Broker tips: Int'l Power, Severn Trent, Stagecoach

20th Jan 2010 13:10

Hopes of a bid for International Power (IPR) were dashed earlier this week when it said talks with GDF Suez were over, but there's more to the energy giant than that, says Credit Suisse.The Swiss bank thinks earnings 'have already troughed' and suggests using any pullback and return to fundamentals as a buying opportunity.'We do not think IPR has sufficient leverage available to buy expensive merchant assets, allaying value-destruction fears,' said analysts. 'We would instead expect it to deploy its strong free cash flow in paying down debt, and IPR now has liquidity to do so, in our view.'Its rating stays at 'outperform' and the price target jumps to 350p from 310p.Severn Trent is up, despite yesterday's decision to accept Ofwat's proposals for 2010-15, as the resulting 10% cut in next year's dividend was less than expected.Nomura didn't think the water company needed a rights issue or a dividend cut to position itself for the upcoming five years. Some anticipated a cash call.But the Japanese broker says 'buy' as the shares, yielding 5.7%, are undervalued versus its peers and trading at a slight discount to Regulatory Capital Value (RCV).HSBC was pleasantly surprised as it thought the payout for the year to 31 March 2011 would fall by a fifth, at the top end of the 15-20% predicted by the market.The bank keeps its 'neutral' rating as it still reckons dividend cover remains tight, but raises the price target to £11.30 from £10.80.Stagecoach is most likely to win a new rail contract, says Morgan Stanley (MS), which upgrades the bus and trains firm to 'overweight' from 'equalweight'.'UK Rail will be front and centre again this year, but this time lower employment declines and a restructuring of the franchising system should restore the market's confidence,' the broker told clients this morning.It thinks Stagecoach, which operates the South Western commuter rail franchise, is the best stock to play this theme. The valuation is not demanding at 10.7x 2011 P/E, while there could be 10% upside to consensus earnings per share, driven by cost savings in rail. The price target rises to 205p from 174p.But FirstGroup is cut to 'equalweight' from 'overweight' with target lowered to 430p from 515p. MS has less conviction that the North American student business will return to 4% revenue growth in 2010/11, while there's a 'lack of rationale' for EPS upgrades.Elsewhere, renewed confidence in exposure to UK Rail leads the US broker to prefer Go-Ahead, up to 'equalweight' from 'underweight', over Arriva, downgraded to 'underweight' from 'equalweight'.