Broker tips: BSkyB, San Leon, Renishaw

10th Sep 2010 13:20

The average household in Britain spends as much on British Sky Broadcasting's services as it does on alcohol and tobacco, research from Nomura Securities indicates, underpinning the broker's view that the stock is worth buying."As we approach the age of austerity, we show Sky accounts for 2% of the average household monthly spend but 35% of true utility spend and is equal to alcohol and tobacco spend," Nomura analyst Matthew Walker said.That sort of cash flow enables British Sky Broadcasting (BSkyB) to consider gearing up the balance sheet to accelerate growth. In Nomura's view moving up the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) to 2:1 or 3:1 "could produce earnings accretion of 11%-23% in fiscal 2012E and 23%-44% in fiscal 2013E."The broker has tweaked its earnings forecasts, resulting in a slight rise in earning per share owing to a lower tax rate. Nomura's projection for high definition customer additions have been reduced to a figure closer to consensus."We still see fundamental value well ahead of consensus reinforced since the News Corp. proposal by strong FY2010 results and a lower UK corporate tax rate. We reiterate our Buy rating and 1,000p price target," the broker said.Daniel Stewart has initiated coverage of AIM-listed oil explorer San Leon Energy with a 'buy' recommendation and a target price of 30p, twice the level at which the shares currently trade."San Leon built a world class portfolio in short order. Their assets are in Poland, Morocco, Albania, Italy, the US and the Netherlands and were acquired at very attractive prices," Daniel Stewart believes.Though some blocks are impractical for the company to exploit, because of water depths, Daniel Stewart expects that management "will move to monetise these blocks in the very short term.""Some, like Barryroe, Schull and others in the Celtic Sea will be packaged and sold. Others will see their value proven at less than drill cost via a seismic programme that San Leon signed with PGS that will conserve cash. These we expect will be farmed out generating cash and a free carry for San Leon in the block," the broker predicts.The broker is looking for a consistent stream of news from the company as well as peers operating in the same areas to underpin the "buy" case for the shares.A meeting with the company's management team has prompted FinnCap to substantially increase its earnings forecast for Renishaw after the company's upbeat trading update on Thursday.Management indicated that it was comfortable with a £240m annual revenue run rate for the year and a gross margin of close to 50%, which FinnCap calculates should deliver pre-tax profits of £55.9m, compared to FinnCap's previous forecast of £41.5m. The earnings per share estimate has been bumped up by 34% to 61.1p from 45.3p.The broker had expected a positive share price reaction to the trading statement but was a little taken aback by the strength of the price rise. It has cranked up its own target price to 1100p, which is based on a fair value of 18 times projected current year earnings.Thursday's strong price rise means that, even with the price target upgrade, the shares qualify as no more than a "hold", with "some further scope for appreciation."