Broker tips: BHP Billiton, Rank, China Foods

20th Sep 2010 12:39

Nomura Securities believes mining giant BHP Billiton is going to have put its hand deeper into its pocket if it wishes to secure the Potash Corporation of Saskatchewan (PCS), though it is debatable whether it should do so.Although BHP's current $130 per share offer is already at a 27% premium to Nomura's calculation of PCS's net present value the broker believes the bid needs to be raised "because of optimistic investor expectations on fertilizers following the recent crop price rally and hopes of another bid."Nomura thinks that instead of spending upwards of £26bn on buying PCS, it would be better off buying back its own shares, which currently trade at around a 12% discount to Nomura's sum of the parts (SOTP) valuation."At USD 130 per share, earnings accretion from PCS is set to be modest for BHP at 2% CY2011E (current year 2011 earnings estimate). Buying back shares of equivalent value would be EPS [earnings per share] accretive by 22%, on our estimates," claims investment analyst Paul Cliff."Given that PCS would represent only 8% of BHP's combined EBITDA [earnings before interest, tax, depreciation and amortization], we see a risk that higher-rated potash earnings may be instantly de-rated to a mining multiple. This could increase the implied discount to BHP's SOTP to 21%," Cliff added.Having weathered the storm of the recession it is time for casino, bingo and online betting operator Rank to kick on deliver sustainable growth, KBC Peel Hunt reckons.Peel Hunt analyst Nick Batram fancies Rank's chances, as it has leading positions in markets with high barriers to entry. The broker thinks that Rank could increase its UK casino estate by around 40% while around 45% of the bingo house estate to the Full House concept. "It has the balance sheet and a clear opportunity in casino, while Full House could accelerate growth within bingo," Batram suggests. "Potential corporate activity also adds spice," Batram notes.Expanding along the lines Peel Hunt suggests would require a capital spend of around £100m but could ultimately deliver £20m or more a year to profits, by Batram's calculations. "With over £200m of financing headroom, this would be easily affordable," Batram believes.Meanwhile, the company has two large stakeholders lurking on its registry: Genting, owner of Stanley Casinos, with 11% and investment group Hong Leong with 29%. "If either of these groups is considering a bid, the catalyst could be further positive progress at Mecca and this may not be long in coming," Batram believes.The broker has raised its target price to 140p from 134p, based on a model that assumes no expanded roll-out of Full House or new casino licence wins. "An accelerated roll-out could add a further £100m of value, £25m of EBITDA ]earnings before interest, tax, depreciation and amortisation ], or 26p per share, and would lead to a significant upgrade to forecasts," Batram maintains."Not only would delivery of the full organic opportunity enhance the bottom line; it could transform the market's perception of Rank, leading to an upward re-rating. A free cash flow yield of more than 10% is also attractive," the broker concludes.Peel Hunt rates the shares as a "buy".House broker FinnCap has trimmed its full year profit forecast for sauces and dips maker China Foods after the company revealed that costs related to a new factory are likely to put a dent in second half results.FinnCap is now expecting full year profit before tax to be £3.3m, compared to its previous estimate of £3.8m. "Reflecting margin pressure in the animal feeds division along with overhead costs related to the new facility in the first half, we have adjusted 2011 profit before tax estimates by £2.0m to £5.5m," the broker said.Despite the hit to short term profits, the broker thinks the company is on the right track with its strategy. Citing Heinz's $165m June acquisition of China-based soy sauce manufacturer, Foodstar, the broker notes that China Foods is committing capital to expansion in a market that the US food giant envisages growing at around 6-7% a year."The cash generation benefit from the new 30,000 tonne soy facility is not to be underestimated and, subject to a capital restructuring, the group plans to make dividend payments from the end of 2010," analyst Duncan Hall asserts."Utilisation [of the facility] will build during 2011 and by 2012 the plant should generate £18m+ of premium rate soy sauce which at 42% gross margin adds £7.5m of profit, and earnings before interest, tax, depreciation and amortisation of £5.3m," Hall calculates.