Broker tips: De La Rue, BATs, Desire

6th Dec 2010 13:09

There is nothing like a bid approach to make a broker reassess the value of a stock and bank note printer De La Rue is no exception to the rule.Confirmation that the crisis-torn company has received a bid approach, believed to be from French rival Oberthur, has prompted Panmure Gordon to whack up its target price from 470p to 800p, and switch its rating from "sell" to "hold".Panmure Gordon thinks an offer of around 750p to 800p would represent "a realistic take-out level given the possibility of significant reputational damage in the wake of the falsification of production standards.""We have suspected for some time that any interest in De La Rue would only come from a competitor given the problems any private equity firm would face in due diligence given the nature of the business, and despite the market position and scarcity of the asset we believe it unlikely this will become a bidding war," the broker said.At a price of 800p De La Rue would be trading on a multiple of 10.5 times recent peak earnings (year to March 2010) which, given the reputational damage caused by the company's recent problems, Panmure Gordon thinks De La Rue will struggle to return to in the short to medium term."On current forecasts this multiple would rise to 35.7x to March 2011, dropping to 28.2x - a more than generous valuation given the unquantifiable risk of reputational damage as its current order book unwinds and new contracts come up for negotiation. We see little possibility that there will be anything but margin pressure, and that there remains a more than decent chance of its largest client terminating its current contract given the length of time negotiations over production problems have been under way," the broker concluded.Nomura Securities has bumped up its price target for British American Tobacco (BATs) as margin progression appears to be ahead of expectations.The new price target is 2750p, and the recommendation remains to buy the shares."We expect underlying margins to be up 150 basis points [one and a half percentage points] in the second half of 2010 and surpass the 35% level in 2011 (a year ahead of target) and go onto over 40% by 2015," analyst David Hayes said.Margins will be helped by the appreciation of emerging market currencies versus the euro and the dollar, as well as more than £1.2bn of cost savings, as the group gets efficiency up to similar levels to its western European peers."BAT faces less risk of mix dilution (less premium than Phillip Morris International) and less risk from illicit trade and economy cigarette competitive intensity (less value than Imperial). Also has more complete options in longer term on research & developmment, mergers & acquisitions and further cost savings from relaxation on regional controls on tobacco," Hayes claimed, adding that the implied medium-term value of the shares is "significantly more attractive than peers".The plugging of the 14/15-2 Rachel North well by North Falklands oil explorer Desire Petroleum was a most unpleasant turn-up for the books and has predictably led to the share price being trashed, but Westhouse Securities thinks the fall has been overdone.On Thursday last week, Desire announced that preliminary data collected indicated that this well was an oil discovery, having encountered a 349 metre gross interval of sands and shales with hydrocarbons, of which 57 metres was net pay in multiple zones.Analysis of the wireline data, however, indicated that the hydrocarbons are residual and that the mobile fluid is water.Despite the "dramatic turn of events" Westhouse remains relatively upbeat, though it is slashing its price target for Desire from 142p to 96p. With the shares slumping more than 60p in the morning session on Monday to around 70p, that still justifies Westhouse sticking with its "accumulate" recommendation."The positives that can be taken are the thick sands that have been encountered, as well as oil that has passed through. Discovering where this oil has migrated to is clearly the challenge for Desire and other operators in the [North Falklands] basin," the broker said.One of those operators is Rockhopper, which has a 7.5% stake in the abandoned 14/15-2 Rachel North well. Westhouse has maintained its "buy" recommendation but has adjusted its price target to 489p.