Broker tips: Logica, Drax, Rentokil

24th Feb 2010 13:10

Logica's 2009 results were in-line operationally and ahead of expectations at the earnings per share (EPS) level, which should help the software firm close the valuation gap on peers, thinks Piper Jaffray.It notes that guidance for 2010 also remains strong compared to peers, with the public sector focused group expecting flat revenues and margins.There were no surprises in the detail as the outsourcing business remained a key driver, with revenues up 9%, offsetting a 10% decline in more cyclical revenue streams.Piper analysts Graeme Clark and Rajeev Bahl also like the "robust" outlook. Logica has good order growth and a healthy pipeline, with a book to bill ration for the year of 114%, indicating it has more orders than it can deliver.Full-year 2010 revenues are expected to be broadly flat, as predicted by Piper, and margins to remain stable, while the company confirmed it does not expect to report any further restructuring charges this year."We expect that this guidance will be positively received," said the analysts, retaining their 'overweight' rating and 136p price target.The stock market and the share price of Drax Group have gone in opposite directions over the last year and a majority of brokers that cover the company remain bearish on the stock.Broker Charles Stanley is stuck in the middle after the coal-fired power station owner's 2009 results announced on Tuesday, which topped expectations but which also painted a mixed picture of future prospects.With around 15% of the UK's energy capacity set to shut down by 2015, Drax, operator of the largest coal-fired power station in the UK, remains a 'key power generator' in the UK but the broker prefers 'other companies in the sector that have more diversified business models.'Charles Stanley is sticking with its 'hold' recommendation and is slightly above consensus with its 2011 revenue forecast of £1,368m (versus consensus of £1,358m) but below the median forecast on earnings before interest, tax, depreciation and amortisation (£324m versus £378m).Nomura still needs convincing about the merits of Rentokil Initial despite the cleaner and pest control specialist posting sharply improved pre-tax profits last Friday.Nomura analyst Marc Van't Sant reckons the company still faces major operational obstacles across its core business lines, such as its poor customer retention rate. 'With 20% churn rates, management faces a large uphill struggle to get the top line moving,' the analyst reckons.Nomura has nudged up its price target from 120p to 130p to reflect the higher margins management expects to achieve through greater cost synergies. The broker retains its 'neutral' rating, however, as it believes the market is already discounting much of the company's recovery potential.