Broker tips: BG, Autonomy, Smith & Nephew

10th Feb 2011 13:04

Even though RBS has raised its production forecasts for BG Group, the broker downgrades the oil titan to a 'hold' on the back of an upward revision to assumed capital expenditure (capex).To reflect revised guidance about Brazilian and US production, RBS has raised its 2015 and 2020 production forecasts by 2% and 11%, respectively, implying compound annual growth rates of 13% in 2010-15 and 8% in 2015-20. "These growth rates are far above those for peer companies," the broker says.However, this positive adjustment is fully offset by higher assumed capex. "Raised capex guidance for 2011 ($10bn) and 2012 ($11bn) implies negative free cash flow in both years and we expect this deficit to persist in 2013-14.""BG has outperformed the European oils sector by 6% this year and the shares are now only 5% below our unchanged price target of 1,540p. Downgrade to 'hold' [from 'buy']" says the broker.UBS upgrades software giant Autonomy to a 'buy' as its sees improving prospects, given possible acquisitions and improving trends in its core division.Core Intelligent Data Operating Layer (IDOL) growth picked up to 12% in the fourth quarter, from 11% in the third, however the broker notes that first quarter comparatives look tough with pro forma IDOL growth of 30% reported in the same period the year before.Additionally, while an acquisition could still be a possible catalyst, the market seems very sceptical that Autonomy will close a deal, "and we feel the shares do not reflect any possible accretion such a deal might bring."UBS questions whether the group's business model transition to the 'Cloud' should have created the uncertainty it has among investors. Although many are concerned at the margin implications of this shift, "original equipment manufacturer's higher margins should provide some offset to Cloud's gross margin dilution" of around 2 percentage points, the broker says.The broker ups its rating from 'neutral' to a 'buy' and raises the target price to 1,800p, from 1,700p.Financial services firm Matrix has maintained its positive stance on Smith & Nephew (S&N), despite the departure of boss David Illingworth, as the broker expects to see strong growth in both S&N's Endoscopy and Advanced Would Management (AWM) divisions."The retirement of the current chief executive officer (CEO) is not a significant issue in our opinion; the new CEO joins from Pierre Fabre. Recent M&A speculation will persist in our view and further consolidation pressures are building within the sector."Orthopaedics revenues were down by 1% in the fourth quarter as European markets were plagued by austerity measures. While the division saw a 2% increase over the full year, Matrix expects to see mixed growth in 2011 as revenues continue to remain under pressure.However, both Endoscopy and AWM grew by 7% in 2010 and are estimated to grow ahead of the market this year. Matrix remains a 'buyer' with a target price of 893p.