-Royce, Wood Group

(Sharecast News) - UBS upgraded Rolls-Royce to 'buy' from 'neutral' and nearly doubled its price target on the stock to 200.0p from 105.0p as it said the shares were "abnormally cheap" despite China reopening. "Even despite the more than 40% share price move since Q4 results Rolls still trades nearly 2pts below its historical yield at circa 9% consensus 2024 estimated free cash flow," the bank said.

"The wide body market is heavily skewed to Asia and especially China, with 51% of 2019 wide body traffic starting or ending in Asia. Chinese weakness alone accounts for more than 40% of the absolute wide body traffic reduction in 2022 versus 2019, so we see China's reopening as an important and underappreciated catalyst that could bring valuations back into line with historical norms."

UBS stated the wide body market may be less structurally challenged than consensus believes and noted Rolls' new chief executive's initial presentations to investors had gone well.

"However in the meantime we see upside centring on Engine Flying Hours (EFH), where our 2025 Large EFH estimates are more than 20% ahead of consensus and implied targets from Roll's 2022 capital markets day," UBS said.

It also noted that 2023 guidance was the major concern, stating 2023 cash flow guidance was "a key risk", with a miss or downgrade here to reset the reputational uplift achieved so far.

Analysts at Berenberg downgraded engineering services firm Wood Group from 'buy' to 'hold' on Wednesday following a fourth cash offer for the company.

Jefferies stated that confirmation of a fourth cash offer proposal, up 3% on previous offers, suggested "serious intent" by the acquirer, and also pointed to a "softening of language" in the board's response - suggesting the parties were closer in terms of value expectation.

The broker also increased its price target from 190.0p to the latest 237.0p cash offer from Apollo but made no changes to its underlying estimates.

It also reduced its upside price target to 245.0p from 290.0p based on a scenario of a further 3% offer increase and to include a view that it sees "little risk" of a counter bid from a new third party, while its downside price target increased to 155.0p based on the last close price ahead of Wood's confirmation of the initial Apollo proposals.

"Increasing price target to latest 237.0p offer price and reduce upside price to 245.0p (a further +3%) as we discount third party counter offer risk and downgrade to 'hold' with bid premium more than 50% to last pre-bid close of 155.0p," said Jefferies.

"With our price target spread risk reward more skewed to the downside after these updates and a 22 Mar 2023 takeover code deadline on intentions, we downgrade to 'hold'."