The year is likely to have started on a very weak note with little to suggest we
are about to reach cyclical troughs. We expect the overall order inflow to be
down by 20%, or more, even after taking into account the favourable tailwind
from exchange rates. Given the current uncertain outlook for the oil & gas and
mining industries in terms of capex spending and aftermarket demand together
with the subsequent risk to earnings expectations for Weir, we believe the
shares should trade at a discount to the sector in the near-term. With ~30%
downside to our price target we are maintaining our Underweight
recommendation.
Weak start to the year. The trading update is due to be released on 28
April. We expect this to show a 45% decline in order inflow for the Oil &
Gas division, which we expect to limit the near-term recovery potential for
this division. We expect the combination of weak demand and increase
price pressure to translate into a 10% decline in order for the Minerals
division, with both the OE and aftermarket falling.
Share price bounce reflects commodity price rise, not fundamentals.
We do not believe the bounce in commodity prices (WTI or metals) since
the publication of Weir's full-year results has been sufficient to translate
into improved demand. For example, the rig count has continued to fall and
is down 30% over the period, despite a >50% increase in the WTI price. We
believe that the financial challenges of many operators in the fracking and
mining industries limits the scope for a recovery in demand in equipment
the absence of a significant increase in commodity prices and/or
consumption.
Downside to forecasts remains. The operating profit delivered for 2015
was 40% below Bloomberg consensus at the start of 2015. Given the
prospect of ongoing weakness in demand, both OE and aftermarket, and the
prospect of increased downward pressure on aftermarket prices, particularly
in the Mining division, we believe there remain above-average downside
risks to consensus expectations.
Valuation. Based on our revised forecasts, the group is trading 2016E
EV/EBITDA, EV/EBITA and PE multiples of 12.4x, 16.1x and 19.6x,
respectively. This leaves Weir trading at a significant premium to our
industrial universe, with an above-average risk to forecasts, in our view.