Broker tips: Ultra Electronics, Ferrexpo, Ocado
Ultra Electronics tumbled on Tuesday as Kepler Cheuvreux downgraded its stance on the stock to 'hold' from 'buy' saying there is limited upside pending the chief executive officer's review.
The broker, which upped its price target to 1,720p from 1,650p as it assumes higher organic growth but lower free cash flow conversion, said first-half results on Monday were mixed but validated the view that organic growth will resume.
"Free cash flow, however, appears to be under some pressure, as capex and working capital could rise," it said.
Kepler added that the order book up 19% organically and sales growth of 1.3% are positive indicators that Ultra is finally returning to organic growth, six years after having entered an unprecedented period of organic decline.
CEO Simon Price is due to present his strategic review in March next year and Kepler said it expects additional cost reduction efforts and improved process implementation across the organisation to improve execution.
"We also see higher investments in core skills and capabilities. Improved discipline in M&A criteria is anticipated, as recent M&A has not delivered in line with plans," it said.
Analysts at JP Morgan slashed their target price on shares of Ferrexpo, on account of what they said was the iron ore producer's now higher cost base.
Indeed, at the half-year stage, Ferrexpo had posted a 31% jump in its unit costs which, in combination with the 21% fall in iron ore prices from peak to trough, had sent its shares tumbling 47% since March 2018, the investment bank said.
However, at spot iron ore and foreign exchange prices, the shares were now trading on a price-to-earnings multiple of 4.3 for 2018, falling to 3.9 for the following year.
On an EV/EBITDA basis meanwhile, the stock was on 3.3, falling to 2.9 in 2019 and JP Morgan estimated that iron ore and pellet premia would need to fall by a further 20% to $55 and $46 per tonne, respectively, in order for them to trade back at their 10-year average multiple of 5.1.
Furthermore, JP Morgan was calculating that the company's free cash flow yield would improve from roughly 15% in 2018 and 2019 to over 5% in 2020, as ore inventories were destocked.
Hence, and despite his target price reduction, analyst Dominic O'Kane upped his recommendation on the shares from 'neutral' to 'overweight', in light of the "attractive" risk-adjusted returns potential that he spied in them.
Ocado was downgraded to 'underweight' at Barclays from 'equal weight' as while the online grocery business has been de-risked, this does not guarantee "unlimited upside" for the share price.
Over the last nine months the company has been catapulted into the FTSE 100 after confounding many doubters by signing signing up four overseas retailers for its Smart Platform robot-operated warehouse system: France's Casino, Sobeys of Canada, Sweden's ICA and US giant Kroger the most impressive of all.
"After several years of unfulfilled promise, the willingness of third parties to pay for Ocado’s online grocery expertise has undermined a central bear argument on Ocado," Barclays analysts wrote.
Raising £340m of cash in the first half also minimises medium-term balance sheet concerns investors may have had.
"However, eliminating serious bear points does not mean unlimited upside for the share price and we think that a more reasonable valuation is now around 875p."
With the share price having risen to almost 1,100p, Barclays target implies around 20% downside.
Future licensing deals may boost the share price but "we struggle to foresee further deals approaching anywhere like the magnitude of the Kroger deal", which involves building 20 customer fulfilment centres, where execution and potential delays "could be problematic”.