Broker snap: Jefferies cuts Experian to 'hold'

6th Nov 2013 09:45

Jefferies has downgraded its rating for credit-checking and information services group Experian from 'buy' to 'hold', saying that the shares are now trading at its target price.The stock closed Tuesday's session at 1,263p, well ahead of the broker's 1,200p target.The share price sunk sharply on Wednesday morning as investors gave a cool reaction to Experian's announced purchase of Passport Health Communication (PHC) and its first-half report.Jefferies highlighted that the results were "exactly" in line with expectations "but the debate today will centre on value creation after another sizeable acquisition".According to the company, PHC will generate $30m in earnings before interest, tax and amortisation (EBITA) on $121m of revenue in 2013. However, there will need to be a significant uplift in EBITA to cover its cost of capital, Jefferies said."As with the acquisition of 41st Parameter last month, value creation is likely to be the main focus of investor debate. While we estimate that the transaction will be circa 1.5% earnings-per-share accretive in fiscal year 2014, aided by the 2% interest rate that Experian currently pays on its revolving credit facility, exit multiples are 7 times price/sales and 28 times enterprise value/EBITA. To cover its cost of capital, we calculate that PHC's EBITA needs to increase from $30m to $80m".Jefferies also noted that outlook comments alongside Experian's results were "slightly softer in tone" with second-half organic revenue growth expected to be similar to the first half at 6%. The broker said this is worse than its 7% estimate and previous guidance that centred on a "mid/high-single digit increase".The stock was down 7.28% at 1,171p on Wednesday morning.BC