Broker tips: Diageo, Renold, Synchronica

15th Oct 2010 13:00

Although Diageo released a statement yesterday broadly in line with expectations, the group highlighted a weak consumer environment in Europe, a concern echoed by broking group Killik.The trading update for the premium drinks company revealed a 5% increase in net sales and a 7% rise in net assets over the first quarter. Despite this, Killik & Co. remain concerned about the outlook for consumer spending in developed markets "given high unemployment levels and the shift from on-trade to lower margin off-trade".The broker expects Diageo's expansion in Asia and the emerging market trend towards premium spirits to be positive in the long term, however even its strong financial position "will continue to be outweighed by these nearer-term issues" in Europe.The group is currently trading on 14.2 times the consensus for earnings per share for the year to June 2011, and is yielding 3.6%. The broker has confirmed its 'sell' rating given the near term uncertainties, with a target price of 1136p.Synchronica is expected to benefit from its recent all-share acquisition of Canadian mobile technology group iseemedia for £5.2m, research firm Equity Development reckons.Equity Development says the UK mobile software developer "has strong strategic value, given the favourable mobile macro trends" as it has tapped in to a rapidly-emerging market in India, through its acquisition.Analyst Philip Carse says 2011 fiscal year forecasts "support a share price of up to 28p, or 50% above current levels, whilst the 2012 fiscal year forecasts support up to 59p / share."Carse sees a strong strategic value given "the strength of the company's sales pipeline, the repeat orders that will start to come through from the various contracts signed in the last 24 months, the growing importance in sales to device manufacturers as well as mobile network operators, and now the iseemedia acquisition."Carse claims that Synchronica's value to a strategic buyer would be considerably higher than today's share price, or indeed Equity Development's estimated fair value.Thursday's trading update from Renold pointed to first half profits ahead of expectations and prompted FinnCap to whack its full year earnings forecast for the supplier of industrial chains and torque transmission products up by 30%.The broker now forecasts adjusted profit before tax of £5.5m for the year to end-March 2011, a significant upgrade to its previous estimate of £4m. The earnings per share (EPS) figure has been bumped up to 1.7p from 1.3p.The improvement is seen filtering through to fiscal 2012, also, with the broker upgrading its profit before tax figure for this year to £12.5m from £10.9m previously and its EPS estimate to 4.0p from 3.5p."We believe that the momentum of order intake could provide further upside to profits in the current year. As the majority of cost savings achieved over the last year have been retained, despite the increase in sales, we look for a strong improvement in operating margins to 3.8% and then to 6.7% in 2012," analyst David Buxton said.Net debt at the company has increased from £18m back at the end of March to £22m at the end of September but FinnCap thinks the increase in the debtor book is understandable given the increase in sales. "We understand nearly all the increase in debt is associated with the increase in working capital," the broker said.Based on the broker's earnings forecast for 2012 the shares trade on an earnings multiple of 8, which FinnCap thinks is "excellent value". Its price target of 55p, up from 50p previously, is based on a fair value earnings multiple of 13.8.