Broker tips: Ashmore, Melrose Industries, Babcock

by | Sep 11, 2023

(Sharecast News) – Shares of emerging markets investment manager Ashmore have tanked since the start of the year but still don’t represent a buying opportunity, according to Citi, which maintained its ‘sell’ rating on the stock on Monday.
The stock has fallen around 23% since the start of 2023, which likely reflects bearish sentiment on emerging markets credit, Citi said.

“We continue to remain cautious on flow and performance outlook over the near term, as our tracker indicates outflows in July-Aug, and our strategists see risk to spreads,” the bank said in a research note.

“Our analysis of fund performance vs peer group indicates improving but mixed trends, and we prefer to wait for further improvement in relative performance before becoming more constructive on overall flow outlook.”

Ashmore released its full-year results last week, which showed a 35% drop in adjusted EBITDA to £106.2m with net outflows of $11.5bn over the period.

Following the results, Citi cut its EPS forecasts for the next two years by 13-15% due to a weaker revenue outlook, and “potential cost headwinds following increase[s] in capping of variable compensation costs”.

Despite the recent share-price slump, Ashmore’s stock is still trading at a 45% premium to its peer group, compared with the long-term average premium of 20%, “which appears unjustified” for its near-term growth forecasts, Citi said.

Citi has a 170p target price for the stock.

RBC Capital Markets downgraded Melrose Industries to ‘sector perform’ from ‘outperform’ as it argued the valuation was “up with events”, but lifted the price target to 540p from 525p.

The bank said the fundamentals remain very supportive, with the business growing well, and it expects further earnings upgrades. It also pointed to the fact that a share buyback is set to start in October.

“However, we think this is all ‘known’ now, even the earnings per share upgrade potential may not surprise the street given traditional management conservatism,” RBC said.

“And it is in the valuation already with the blended peer multiple at 11x2025E EV/EBITA versus Melrose at 10.6x (and that is on our above consensus Melrose forecasts).”

Bank of America Merrill Lynch initiated coverage on Babcock with a ‘buy’ rating and 585p price target, implying more than 50% potential return.

The bank said Babcock is in the early stages of its turnaround, but it is already seeing the first positive effects of the restructuring.

BofA said that Babcock still trades like a business services company and has missed the significant re-rating of defence peers.

It sees the company increasing defence revenues to around 80% by FY26 driven by the disposal of civil assets, conversion of the backlog and management’s focus on signing defence contracts.

“We make 3 key points: 1) We model circa 140bps of margin expansion through FY26E, which should be supportive of better free cash flow generation. 2) We see FCF inflecting from FY24, leaving room for shareholder returns,” it said.

“3) We estimate BAB could generate circa 80% of revenues through defence markets in FY26 vs 61% in FY23 on BofA estimates. This should underpin a re-rating from c.6x EV/EBIT and c.7x earnings on FY26 BofA estimates to 11x & 12x respectively.”

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