Broker tips: BAE Systems, PZ Cussons, Spirax-Sarco

(Sharecast News) - Analysts at Citi reinstated their 'neutral' rating on defence group BAE Systems on Friday, updating its forecasts following the company's acquisition of Ball Aerospace. Citi said over the last couple of years, BAE Systems medium-term outlook has accelerated from low/mid-single digit to mid/high single digit as its pipeline expanded. In addition, Citi expects this growth to be "relatively capital light", resulting in strong cash conversion.

However, the bank said its share price has already largely reflected this and the roughly 10% upside to its new target price of 1,400.0p does not merit a 'buy' recommendation.

"Pushing the scenarios towards the upper end of realistic expectations does give more attractive upside to 1,600.0p but we consider this to be in 'everything has to right' territory; conversely, our downside scenario, which is approaching the realms of the bottom end of realistic expectations, gives fair value of 1,070.0p," said Citi.

Barclays downgraded shares of Imperial Leather maker PZ Cussons on Friday to 'equalweight' from 'overweight' and slashed the price target to 111.0p from 205.0p, citing "too much" Nigerian exposure.

The Naira devaluation has brought more issues with a weakening macro backdrop, which continues to weigh heavily on PZ, Barclays said.

"Underwhelming contributions from beauty and Indonesia, low stock liquidity and a lack of catalysts leave us looking elsewhere."

Analysts at Berenberg raised their target price on manufacturer Spirax-Sarco Engineering from 8,800.0p to 9,800.0p on Friday after the group's full-year results came in line with expectations.

Berenberg noted that organic guidance was "slightly better than consensus", but with near-term offsets in FX, interest, and tax which dragged its earnings per share forecasts lower.

"We think the guidance is good in the context of the current market environment, albeit with the caveat of H2-weighting and caution about a global industrial production recovery in H2 2024," said Berenberg. "Management's apparent confidence in returning to growth in the semiconductors business is a slight improvement versus previous management commentary in our view, but bakes in some management hope ahead of actual evidence of this."

The German bank noted that there were "many moving parts" in terms of cost actions, investment, and organic developments, but stated that guidance still appears to be a "slight net positive" at the organic level and said it "can understand" yesterday's positive reaction in shares, even if perhaps it was "a bit stronger" than it had expected.

That said, Berenberg stated that while the "commentary and confident presentation" addressed some of the concerns it had in parts of the Spirax businesses, there were still further developments that it believes need to take place to justify the current valuation.

"We make small changes to earnings reflecting slightly better organic guidance offset by FX/interest/tax. The stock now trades on 33.2x 2024 P/E, 23x EV/EBIT and 1.7% FCF yield," said Berenberg, which reiterated its 'hold' rating on the stock.