Broker tips: Compass, Paragon, Afren

24th Nov 2010 13:03

Charles Stanley expects Compass Group to reinvest in growth and deliver steady margin expansion as it is well placed for significant structural growth opportunities in both food and support services around the world.The contract caterer's organic revenue growth improved from 0.4% in the first half to 3.2% for the year end. Meanwhile margins have improved consistently over the past four years, and analyst Tony Shepard expects this to continue in 2011 and 2012.The broker remains hopeful that Compass can "reinvest its efficiencies" and "continue to generate new business wins" in the current financial year and maintains its 'buy' recommendation.With funding sources now available again for Paragon, KBC Peel Hunt sees a bright future for the buy-to-let mortgage lender.Final results came in marginally ahead of September guidance while the net asset value (NAV) per share at the end of September, at 234p, was slightly ahead of the 229p the broker had forecast. With the share price trading at around 160p, the stock trades at a significant discount to NAV.Paragon's pre-tax profit for the year was £66.1m, ahead of the £64.6m guidance given by the group in September. In line with broker expectations, unadjusted earnings per share was 17.8p and the dividend increased by 9% to 3.6p.Since obtaining a new a £200m senior secured loan facility at the end of September the group has said the flow of mortgage applications has been encouraging. Additionally, discussions with potential sources of additional warehouse loan capacity are ongoing.The broker forecasts a 2011 fiscal year net asset value of 240p leaving the stock at a projected 34% discount to NAV. In addition the stock has a current yield of 2.4%."We continue to believe this is unjustified - the business is cash-generative ... and the return to new lending indicates the business is moving forward again in what we expect to prove to be attractive market conditions", says analyst Stuart Duncan.The broker retains a 'buy' and has upped the target price from 227p to 247p.While Afren has successfully completed appraisal activities at one offshore project in Nigeria, finnCap believes that the oil company needs a higher resource base to warrant an upgrade to its forecasts and retains its negative view on the stock.Operations at the Okwok-9 appraisal well were completed with Afren declaring that results were in line with pre-drill estimates and consistent with its subsurface model.The group has confirmed that a minimum commercial resource base of 25 million barrels (mmbbl) has been established but do not provide an updated resource estimate."Pre-drill we understand the resource estimate was 20mmbbl with upside to 70mmbbl and we valued this at 3.4p per share (risked at 50%) and 5.6p per share (risked at 33%), respectively", says analyst Will Amstein.However, without an updated resource number, the broker is unable to make a change to its net asset value estimates at this stage. "Assuming we move to de-risk Okwok to 75% then the resource base would have to be in excess of 35mmbbl for an upgrade to be warranted", adds Amstein.Due to this uncertainty the broker maintains its 'sell' with a 100p target price.