Broker tips: Prudential, BHP, Serco

10th Mar 2011 14:24

Nomura seems concerned that, despite consensus-beating results, only a quarter of Prudential's earnings come from Asia, and has maintained its 'reduce' recommendation on the insurer."Prudential's results beat consensus in most respects but most of the company's growth came from the US and not Asia, and even to some extent from a renaissance of Pru's UK strategy," says analyst Nick Holmes.US earnings grew by 35% and now contribute 41% of group operating profit, while Asia contributes just 25% of earnings and grew by only 19% on a currency-adjusted basis.Also, the Japanese broker thinks that the group's US performance is likely to slow considerably in 2011, both in terms of new business and earnings growth partly due to increasing competition limiting the increase in sales.Nevertheless, Nomura raises 2011 operating earnings per share estimates to 55.2p, from 51.42p, to reflect Pru's re-entry into the UK bulk purchase annuity market, and raises the target price from 700p to 735p.Credit Suisse keeps its 'neutral' rating on mining giant BHP Billiton but suggest that a series of significant capital expenditure announcements over the next two years could provide a catalyst.The broker notes that BHP recently guided to $80bn in growth capital expenditure between now and 2015. "In our note we have modelled the growth projects we expect to be approved in the next 12-24 months to identify the value add," says analyst Paul McTaggart."In line with BHP's long-term basin-growth strategy a number of the projects we have assessed have a modest net present value (NPV) impact at initial production rates but open up long-term brownfield expansion options (that are potentially very high returning)," says McTaggart.While the incorporation of the growth projects into the broker's model has added 7%, or $17bn, to its valuation, changes to earnings are minor.Credit Suisse keeps its cautious recommendation on the stock, but increases the target price from 3,000p to 3,150p.UBS says that the outlook at Serco is encouraging as some short-term headwinds in the UK should be offset by a longer-term pipeline and international performance.2010 results announced last week were broadly in-line with market expectations, "with growth and cash flow particularly encouraging in our view," says the broker.The outsourcing group guided to 5.5 - 6% organic revenue growth in 2011, compared with 7.6% growth in 2010, with the UK business "mainly to blame." However, "the bid pipeline was up to £29bn and, importantly, weighted evenly across group revenues (60:40 - UK: international)."UBS notes that while the medium term confidence in the UK is encouraging, the international business showed double digit growth in 2010. "We still believe that this access to a wide range of geographies and sectors is key to the longer-term Serco growth story."The price target is upped to 670p, from 640p, and a 'buy' is retained.