Broker tips: InterContinental, Mothercare, Gem Diamonds

25th Nov 2010 13:10

Nomura says that the long-term growth potential for hotel giant InterContinental Hotels (IHG) lies in the opportunity in emerging markets.IHG expects the size of the Chinese hotel market to more than double from 2.3m to 4.8m rooms by 2020, predicting that it will surpass the size of the US hotel market by 2025.Analyst Simon Larkin's number crunching has projected IHG's managed and franchised earnings before interest and tax (EBIT) in China will grow from $21m in 2010 to over $90m by 2015, and to around $280m by 2020.With margins already strong at 76% in the Middle Eastern market, the broker predicts profit from this geography will grow from $44m in the current year to over $75m by 2015, and $150m by 2020.Nomura says that its EBIT projections for IHG's operations in China and the Middle East could potentially be understated by 45%.The broker is bullish on the sector generally, and reiterated its 'buy' rating and 1,350p target price for IHG. Mothercare has many strengths, including its international exposure, but finnCap believes that its current premium to sector peers is too wide and remains a seller.Based on projected calendar 2010 and 2011 earnings, the mother and baby retailer trades at a 2-point and 2.5-point price earnings ratio premium, respectively, when compared with the broker's retail sector coverage universe."However, its 3-year compound annual growth rate in earnings per share ranks below the median for that coverage," says analyst David Stoddart.While Mothercare looks far more attractive in yield terms - with its calendar 2011 dividend yield of 3.8% beating the sector's 3.5% - and its international growth model has scope for further expansion, "its earnings growth, return on capital and lease-adjusted leverage are not especially attractive," claims Stoddart.However, despite the group ending the first half with a net debt of around £8m, resulting from seasonal factors and acquisitions, the broker expects it to return to net cash by year end."While we believe that the international exposure merits a premium rating against the sector, we believe the current premium is too wide," Stoddart concludes.The target price has been bumped from 440p to 470p.Diamond prices in the fourth quarter are remaining strong, judging by the prices achieved by Gem Diamonds' recent sale of two giant stones.Gem announced Thursday the sale of the 196 and 184 carat (ct) diamonds for a total of $22.74m, well above broker Panmure Gordon's $19m estimate.The two rough white diamonds were recovered from the Let?eng mine in Lesotho in the second half of 2010.Excluding the sales, prices for the November tender averaged $2,341/ct, broadly in line with the $2,422/ct achieved in October. However, the broker notes that this is once again well above the $1,680/ct achieved in the previous quarter.Analyst Alison Turner says this is very positive news "confirming that the October result was not just a once-off based on the mix of stones sold".However, she also sounds a note of caution regarding full year production and further sales from Let?eng. The company has indicated that production continues to be dominated by the main rather than the satellite pipe, "which has implications for grade (and thus production assuming that tonnes treated remains constant). Also the timing of the three fourth quarter tenders may mean slightly lower sales than production. Nevertheless, these are minor tweaks in what is a good news story today," Turner concluded.The broker gives a 240p target price and retains its 'buy' rating.