Source: Sharecast
The Canadian bank said Babcock is a significantly better-quality business 4.5 years into a turnaround, but its 5x PE (NTM) discount versus the European defence sector fails to capture this.
"Babcock's UK MOD relationship, military operational asset engineering know-how and infrastructure ownership underpins high visibility," RBC said. "This, combined with a strong management team and execution, now provides strong prospects for success on an attractive hopper of opportunities in the UK and abroad."
RBC said Babcock's management was one of its key strengths, noting that the team has reduced contract risk, improved earnings quality, and strengthened the balance sheet through disposals. Babcock now has a 74% defence mix, versus 46% in 2019, RBC said.
"Beat and raise is the mantra, with three earnings upgrades in FY25 and a recently increased mid-term (3-5 year) guidance," it added, as it said it views guidance as conservative and sits around 3% ahead on FY26-28 estimated adjusted earnings per share, with potential for upside beyond this.
RBC Capital Markets also downgraded Close Brothers on Monday to 'sector perform' from 'outperform' as it said the motor finance event has played out.
It noted the shares were up around 120% year-to-date, and now trade at 0.56x TBV one year-forward for a 5.9% return on tangible equity.
"Our thesis that there would be a positive motor finance Supreme Court (SC) outcome played out, and we have run out of upside," it said.
RBC, which left its price target on the stock unchanged at 525p, pointed to the company's full-year results due in September and said management was incentivised to reset expectations lower, in its view.
"Therefore, we downgrade to sector perform and remove our Speculative risk qualifier," the bank said. "We make no changes to our estimates, but note that our numbers already had included the removal of Winterflood following the disposal announcement."
Analysts at Berenberg lowered their target price on critical power control systems XP Power from 1,700p to 1,500p on Monday following the group's interim results earlier in the month.
Berenberg noted that XP Power had delivered adjusted underlying earnings that were in line with its expectations, although it said revenue had declined in the period as channel destocking peaked in two of its three end-market segments.
"We are encouraged by XPP's commentary on 'clear signs' of end-market improvement, and by the increasing quarterly order intake and the book-to-bill going above 1x for the first time since H222," said Berenberg, which kept its 'buy' rating on the stock.
The German bank stated that while investor focus was "rightly" on FY26 and beyond, the £2.3m FX impact in H1 had pulled down its FY25 profit forecasts.
"We cautiously trim our FY26E assumptions, with our adjusted EPS declining 16% to 49.2p. Our price target decreases in line with EPS to 1,500p. We maintain our 'buy' recommendation with XPP's path to a profit recovery gaining visibility," added Berenberg.
