Broker tips: Centrica, SABMiller, Davis Service

12th Jan 2010 12:53

Having selected Centrica as its top UK pick for 2010, Nomura Securities has decided to 'put a little more meat on the bones' and explain why.For a stock that 'delivers sector beating EPS [earnings per share] growth' Centrica's valuation of 11.4 times forecast 2010 earnings lags undeservedly behind the 12.9 price/earnings ratio of its integrated peers. 'This valuation is more compelling if we strip out the benefit of free carbon elsewhere in the sector (11.6x [Centrica] vs. 14.5x [peers]),' Nomura analyst John Musk writes.The broker has a 340p price target for the stock.Brokers UBS and Nomura Securities are of differing views over the prospects of brewing giant SABMiller with the former a fan and the latter turning lukewarm on the stock.UBS has reiterated its 'buy' recommendation for the lager brewer, claiming that the company is at an inflexion point as economic growth in emerging markets offers scope for volume growth.UBS reckons that even after losing out to Heineken in the battle for FEMSA Cerveza, SABMiller offers a 'strong organic story' and has raised its price target from 1900p to 2000p.Nomura cites the 'missed opportunity' on FEMSA as well as the recent strong run by the shares as reasons for downgrading the stock to 'reduce' from 'neutral'.The broker believes that with Heineken snapping up FEMSA, SABMiller's chances of establishing a strong presence across the Americas have been removed. Now, far from closing the size gap with number one brewer by volume Anheuser Busch InBev (ABI), SABMiller has seen the gap between itself and smaller rival Heineken diminished.'We see little scope for positive surprises in the short-term - we estimate Q3 [third quarter] volumes to be reported next week down 1% in line with H1 [first half],' Nomura predicts.The broker's price target has been trimmed from 1800p to 1730p. Top-line pressures at laundry and workwear group Davis Service could ease in 2010, UBS reckons, despite the company's focus on the hard pressed hotel and construction sectors, 'Davis fits the UBS equity strategy theme for 2010: despite moderate growth, it is well-managed and high margin with a strong competitive position in selected markets (UK, Nordics and parts of Continental Europe),' UBS analyst William Vanderpump states, in a research note announcing the bank's upgrading of the stock to 'buy' from 'neutral'.Vanderpump likes the stock's 'sustainable 5% dividend yield' and regards it as solid defensive pick, 'the sort of stock that has traditionally performed well in "year 2" of a recovery.'The long term valuation of the Davis share price is 12 times earnings per share, and on the basis of projected earnings per share for the current year UBS has upped its price target from 40p to 450p.