Broker tips: Capita, easyJet, Lonmin

18th Nov 2010 13:56

KBC Peel Hunt expects to revise down its full year revenue forecast for outsourcing specialist Capita but is still high on the medium and long term prospects of the company."Overall trading remains solid despite subdued revenue growth, and margins are progressing, thanks to internal efficiencies and increased benefits of scale", said analyst Henry Carver, after the company's trading statement on Thursday.The company has downplayed the impact of the cost-cutting deal it has agreed with the government, saying the impact will not be material to the group, and this has removed a large 'unknown' created by the comprehensive spending review, the broker argues.Peel Hunt concludes that the short term remains tough, but the longer term opportunities "in both public and private sectors" are more apparent than ever."Our initial read of the statement is that 2010 full year estimated revenues will be lower than expected, but profits in line; however, until we can gain further clarification we are placing our forecasts under review.""With a strong financial position underpinning future growth and an outstanding management team, we continue to regard it as a key pick in the sector," says Carver, reiterating a 'buy' rating and target price of 850p.Panmure Gordon is also a buyer of the stock, though it expects revenue growth to remain subdued. Much of this will be mitigated, however, by margin expansion, as the company continues to offshore more processed to India."Our longer term stance on the shares remain unchanged, as we believe 'pent up' demand will emerge in the public sector next year, with Capita still very well placed to benefit from this in our view," the broker said."We are very much of the view that organic growth will revert back to more normal levels, and the headwinds seen during 2010 should turn into positive tailwinds for 2011 and beyond," Panmure Gordon predicted.The broker has an 885p price target based on a ratio of 18 times projected 2011 earnings. The shares took a hammering in the wake of the announcement of the interim management statement and Panmure Gordon thinks such instances of share price weakness represent suitable opportunities to increase exposure to the stock, particularly for investors "with longer term horizons".Nomura thinks a new focus on business customers and the introduction of other initiatives will see no-frills airline easyJet hit its target of £5 profit per seat by 2013.The annual report on Tuesday saw pre-tax profit for the year ended September surge to £154m from £54.7m the year before. While revenue per seat, 5% higher than last year, "developed robustly," according to analyst Andrew Evans, cost per seat (excluding fuel performance) was poor at 7% higher than the previous year, though the company was affected by a series of disruptions."The key drivers to achieve the targeted £5 profit per seat are more related to execution of the business model and initiatives," says the broker. These include the focus on business customers and customer relationship management data, "which have been only partially implemented in recent years"."A blue sky profit bridge to 2013 points to £7.38 profit per seat if management executes planned initiatives. That leaves a £2.38 buffer to hit our forecasts," says Evans.The estimated profit per seat in 2013 equates to over 60p of earnings and has the shares trading on a little over a projected price earnings ratio of 7.The broker has raised its price target and has reiterated its "buy" recommendation. "We raise our price target to 600p (from 500p) based on 12 times our 2013 earnings per share forecasts, discounted back to today. We forecast easyJet to yield 2.7% in that year".Panmure Gordon is not yet ready to abandon its bearish stance on Lonmin, as it sees rising costs and increased capital expenditure ahead for the miner.The broker's initial response to the platinum miner's full year results on Monday was positive, however, with fourth quarter production well above its expectations.Panmure analyst Alison Turner said that the pick-up in production was reassuring on the outlook for conventional operations, and she now expects Lonmin to slightly exceed its 750 thousand ounce (koz) sales guidance. The broker has increased its forecast to 755koz from 733koz.The broker's sales estimates for 2012 and 2013 "remain unchanged at 900koz and 850koz respectively, however, our confidence in the company's ability to achieve that pace of growth is greatly enhanced," says Turner."Lonmin's guidance is for unit costs to rise at 'below the wage settlement' (likely to be 8-9%)," Turner observed. "Whilst there may be an element of conservatism at play, management nevertheless sees cost control as a key challenge this year and increasing opencast production will add to costs."The broker's cost forecast for 2011 is increased by 5% to 7,000 rand per ounce, and by 4% to R7,225/oz in 2012. Additionally, the miner now estimates sustaining capital expenditure at $200-250m per annum, where previously it was $150m.The increases to cost forecasts have resulted in the broker reducing its 2011 and 2012 estimates for earnings before interest, tax, depreciation and amortisation by 18% and 5% respectively.The broker has retained its 'sell' rating, along with the target price of 1,100p.