Broker tips: Dunelm, Regus, Morgan Crucible

18th Feb 2011 12:52

Nomura maintains positive about bedding and curtains retailer Dunelm, saying that while the first half saw higher costs, investors should expect a better top line from the fourth quarter onwards.A 14.3% rise in costs limited operating profit to just 5.4% growth, as the group experienced £0.5m of warehouse expansion costs and an onerous lease charge of £0.75m. In the second half the group is expected to see higher depreciation and new head office running costs, says analyst Christopher Walker.While growth has been limited in 2010, the Japanese broker notes that comparatives should ease in the future: having annualised +15.4% and +11.6% like-for-like sales in the first and second quarters, respectively, comparatives fall to +7.1% and -1.9% in the third and fourth, respectively."In our view, the third quarter may remain challenging, given the recent VAT rise and macro headwinds, however the fourth may represent a slowing of internal investment and an easing comparative," says Walker. The target price is 550p.Credit Suisse keeps an 'underperform' rating on engineering group Morgan Crucible, as the share price is close to a 40-month high. "The release of group targets by management on 16 February, that included a doubling of underlying 2010 pre-tax profit of £75.7m by 2013, has provided a road map to both the expected future group progression over the short to medium term as well as a bench mark against which to measure performance," the broker says.While management has given increased guidance on profitability, Credit Suisse believes the targets are "financially stretching versus historic performance and as yet the finer details of the transition are yet to be released." The broker remains cautious until further clarity.However, the target price is raised from 230p to 267p to reflect a 2% and 5% upgrade to pre-tax profit forecasts for 2011 and 2012, respectively.Royal Bank of Scotland (RBS) upgrades serviced office specialist Regus to a 'buy', from 'hold', as it believes earnings can surpass a previous peak.The broker views the company as a "play on US economic recovery and continued emerging market growth."With confidence in US small- to medium-sized enterprises improving, RBS says that this bodes well for Regus, which derived 42% of its 2010 first half revenues for North America. Additionally, much of the previous bear case for the group centred on its UK exposure (17% of first half revenues), but recent updates from its peers indicate that the market there is improving.Additionally, with a growing emerging market footprint (which accounted for over 25% of first half revenue), the broker sees confidence building in the recovery and raises the target price to 140p, from 83p.