Broker tips: AB Foods, London & Stamford, BSkyB

5th Nov 2010 12:49

Panmure Gordon expects Primark and British Sugar owner Associated British Foods (ABF) to report a strong set of full year results on Tuesday but next year things might be a bit tougher. The broker thinks the year to September 30 2010 was "a remarkable year" for the food and retail company, and forecasts earnings before interest, tax and amortisation (EBITA) will show a 46% rise in the Sugar business to £245m, with Primark's earnings up 33% to £335m and the Grocery division's EBITA 20% higher at £230m.For the group as a whole, the broker forecasts pre-tax profit to rise by 24.5% to £816m, driving a 21.2% growth in earnings per share to 70p.While sugar prices are now hitting 30-year highs, the broker maintains that ABF does not have significant direct exposure to the world price. However, "this should keep EU supplies tight next year and it has dragged Chinese prices up significantly over the past month or so, both of which are beneficial to ABF", the broker said.Primark has already stated a like-for-like sales growth of 6% for the reporting period, led by strong growth in both continental Europe and the UK."The sharp rise in cotton and freight costs, combined with VAT rises and a continued weak consumer environment means we forecast an 80 basis points [one basis point = one hundredth of a percentage point] margin squeeze for 2011 to 11.6%", the broker said. "This restricts our forecast EBITA growth to 5% to £353m next year."In Grocery, the broker notes that despite a strong growth expected for the current year, promotional activity remains high "and the sharp spike in wheat costs does suggest margin pressure in 2011".Therefore, the forecasts for next year "have an element of caution" and the broker retains a 'hold' and its 1,125p target price despite an impressive year all-round for the group.Following Vince Cable's announcement of a review of News Corp's bid, broker Daniel Stewart & Co. recommends a 'hold' for pay-TV operator British Sky Broadcasting.Business secretary Vince Cable initiated a review Thursday by communications industry watchdog Ofcom into the bid to buy the remaining 60.9% of British Sky Broadcasting, on the basis that the move might reduce diversity in UK media.The broker notes that if Ofcom refers the situation to the Competition Commission, it could "initiate a lengthy review process"."Although the announcement is not a surprise, Vince Cable is widely seen as a sceptic, with the view (promptly denied by the government) that Liberal Democrats remain aggrieved by News Corp's press coverage of the election campaign", the broker said."One result might be concessions such as divesting some assets such as Sky News".As Sky's strategy to hit a 10 million home subscriber target nears fruition, the broker says the review "is of parallel significance to the issue of valuation" of the broadcaster.A 'hold' rating is confirmed with a target price of 690p.KBC Peel Hunt has given the thumbs up to London & Stamford's first acquisition since converting to a real estate investment trust and notes the company still retains plenty of firepower for further acquisitions.London & Stamford (L&S) announced Friday the acquisition of a portfolio of five prime distribution assets from Harbert Management Corporation for £82m."We estimate the initial cash on cash return of the acquisition to be 9.6% rising to over 12% through rental reversion and higher loan-to-value assumptions i.e. 60% loan-to-value", the broker said."The company maintains continued on balance sheet firepower of circa £450m providing scope for further significant deals."Panmure Gordon also welcomed the acquisition, which it reckons "should be attractively enhancing to earnings, replacing low yielding interest on cash with much higher yielding property income."The broker likes the fact that even though L&S has money to invest, it is not afraid to recycle capital quickly, citing the example of the recent disposal of the Racecourse Retail Park.Like Peel Hunt, it has a "buy" rating on the stock. Panmure's price target is 134p."We believe that shareholders will benefit from the change of L&S to an open-ended vehicle and see potential for the realisation of greater returns over the long term. Furthermore, with management now significant shareholders themselves, we believe that there is a stronger alignment of interests with existing investors, while the move to the main market should give the company access to a larger pool of potential investors," the broker opines."The business has a broad portfolio spanning investments in retail, office, industrial and residential properties. This should help diversify trading risks while there are also attractive opportunities to improve rents through active asset management. We expect the company to make further acquisitions from its cash resources and, as such, believe there is a resilient trading outlook."