Broker tips: GKN, Gulf Keystone, Airlines

11th Apr 2011 12:13

Charles Stanley downgrades automotive and aerospace engineer GKN to 'reduce', from 'hold', despite first quarter numbers being 'in line', as it believes that automotive market conditions remain tough."GKN is a typically early cycle investment and as leading indicators roll over and comparatives, especially in European autos begin to exert a significant headwind we believe that investors should be looking to lower exposure," said the broker.The company is expected to make "good progress" but comparatives are likely to get tougher as 2011 progresses, and rising raw material prices are also present a significant headwind, according to Charles Stanley.Matrix keeps its 'buy' for oil explorer Gulf Keystone Petroleum (GKP), but highlights its caution in regards to the group's ongoing dispute with procurement firm Excalibur Ventures."Excalibur asserted certain contractual and on-contractual claims against GKP and is claiming up to 30% interest in the company's licences in Kurdistan [Iraq]," notes analyst Vugar Aliyev.The broker says that in the worst-case scenario (if GKP loses this case), the valuation of the stock could be slashed by 50p, reducing its current target price of 190p to 140p."However, this case is likely to drag on for some time, and we think that a risked 10-20p of negativity could be built into the stock medium term," said Aliyev.Nevertheless, a 'buy' rating is kept.While Nomura thinks that elevated oil prices will probably fall over the medium term, the Japanese broker prudently factors in the current levels to its earnings estimates for airlines, resulting in forecast reductions at easyJet and Ryanair.Brent oil is 30% higher than the start of the year and now sits 17% below the peak registered in 2008. The broker incorporates a $120 oil price into its forecasts.Budget airline easyJet sees its target price cut to 470p, from 600p, while a 'buy' is retained. Rival Ryanair also has its 'buy' rating left intact, but its target is lowered from €6 to €5.50.Forecasts at British Airways owner IAG are kept the same as Nomura had already factored in a $115 oil price into estimates previously."The market is likely to adjust to higher fuel with the imposition of fuel surcharges and capacity decisions. However, that adjustment lags the movement in the spot oil price and so there is near-term margin pressure when fuel rises sharply," said the broker. ---bc