Broker tips: Diageo, Fidessa, Telecom Plus

14th Feb 2011 13:37

Charles Stanley stays with its 'accumulate' rating on beverage group Diageo and suggests that investors should use the recent weakness in the share price - following the results - as a buying opportunity.Although the results came in at the bottom range of expectations, the broker notes that Diageo's performance varied materially by region, with an improving trend in the US and growth in emerging markets, being partly offset by a weakness in Europe. Additionally, the financial performance of the group, whose brands include Guinness, Smirnoff vodka and Johnnie Walker whisky, was also held back by a 10% increase in marketing expenditure.Earnings per share estimates for 2011 and 2012 are reduced by 2% to 78.8p and 86p, respectively, "reflecting the slightly slower than expected progress made in the first half of the year," says analyst Sam Hart. However, Hart notes that this is not a beginning of a sustained period of forecast downgrades.Diageo's "unrivalled portfolio of premium brands and distribution network leaves it very well positioned to benefit from the ongoing premiumisation trend in the global beverages industry." Charles Stanley's 12 month share price range is between 1,025p and 1,258p.Fuel price increases, capacity issues and the winter impact on pricing are all concerns for British Airways owner International Airlines Group (IAG), but the shares are still worth buying at this price, UBS says."We think investor concerns that fuel increases will not be able to be fully passed onto consumers in the near term is valid. In addition to the normal lag in passing on fuel increases to consumers, capacity on certain routes is running high which diminishes pricing power for airlines. Given these issues we downgrade estimates," says UBS.The broker cuts 2011 yield forecasts from 9% to 7% given excess capacity on certain routes and "what appears to be winter impact on pricing." However, the 2012 yield estimate is raised from 2% to 3% as the lag in pricing is pushed into the following year.UBS notes that the group has underperformed the FTSEALL by 15% since listing, but says that, should capacity restraint over the summer months persist, pricing will improve.A 'buy' is retained, but the target price is lowered from 360p to 290p. RBS stays with a 'buy' rating on Fidessa Group after a robust set of results, and is encouraged that on a 24-month timeframe, market conditions are expected to improve.The trading systems developer showed 10% revenue growth in 2010 to £262.3m and 11% growth in adjusted operating profits to £39.8m, with all of the growth driven by organic means.Additionally, net cash was especially strong at £63m, versus an RBS forecast of £48.9m, prompting the group to announce a 45p special dividend on top of the annual 33p dividend.However, margin performance was broadly flat sequentially, and RBS notes that this is the first time in (at least) 10 years that second half margins have not been noticeably higher than the first half, reflecting the cautious equity market conditions in the period.Nevertheless, the broker sees conditions improving and retains its positive stance and target price of 1,727p.Peel Hunt is more equivocal about the shares and has stuck with its "hold" rating, though it has raised its target price to 1576p from 1484p. The broker has downgraded 2011 earnings forecasts by 2% and 2012 forecasts by 6% as margins normalise in those years. Fidessa sees "early signs of improvement (higher consultancy), but has guided to lower revenue growth than we had anticipated, with a 5% impact from previous years' customer losses flowing through," Peel Hunt Alex Jarvis notes.Jarvis admits Fidessa "remains a solid company" but trading on an earnings multiple of 20 would like to see better visibility on the timing of a return to high growth before coming off the fence on the shares. While Peel Hunt increases its target price Panmure Gordon goes the other way. "We love the business, the financial model, competitive clout and expanding operational footprint, but we move to a Hold given the recent strong share price performance. We also reduce our target price from 1703p to 1665p," the broker said. Panmure Gordon has, like Peel Hunt, tempered its growth expectations for next year, trimming its sales growth estimate from 13.5% to 12.8%, while being mindful of Fidessa's track record of delivering ahead of expectations. Completing the gamut of opinions on the stock, finnCap has reiterated its "sell" recommendation and 1265p target price. "Forecasts are likely to remain little changed, and the economic environment for sell side clients, which constitute 90% of Fidessa's customer base, remains testing," analyst Andrew Darley maintains. "While the company highlights positive expectations 24 months out, we still see no reason to commit to the risk in the near term, which the special dividend seems to constructively acknowledge," the broker concluded.