Broker tips: Diageo, Autonomy, Micro Focus

2nd Jul 2010 11:40

Nomura Securities has welcomed the finalisation of a 10-year funding agreement on pensions by drinks group Diageo and thinks the deal could open the door for the company to consider accelerating return of cash to shareholders.With the ratio of net debt to earnings before interest, tax, depreciation and amortisation expected to be down to 2.3:1 by the end of fiscal 2010 and lower still, at an estimated 1.8:1 at the end of the following year, the company should have scope to accelerate dividend flows and contemplate the resumption of share buybacks."This supports our positive view on the shares," said Nomura analyst Ian Shackleton, who thinks that Diageo's "dividend payments could rise faster than the historic 5% rate going forward."The company might even have scope for some bolt-on acquisitions of spirits brands, Shackleton speculates.The broker has maintained its "buy" rating on the Guinness brewer and has a target price of 1530p.According to Digital Look's broker coverage page on Autonomy, only three of the seventeen brokers covering the company have a negative view on the software giant but you can add KBC Peel Hunt to that list.The broker has initiated coverage with a "sell" recommendation and a sceptical viewpoint."Our thesis is that Autonomy needs to make acquisitions to sustain high rates of growth and poor cash conversion is caused by working capital rising faster than growth should dictate. There is also evidence to suggest the early recognition of revenues, particularly with reference to acquired deferred income. Given our concerns and uncertainty around the next acquisition, we believe Autonomy is a stock to avoid," writes KBC analyst Paul Morland.For a high growth software company a price/earnings ratio of 22 on projected earnings "is not unreasonable", the broker concedes but "as we believe that organic growth is overstated and cash generation poor, we suggest the rating is unwarranted."The broker has a target price of 1500p, some 300p below the current share price.The purchase of £400,000 worth of MicroFocus shares by the company's chairman at the tail end of 29 June is a sign that the software firm's shares have fallen too far, according to Canaccord.The financial services firm notes that Micro Focus's shares have fallen a further 20% since well respected finance director Nick Bray announced his resignation, and that's on top of a 14% fall suffered after Stephen Kelly quit as chief executive officer (CEO).At the same time, earnings estimates have been upgraded by 20% since the board room upheaval started, leaving Canaccord at a loss as to why the company appears to be so unloved."MCRO [MicroFocus] is the fourth-largest listed UK software company that is highly cash generative, and has both organic and acquisitive growth potential. The new CEO Nigel Clifford is respected with 30 years of experience leading technology companies including Symbian, Cable and Wireless and BT," Canaccord said.The company should not have much difficulty finding another strong chief financial officer to replace Nick Bray, Canaccord believes.The firm has reiterated its "buy" recommendation but has cut its price target from 540p to 510p to reflect market weakness.