Broker tips: British Airways, Marstons, miners

22nd May 2009 12:07

Things are so volatile in the airline business at present that British Airways declined to give any trading guidance for the current financial year with its 2008/9 results announced on Friday, making it difficult for analysts to get a handle on the company's prospects.Charles Stanley is playing it safe and maintaining its 'hold' recommendation after the UK airline announced results that 'were as bad as expected'. 'Earlier guidance (issued at Investor Day in March) was for a 5% decline in revenue in 2010. However, guidance has been abandoned with the preliminary results,' the broker noted. A 17.7% decline in premium traffic in April, the first month of the company's financial year, does not bode well for the year as a whole, the broker said, although costs should be lower as a result of action taken by British Airways' management plus the much lower oil price.Some investors are pinning their hopes on merger activity gingering up the company's share price but with 'uncertainty over costs, capacity and pensions any merger is unlikely until trading conditions become more settled. In 2010,' the broker believes.Doubts about the commitment of Marston's to maintaining its dividend have been dispelled, at least for now, by Friday morning's announcement of a maintained interim dividend. The shares are now trading on an implied dividend yield of 8%, underpinning broker KBC Peel Hunt's 'buy' recommendation.'The interim dividend is held, despite cover falling to 1.7x. Management aims to keep cover close to 2x "in the medium term" but is clearly confident that it can modify this short term, given a well funded balance sheet,' said KBC analyst Paul Hickman.'We have stress-tested the balance sheet and calculate that a 16% LFL [like for like] decline would be required to cause a cash trap and a 28% decline would be required to breach the securitisation default covenant,' Hickman said. 'Marston's combination of sensible securitisation and bank debt means it has adequate headroom above covenants even under severe stress conditions,' Hickman believes.KBC is upgrading its full-year earnings per share forecast by 6% to 19.5p while its profit before tax forecast is lifted by 2% to £68.4m. The discrepancy in the size of the upgrades is explained by expectations of a lower tax charge than previously assumed. 'On a flat dividend forecast for the year of 13.3p the yield is 8.3%. Maintaining a substantial dividend income for investors is, we believe, a strategic priority for management,' the broker concludes. KBC Peel Hunt has a price target of 180p for the stock.Mining stocks are helping Footsie win back some of yesterday's losses after Goldman Sachs ramped up price targets across the sector in expectation of a China-fuelled rally in commodity prices."Datapoints from China, and a more bullish outlook from our colleagues in the region, prompt us to analyse which metals might soonest experience capacity constraints," the broker said. "We believe that GDP growth close to, or slightly above our economists' current forecasts, could result in copper and iron ore suffering capacity constraints by 2011."The broker more than triples its target price on Vedanta to 1,997p from 537p. Rio Tinto's is raised to 2,994p from 1,637p, BHP Billiton's to 1,778p from 1,302p, Anglo American's to 2,491p from 1,124p and Xstrata's to 1,074p from 388p.