Broker tips: Spirax Group, Costain, Inchcape, NatWest

(Sharecast News) - Shore Capital downgraded Spirax Group on Friday to 'sell' following a 20% share price rise since it upgraded to 'hold' shortly after the in line update on 14 November 2024. The broker said that some structural threats, such as the impact of generative AI and lengthening replacement cycles, may be underestimated by investors.

It also said there are no clear catalysts for upgrades or a share price outperformance over the next 12 months.

"Clear evidence of improvements in the ETS division may not be seen until FY26F, whilst global industrial production growth forecasts for FY25F indicate limited risk to the upside for forecasts, in our view," it said.

The broker said that while a premium rating has previously been justified by the company's long-term earnings record - as opposed to IP or products with unique capabilities - recent trading and margin guidance has disappointed investors.

Shore said the FY25F PER of 26x (16x EV/EBITDA) appears stretched given the five-year earnings per share compound annual growth rate of 1.6%.

"The company's five-year EPS CAGR to FY24F is 1.6% with FY24F EPS consensus being downgraded by 34% cumulatively over the past two years with similar percentage downgrades to FY25F," it said.

Berenberg initiated coverage of construction and engineering group Costain on Friday with a 'buy' rating and 140p price target.

It said the company has overcome its recent challenges, as it improves both its profitability and its free cash generation, and it has strengthened its balance sheet, to the extent that in 2024 it was able to buy back shares for the first time in at least the past 10 years.

The German bank pointed to a pipeline of revenue opportunities. Berenberg said there are significant infrastructure spending commitments in the coming years that it expects to benefit Costain.

"That it ended FY 2024 with a forward work position of £5.4bn, £1.5bn higher than the previous year, suggests the company is capitalising on these opportunities," it said. "A strong order book not only underpins future revenue but should also enable greater discipline in contract selection and help Costain to pursue only those contracts with acceptable terms."

With this in mind, the bank said its base case is for group revenue to be broadly flat in the coming years, with growth in the Natural Resources division offsetting lower revenue in the Transportation division. Berenberg also highlighted improving margins and reduced exceptionals.

"Earnings growth will, in our view, be driven by improving margins and fewer exceptionals," it said. "We expect margin growth to be driven by a combination of more higher-margin digital and consulting work, and the ending of older, lower-margin contracts."

Finally, the bank said the stock's valuation is "undoubtedly cheap", trading at 7.3x FY 2025 price-to-earnings, 1.8x EBITDA and 2.4x EBIT, with an 11.4% free cash flow yield.

Citi has reiterated its 'buy' rating for Inchcape ahead of the automotive distributor's full-year results on 4 March, saying little upside is currently priced into the stock despite its strong growth prospects.

"We believe that Inchcape has a unique opportunity to consolidate the automotive distribution market," said analyst Arthur Truslove.

Citi currently stands 6% above company-compiled consensus on an adjusted pre-tax profit level for 2025, predicting a figure of £525m, up from an estimated £446m in 2024 according to market forecasts.

Truslove highlighted that the stock trades at an enterprise value-to-EBIT ratio of just 5.7, on consensus forecasts - "only just above the minimum seen since the start of 2013 of 5.5x and vs an average of 8.4x over the same period".

"In our view, this does not fully reflect the quality of the business, and we believe that management has an opportunity at FY24 on 4 March to provide significant additional information and comfort," the analyst said.

Bank of America has maintained a 'buy' rating and 500p target price for NatWest after the UK bank's better-than-expected fourth-quarter results on Friday, highlighting the "sustainable quality" of the business.

NatWest's shares were down more than 3% at 423.5p in afternoon trade despite the company reporting an adjusted pre-tax profit of £1,539m for the fourth quarter, some 13% ahead (£177m) of the consensus forecast of £1,362m.

The beat largely reflected impairments coming in £137m below estimates, though results were still 3% ahead of forecasts when provisions are excluded.

Meanwhile, the company's guidance for 2025 was largely in line with market expectations, but the future dividend payout ratio was lifted to 50% from 40%, putting it towards the top end of the sector.

"We think Q424 results and the new guidance point to a story of sustainable quality. Income ex notable items was 4% ahead, with volume growth continue to be strong - in particular, Commercial and Institutional again grew by c.3% in one quarter (also up c.3% in Q324)," BofA said in a research note.

"While 2025 and 2027 guidance were not significantly ahead of consensus, they demonstrate confidence in the sustainability of returns. The shares are not particularly cheap at 1.2x consensus P/TBV25e, but we see scope for a simple, sustainable mid-teens ROTE bank to continue re-rating."