Broker tips: Aviva, WH Smith, WPP

4th Mar 2011 13:02

Nomura continues to believe that insurance giant Aviva offers investors good growth prospects at an attractive price after an impressive 2010.The insurance group's cost reduction and focus on higher-margin product selection were the main drivers of a 26% increase in operating earnings. However, while these were boosted by a number of one-off items - mainly relating to the reattributed estate and Irish reserve releases - the broker estimates that Aviva can grow operating earnings by 9% in 2011."The main growth drivers are likely to come from two areas, in our view: 1) its weighting towards life business, especially risk and unit-linked life in continental Europe and the UK, which is likely to grow at a rate well above Property & Casualty insurance, and 2) its ongoing cost-reduction target of £400m by the end of 2012," says analyst Nick Holmes.The broker stays a 'buyer' and raises the target price to 650p to reflect time value appreciation.The defensive nature of WH Smith's business should play well in 2011, with its reliance on small ticket items seeing the company less likely to be hit by any slowdown in consumer spending, according to UBS.The broker expects the newsagent to perform well relative to the retail sector over the next 12 months and cites four key reasons: low average ticket price; less gross margin pressure; potential benefit from bookseller Waterstone's shutting further stores; and recovery in air passenger numbers (helping sales at its airport stores)."We believe its core categories [of] confectionery and stationery [will] grow broadly in-line with GDP and although the physical book market remains in structural decline, WH Smith may benefit from the reduction in competition on the High Street," the broker says.UBS upgrades the stock to a 'buy', from 'neutral', but reduces forecasts as trading conditions appear to be weak across the retail sector. The target price is lowered from 535p to 525p.Barclays Capital (BarCap) expects advertising giant WPP to benefit from short-term momentum but sees better value in sector peers with more exposure to the UK.The debt ratings agencies have been down on WPP of late, which has affected the group's access to cheap capital, but this may be about to change. The broker expects the group's near-term performance to be supported by positive ratings actions at both Standard & Poor's and Moody's. "Moody's Baa3 rating appears too low while S&P's Negative Outlook looks inappropriate, in our view," the broker said. "Average net debt has fallen to £3.1bn in 2010, which has taken average net debt/EBITDA [earnings before interest, tax, depreciation and amortisation] to 2.1x, broadly in line with the third quarter's 'approximately 2x' guidance," the broker notes. While welcoming the paying down of debt that resulted from the acquisition of market research firm TNS, BarCap was alarmed to see WPP management claim it has largely achieved its post-TNS deleveraging objective "one year ahead of schedule" as this could suggest the company is ready to go on another buying binge."We are ... concerned that management may prefer to identify inorganic opportunities to accelerate its expansion into faster growing markets, which could weigh on credit metrics," BarCap said.While WPP's UK organic growth (+5.9%) is exceeding emerging markets growth (+5.6%), the overall contribution is less than half the size made by emerging markets, and BarCap prefers publishers and broadcasters such as ITV, Daily Mail and United Business Media, as these have a greater dependency on the UK advertising market.The group's outlook for 2011 is for organic revenue growth of 5% and an expansion of the operating margin by half a percentage point, "which should support continued deleveraging in 2011 provided that management does not choose to increase its exposure to fast-growing markets", says BarCap.BarCap has a 'market weight' recommendation for the shares.