Broker tips: Rentokil, Mulberry, Bellway

21st Jan 2011 13:51

Panmure Gordon has upped the price target for Rentokil Initial , having crunched the numbers and come up with a new sum of the parts (SOTP) valuation. The new price target is 108p, up from 96p, even though the new valuation is based on based on the group's troublesome City Link business being worthless. The broker thinks that all of the bad news relating to its courier arm is in the price now of the rat catching and laundry group, while the potential reintroduction of a dividend this year could put a floor under the share price, justifying the broker's "hold" recommendation."Given the current problems at City Link we ascribe no value to this business in our model, which is based on 2012E estimates assuming some recovery in the business but still cyclically depressed in some parts. If we assume a recovery multiple of 16x 2012E to City Link, this would imply a valuation of £164.4m and a SOTP valuation of 115p," the broker explains. Rentokil is scheduled to release fourth quarter results on 18 February, which are likely to be mixed, in the broker's view."We noted the profit warning from UK Mail earlier this month suggesting that the market remains tough. Elsewhere, we think Pest Control, Asia Pacific and Facilities Services should show good progress, with underlying cash generation remaining strong. The balance sheet remains in much better shape, with 2011E forecast interest cover of 6.8x. This could well provide the opportunity to re-introduce a dividend. If we assume the company starts with conservative dividend cover of 3.5x in 2011E, this could derive a dividend of 2.5p, implying a yield of 2.5% at current levels, and should help to underpin the share price further from here," Panmure Gordon said.For years, shares in Mulberry have, like their handbags, looked expensive, but people still keep buying them (the shares, and the handbags).Broker finnCap reckons the reasons why people keep faith with the shares is the expectation of upgrades to earnings forecasts, and the latest trading update shows the company justifying the optimism.However, even after increasing its forecasts on the back of Mulberry's latest trading statement finnCap analyst David Stoddart concedes that "the shares appear expensive again," yet the broker sticks with its "buy" recommendation and 1450p target price for the shares,"We would argue that the scope for the brand in major global markets, where it remains a small player, is substantial and merits a substantial premium rating. And who would rule out further forecast upgrades in the near term?" Stoddart asks.Bellway is still the preferred mid-size builder of financial services firm Martrix Group, which said that the surprise recovery in the housebuilder's sales has made it more likely that full year financial targets will be met."Progress on the key metrics provide confidence for the outcome of the current year based on the forward sales position and the group's potential margin growth from the new sites coming on stream," says Matrix analyst Simon Brown."Although sales rates up to end September 2010 were below those of last year over the same period, sales improved through to the end of November and into 2011 despite the hiatus of December caused by the normal seasonal decline and poor weather. As there are more sites open (200 vs 185 last year) and despite buyer confidence being under pressure on the back of the spending cuts following the government's spending review, the level of completions in the first half are now expected to reach the level (2,247) seen in the prior year's first six months," Brown added.Matrix has reiterated its "buy" recommendation and target price of 1,050p. "The NAV [net asset value] per share was 855p for end of July 2010, which we expect to increase to 880p by July 2011, without any write back of land values from the NRV [net realisable value] provisioning exercise of two years ago. As land prices have started to rise, particularly in the southern half of the UK, further provisioning is seen as very unlikely," Brown concluded.