Broker tips: Marks & Spencer, Babcock, blinkx

9th Nov 2010 13:22

If you are looking to gain exposure to the UK retailing sector then KBC Peel Hunt reckons there are better options available than high street bellwether Marks & Spencer (M&S).KBC Peel Hunt sees "better opportunities in midcap retail" and retains its 'sell' stance on M&S after the retailer's interim results.Despite a strategic review by new M&S boss Marc Bolland, which set out clear targets by 2013/14, the broker would "rather have seen debt addressed more directly".Net debt for the retailer remains consistently high at £2.2bn.Bolland's seeks targets of £11.5-12bn in group revenue by 2013/14, against the broker's forecast of £11bn for 2013.At first glance, the revenue targets that sit 10% ahead of KBC's forecasts should be sufficient to take pre-tax profit levels "back to the mythical £1bn, around 45p of earnings" and see a compound earnings per share growth of circa 12% per annum over three years, with a 3-year price to earnings ratio of around 9 times.However, the broker sees "better opportunities in midcap retail with Debenhams, Super Group and Dunelm".KBC will review its forecast, target price and recommendation in light of Tuesday's update, but expect to retain its 'sell' stance.Despite profit being 2% below Panmure Gordon's forecasts, the broker has retained its 'buy' recommendation for Babcock International after a "solid set of first half results"."Marine once again delivered a robust growth and margin performance, with the company seeing lots of opportunities in its Defence business."While US operations remaining stable and in line with expectations, South Africa continues to go "from strength to strength", the broker says.The broker notes that the integration of VT is progressing well, with Babcock confident of achieving the merger benefits of £50m by 2013.A better-than-expected cash conversion of 189% brought net debt down to £796, compared to the broker's forecast of £861.1m. That has given the company scope to bump up the interim dividend by 8% or so, in line with the group's avowed intention to stick to a progressive pay-out policy.Panmure maintains its target price of 750p, based on 13 times the projected 2013 earnings per share value, and with an excess of 30% upside potential, it confirms a 'buy'.KBC Peel Hunt is also a buyer of the shares, but won't be adjusting its full year estimates after the "in line" interim results."While we remain of the view that the impact from the Strategic Defence Review (50% of Babcock's activity is UK MoD) and Comprehensive Spending Review is yet to filter to company level, we believe our estimates cover the risks of (1) procurement disruption arising from client hesitancy as programmes (existing and new) are reviewed (2) contract re-profiling to reduce activity and (3) margin pressure as government exerts its buying power and influence," said Peel Hunt analyst Andrew Nussey."While Babcock is not immune to a reduction in government spending, we believe the migration towards incentive-based procurement is positive for returns," Nussey said.Broker Daniel Stewart sees "momentum of growth" at blinkx, the online video search specialist.First half revenue was up more than 100% year-on-year at $27.4m. Gross profit also rose 109% to $17.7m, compared with the broker's forecast of $16.9m.The group swung to an operating profit of $2m from a loss of $7.4m for the same period last year.The broker notes a substantial increase in Average Daily Search run rate, from 22.6m reported in March, to 31.6m for the half-end, which is "the most intriguing feature" of the results. Additionally, the statement Tuesday also announced a partnership with Amino Communications to develop an integrated search, recommendation and personalisation solution to be deployed on Amino's new product, "which brings broadcast, on-demand TV, open Internet and local content together in a single device".A target price of 110p and 'buy' rating is reiterated.