Broker tips: Petrofac, Charter

Charles Stanley said oilfield services firm Petrofac put in a strong first half performance, but that has not stopped the broker from downgrading the stock after the recent good run for the shares.

Though the order book has slimmed down in the first half of 2010, Petrofac's markets remain buoyant and the future is looking bright for the company, the broker thinks.

"In terms of the outlook, Petrofac expects like-for like net profit growth for the full year excluding the gain on the EnQuest demerger, of around 20%. As the 2009 comparable base is $341m net profit, it implies $410m profit for 2010, which appears to be in line with the current consensus estimate," notes Charles Stanley analyst Tony Shepard.

"Petrofac's large and growing order book continues to give a high degree of visibility to earnings over several years and unlike other peer groups, Petrofac is predominately focused on the Middle East and is not involved in the deepwater industry. However, the share price has performed strongly and appears to reflect the immediate prospects," Shepard believes. As a result Charles Stanley has downgraded the stock from "accumulate" to "hold".

Panmure Gordon thinks it has been too optimistic on the prospects of recovery at Howden, the subsidiary of Charter, and no longer rates the industrial engineer's shares as a 'buy'.

It has cut its rating to 'hold' on concerns over revenue visibility for next year.

"The rate of Howden's order intake for delivery in 2011E is lower than expected and threatens to create a revenue shortfall," said Panmure analyst Oliver Wynne-Jones. "A recovery in power sector orders at some stage during 2011E provides some hope but until then we believe the disappointments are set to continue."

The broker thinks that the company's fan base has been diminishing, with the market concerned over the group's holding structure, its guidance record and a desire for more detailed disclosures from management.

The target price has been slashed from 1010p to 770p as a result of applying reductions to the fair value of the company for "pension mix, for opaque aspects of its business structure, and for the lack of revenue visibility."