Broker tips: Hikma Pharmaceuticals, BP, GKN

4th Sep 2015 14:00

(ShareCast News) - Goldman Sachs upgraded Hikma Pharmaceuticals to 'buy' from 'neutral', added the stock to its regional stock 'focus list' and lifted its price target to 2,840p from 2,210p."We see the acquisition of Roxane Labs as the realisation of large transformational M&A that we had expected to be a key catalyst."GS said the deal makes Hikma the sixth-largest player in the US generics market and offers potential to further improve its market position, with the acquired high-value pipeline playing a key role.The bank said the current share price does not reflect Hikma's accelerated growth profile. It noted that the stock trades at a 20% discount to global generic peers, which it believe is not justified and suggests re-rating potential."Though Hikma's share price has increased 11.3% since announcement of the deal , we believe this does not fully reflect the potential offered by the acquired portfolio, the extensive pipeline, R&D capabilities, and increased manufacturing capacity."Goldman said accelerated top-line growth together with synergies likely to be realised and cost savings from economies of scale and improved operational leverage should help Hikma deliver an 18% EBITDA compound annual growth rate over 2016-18. Bank of America Merrill Lynch downgraded oil giant BP to 'underperform' from 'neutral' and slashed its price target to 330p from 420p.The bank said incorporating its reduced macro forecasts - which suggest Brent oil prices will not recover far above $60 a barrel until 2018 - into its BP estimates indicates the company will run persistent and sizeable free cash flow shortfalls for the foreseeable future."This will in our view increase the likelihood of BP issuing equity for more M&A as it replenishes its resource base under threat from dilution, as it cuts more capex to fund its dividend - the 'path of pain' is even longer."Merrill said although BP may accept an increase in its financial leverage to help maintain its dividend while waiting for the macro environment to improve, it expects an annual free cash flow shortfall of around $5bn to ultimately require significant repair measures. Shares in engineering group GKN were under pressure after Investec downgraded the stock to 'hold' from 'buy' and slashed its price target to 300p from 370p."We adopt a more cautious view on the outlook for Driveline and Powder Met's revenue and profit growth to reflect a potential slowdown in auto production in China and other emerging markets," it said.Investec said weak earnings momentum has shaken confidence and investors may require consensus forecasts to stabilise before buying into GKN's longer-term potential to drive a re-rating.The brokerage said it has cut its full-year 2015 earnings per share forecast by around 3% and its 2016 estimate by around 10%. The estimates are now around 2% and 6% below consensus, respectively.Nevertheless, Investec said it still expects Driveline to sustain above-market organic revenue growth and profit margins above 8% as the division benefits from investments in new technologies .In addition, it pointed out that Powder Met has demonstrated that it can expand margins even in a low-growth environment following repositioning towards higher value products and restructuring.