Broker tips: Mid-cap income plays, Carnival, Speedy Hire

8th Oct 2010 13:15

Broker Charles Stanley has run the microscope over constituents of the FTSE 250 index looking for key income buys and come up with five likely candidates.Though the broker was looking at stocks primarily for their attractive yields, it makes a good case for diving into the FTSE 250 for capital appreciation too.The broker notes that the FTSE 250 has outperformed its bigger brother, the FTSE 100, in eight out of the last 11 years, and that £1 invested in the FTSE 250 at the start of the millennium would now be worth £1.67, whereas the same amount invested in the FTSE 100 would be worth just 82p.The latest trawl sees entertainment media retailer HMV ejected from the broker's top picks for 2010 and replaced by Carillion, the construction and engineering group. The stock joins N. Brown (shopping catalogue), Hays (recruitment), Marston's (pubs and brewing) and Thomas Cook (holidays) among Charles Stanley's favourites."Each of the above offers a yield of at least 4.0% (FTSE 250-ex investment companies historic yield 2.51%) where Charles Stanley Securities analysts are confident of a future stable or growing return," the broker note said."The law of averages suggests that the FTSE 250 Index will again outperform in 2011. However, should the index underperform, history suggests that any underperformance is likely to be muted.""Should the FTSE 250 outperform on the basis of recovery in the UK economy into 2012 the stand-out buy from our picks is Marston's with a beta of 1.46 to the FTSE 250. Other selections that should perform well into such a scenario are Thomas Cook (0.96), Carillion (0.89), and Hays (0.87). N.Brown (0.32) may be a selection, all other considerations aside, if the FTSE 250 were to weaken. However, all our selections exhibit the common characteristics of high, strong and sustainable yield," the note concludes.Third quarter results announced last week by Carnival were ahead of Nomura's expectations, prompting the broker to raise full year forecasts for the cruise operator.Nomura has upped its earnings per share forecast for the current year by 5% to $2.47 while the 2011 figure has been jacked up by 10% to $3.00.The 2010 forecast, even after the upgrade, still puts Nomura's figure just below the company's own guidance range of $2.48-$2.52 earnings per share, based on a net revenue yield improvement of 2.5% year on year.However, looking beyond the current year, the broker is more optimistic. "Slower industry capacity growth (3-4% pa from 2012), cyclical recovery in net yield, which remains c7% below its 2008 peak and strong value credentials, together lead us to forecast above-trend net yield growth over the next few years," said Nomura analyst Nicholas Thomas.The stock has, on average, traded at a price/earnings ratio (PER) of 17 over the past 20 year, a 17% discount to the US market's average PER of 20, according to Nomura."However, this discount has closed during periods of above-trend yield growth," Thomas notes. "Given our above-trend yield forecasts, we believe that Carnival should trade at least in line with the US market."The broker rates the shares a "buy" and has a price target for the stock of 3300p.The share price of tool hire firm Speedy Hire has been hammered after the company revealed a £1.7m bad debt charge, but KBC Peel Hunt thinks the company is well positioned for recovery. Aside from the bad debt, related to the collapse of the social housing group Connaught, Speedy Hire's first half trading was in line with management expectations. Net debt has fallen to £125m from £134.9m in July, but with KBC Peel Hunt pencilling in capital investment this year of £40m it does not expect net debt to change very much in the current financial year; previously it had forecast a reduction to £106m.The broker is maintaining its headline fiscal 2011 estimates, which call for 3% revenue growth. It expects this growth to come from the International and Branded Advisory division, with UK Hire slated to show modest revenue contraction."Self help initiatives (noting the departure of the UK Hire Managing Director), the mix shift to more enduring revenue streams, the flexible elements of the cost base and tight management also provide support to estimates," Peel Hunt analyst Andrew Nussey believes.The broker is sticking with its "buy" recommendation. "For investors looking for an asset backed (2010 Net Asset Value per share is 48p), market leading and cash generative recovery story we recommend buying Speedy Hire," Nussey says. The target price is maintained at 50p.