Broker tips: BHP Billiton/Rio Tinto, Ashtead, tour operators

3rd Apr 2012 07:34

Nomura has looked at the possibility of a tie-up between the diamond businesses of BHP Billiton and Rio Tinto, both of which have been put up for sale.BHP's and Rio's diamond units are valued at $2.2bn and $1.9bn, respectively, and only represent around 1% of each company net present value. As they both contribute less than 1.5% of total group earnings before interest, tax, depreciation and amortisation (on 2012 forecasts), Nomura says they are no longer material contributors.Nomura says that the diamond businesses of both companies still have growth potential, but given the parent companies' growth pipelines in bulk commodities, energy and base metals ("which have higher potential returns and earnings impact"), the diamond divisions might "find it hard to compete for both capital and management focus".As for the parent companies, Nomura keeps a buy recommendation for both stocks.Broker Jefferies says the bolt-on acquisition of specialist temperature control equipment rental provider Topp Construction Services has come too late to have much effect on Ashtead's profits for the current financial year, but should provide a small fillip to fiscal 2012/13.For the year to the end of April 2013, Jefferies expects consensus profit before tax and earnings per share consensus forecasts for the plant-hire firm to edge up by 2%.Jefferies rates the stock a "buy" and has a price target of 300p. "While [Ashtead's] valuation is broadly in line with US peers, we note that Ashtead has a stronger balance sheet than its US peers and therefore can self-finance fleet expansion capex [capital expenditure] of twice depreciation over the next 2-3 years and bolt-on acquisitions such as Topp, while maintaining net debt/EBITDA [earnings before interest, tax, depreciation and amortisation] below 2.5x," the broker maintains.With the results now in from Britain's two biggest package tour operators, UBS has declared that things continue to look sunnier for TUI Travel than they do for Thomas Cook.The broker said that the pair, along with Swiss rival Kuoni, all delivered trading updates which partially confirmed expectations of a collapse in volumes, but bookings proved more resilient than anticipated, with the best performances coming from the non-tour operator divisions."With the sector continuing to trade on a discount, increasing confidence in consensus expectations is likely to lead to a re-rating if companies continue to deliver at the operating level," UBS said.With TUI Travel, UBS says the detail is encouraging, and the group is benefiting from the mix effect. As for Thomas Cook, UBS's verdict is that the top line is good, but the costs are a problem."Thomas Cook delivered an encouraging update from a top-line perspective, with bookings and pricing both proving resilient. However, the key takeaway was in the EBIT [earnings before interest and tax] guidance, which at £200-210m was 20% below consensus and represented an EBIT margin of c2%, down from 3.1% in 2011. This suggests that cost control remains tough, and we reduce our EBIT forecasts by 18% and 7% for 2012/13," UBS revealed.JH/BC