Broker tips: Meggitt, Holidaybreak, Silverdell

30th Nov 2010 13:48

Nomura Securities has upped its target price for Meggitt as the airplane components maker looks set to see strong top-line growth from the upswing in the commercial aerospace cycle while further cost savings should expand margins."We think the recent market pullback is a good opportunity to buy into some of the mid-cycle commercial aftermarket names that should see good earnings momentum over the next few quarters and, Meggitt, with best-in-class operating margins and free cash flow generation, remains a top pick," said Nomura analyst Jason Adams.In the broker's view Meggitt offers strong earnings momentum at a reasonable price. The broker is 5% ahead of consensus on the forecast for earnings per share (EPS) for the current financial year, and believes the market is underestimating Meggitt's growth prospects in the second half of the year.In the medium term, Nomura is projecting a compound annual growth rate in EPS of 8.55 over the next five years. "In our view, earnings risk remains biased to the upside."Following an 3% upward adjustment to its earnings estimates Nomura has lifted the price target for Meggitt from 350p to 370p, and has reiterated its "buy" recommendation.The share price of educational trip organiser Holidaybreak seems to get an attack of vertigo every time it approaches 300p, but it was heading back up towards that level on Tuesday morning after well received results."Final results came in ahead of our expectations, with a particularly strong cash performance (net debt reduced by over £38m)," said Nick Batram, of KBC Peel Hunt. "The results were accompanied by an acquisition that demonstrates the scale of the opportunity in Education. Today's deal should act as a catalyst to accelerate the re-rating, with Education now making up over half of group profits," Batram asserts.The company signalled its commitment to its strategy of focusing on education with the acquisition of 50% stake in German provider of accommodation for school trips Meininger for €36.5m (£30.9m)."The acquisition of Meininger demonstrates ... management's ability to source compelling investment opportunities. In this respect the deal could be transformational and prove to be the catalyst for a substantial re-rating. Holidaybreak is emerging as one of the most exciting opportunities within the sector and we see significant room for share price outperformance," Batram enthused.Peel Hunt has increased its price target for the stock by just over a fifth to 398p.Mark Bumby of Langton Capital is a little less effusive in his assessment of the company's prospects, noting that the outlook for 2011 looks challenging, "but the group has better visibility (with regard to educational trips) than do most operators and remains well-placed to prosper."The share price of asbestos removal specialist Silverdell remains substantially cheaper than that of its peers, argues house broker finnCap, which is probably due to the problems the company ran into under the previous management."The group's low valuation continues to reflect its chequered past, but management has changed and turned around profitability, with the first 'clean' set of results for a while. Sector sentiment has also been affected by some high profile corporate failures and fears over the impact of government cuts," said finnCap analyst David Buxton.Tuesday's results suggest the company is now on the right track, however, with earnings before interest, tax, depreciation and amortisation of £3.9m up 62% on the previous year, despite a 4.8% dip in turnover to £56.7m."Consulting operations have traded well. Remediation operations have experienced a slower level of schools maintenance through the summer, but this was partially offset by strong order and work flow from utilities, nuclear and industrial customers. While the group has a fairly broadly spread public sector base, management expects that the impact of government cuts will be fairly limited, with much of its workflow determined by regulation," Buxton noted.The analyst is a little more circumspect than management about the public sector impact and feels "some work will inevitably suffer from project deferral."The broker is projecting earnings per share of 1.5p for fiscal 2011, which gives a forward price/earnings ratio of just 5.2, around two-fifths below the sector average. "If we use a P/E of 7.4x, this implies a fair value of 11p. With further profit recovery and growth, its reputation and rating should progressively respond," Buxton believes.