Broker tips: Diageo, SABMiller, Greene King, RPS

8th Sep 2009 12:30

The Kraft bid for confectionery company Cadbury has prompted a bout of bid speculation in the market with Nomura suggesting that another British company with a long and storied history, Guinness owner Diageo, could get in on the act. While Kraft has extolled the virtues of economies of scale for the snack food and confectionery business in its pursuit of Cadbury, Japanese broker Nomura thinks many of the same arguments apply to the global brewing market.'We would expect beer consolidation to continue as medium-size groups around the world look to widen their footprint (e.g. Kirin, Asahi) and as some of the larger operators seek to improve their country weightings (e.g. Heineken, SABMiller),' Nomura said in a research note on the sector.'For Diageo with its relative low leverage, there are still buying opportunities in spirits, such as Moet-Hennessy, possibly the Jim Beam brand out of Fortune Brands or the Jose Cuervo tequila brand, but only if the seller's idea of valuation comes down,' Nomura suggests.Nomura also speculates that SABMiller could be smarting from losing its position as biggest brewer in the world, slipping to a distant second behind Anheuser-Busch InBev.'We believe the market could warm to an emerging market deal (such as Femsa or Anadolu Efes if family shareholders were to agree) but could be sceptical about a mature market deal such as Fosters or Molson-Coors,' Nomura said.Keeping with the brewing theme, Greene King is worth holding for the dividend yield but no longer worth buying for short term share price appreciation, reckons broker KBC Peel Hunt.KBC has downgraded the stock from 'buy' to hold' while retaining its price target of 470p. It is trimming its full-year earnings estimates for Greene King by 6% to reflect the one percentage points reduction in managed margin announced by the brewer 'and continued average declines in tenancy combined with caution on the economic climate in H2 and strong comparatives.'Broker Charles Stanley remains a buyer of the stock, however, on the grounds that with £207.5m of rights issue funds about to swell its coffers, the group will have the wherewithal to cherry pick pubs from the estates of distressed competitors while still reducing debt. 'That said, the group continues to report encouraging trading indications from the managed houses, but the emphasis of now is on improving life amongst the poor quality tenancies,' Charles Stanley analyst James Dawson believes.The broker has a price target of 525.3p, adjusted for the bonus element of the rights issue 'and so at present does not incorporate any additional pub buys'.Acquisitive environmental consultant RPS Group could be back on the acquisition trail when markets recover as smaller businesses look for a backer with the working capital to finance growth, broker KBC Peel Hunt reckons.The company has a good record on the acquisitions front, but enthusiasm for the shares has been dampened this year by a weaker trading outlook for the group's energy division despite the rising oil price. Ordinarily an oil price hike would drive an increase in spending by RPS's clients in the oil sector; instead, the cloudy economic outlook is prompting clients to remain cautious with their spending plans.'Investors ought to start looking through 2009 and consider the impact a recovery on spending may have on earnings in 2010 as global Energy clients look to secure scarce resource,' KBC analyst Andrew Nussey suggests. 'We estimate that a £10m (2%) rise in revenues could lead to a 3% rise in EBITA [earnings before interest, tax and amortisation] given the potential operation gearing.'KBC has reiterated its 'buy' recommendation on the shares for which it has a price target of 250p. 'While we have no certainty on the timing of recovery we are certain of the underlying cash generation capability and hence a 2010 free cash flow yield of 8.9% looks good value,' the broker asserts.