Broker tips: Mitchells & Butlers, GoIndustry, Deltex

23rd Sep 2010 13:43

When it comes to shares in pubs group Mitchells & Butlers (M&B) it is time to get a round in, reckons KBC Peel Hunt, after an unexpectedly strong pre-close trading statement from the All Bar One and Harvester owner."M&B remains the fastest changing of the pubcos, yet it is one of the cheapest stocks in the sector, trading at a 10% EV:EBITDA [enterprise value:earnings before interest, tax, depreciation and amortisation] discount to the peer group," enthuses Peel Hunt analyst Paul Hickman.Hickman was encouraged by the upbeat mood of the management at a recent meeting with them."At our recent meeting, management showed increasing confidence in the state of the consumer economy in its market, and is currently still intending to pass on the VAT increase in January. This makes it very likely, we believe, that a dividend yielding 2.5% will be reinstated at the prelims in November," Hickman said.The broker has upped its full year profit before tax forecast for fiscal 2010 by 3% to £166m, which puts it some £9m above the median forecast from a universe of 15 brokers.The turnaround is continuing at the oddly named GoIndustry Dovebid , the provider of asset management, auction and valuation services, but the market has yet to recognise the value of this strongly cash generative company, the house broker believes. "Interim results underline the progress that has been made in turning what was a loss making concern into a profitable and more focused business," said WH Ireland, which has just initiated coverage of the stock. "We believe the market opportunity to be significant with a revised company strategy leveraging GoIndustry's global strengths into the targeting of higher margin, corporate-led, business. Although the turnaround programme has yet to complete, and thus execution risk remains, we believe the company has the capability to generate significant levels of earnings and cash," said WH Ireland analyst Matthew Davis.The broker rates the shares a "buy" and has a price target of 195p, based on a discounted cash flow valuation model.WH Ireland thinks the company is set to make a maiden full year profit of around £0.44m after interim results that saw adjusted pre-tax profits of £0.2m. Shares in oesophageal doppler monitoring equipment group Deltex Medical have shot up this week following interim results on Tuesday that showed accelerating sales growth, but the company's house broker thinks Deltex might have left itself too much to do to meet the broker's full year sales forecast.The second half of the year is normally "the seasonally stronger period for the company and the company has a strong pipeline of potential business, including some significant individual projects," according to Arden Partners.However, the stockbroker's current full-year sales forecast of £6.8m implies 27% growth in the second half, "which we think is achievable albeit somewhat demanding, particularly given the trend towards placing rather than selling monitors," Arden analyst Chris Thomas said.The broker has therefore trimmed its forecast sales from £6.8m to £6.5m, representing 17.4% growth in the second half, which would still allow the company to break even in the second half as well as generate cash before working capital movements."Looking further out, we believe that the company should be able to return to, or even exceed, historic growth rates of c25%. We have assumed 25% sales growth in 2011 and 2012 and given the high gross margin of c77% this should lead to a rapid improvement in the financial position of the group," Thomas opines."Our model assumes that, once the group moves into profit, roughly half of incremental gross profits will be reinvested in the business in additional sales and marketing resources and R&D [research & development] to drive further growth but ... this would still allow rapid improvements in profitability and cash generation," the broker said.