Broker tips: SABMiller, Smiths, SSL

19th Nov 2009 13:08

The world's second biggest brewer, SABMiller, was the best performing blue-chip in London on Thursday after interim results, but Merrill Lynch remains hard to please.'We do not believe the market will upgrade EBITA [earnings before interest, tax and amortisation] materially for 2010, but earnings certainly have scope for upside depending on the guidance on full year interest and tax guidance,' the US broker reckons.'In line with the other brewers the top line missed, but margins were ahead of expectations, leading to likely upgrades,' Merrill Lynch said.Based on its own earnings forecasts, however, SABMiller remains the most overpriced brewer in the broker's research universe, trading on a multiple of 15.8 times projected 2010 earnings, while the free cash flow yield of less than 4% is lowest in the sector.'Based on our price objective of 1750p we have a underperform rating on SABMiller,' the broker concludes.Bid speculation that Anglo-Dutch household goods maker Reckitt Benckiser is contemplating a merger with US peer Colgate-Palmolive could be bad news for the share price of Durex condom firm SSL International.'If the rumours that RB's [Reckitt Benckiser's] target is Colgate-Palmolive turn out to be true, then the bid premium that has historically been attached to SSL's share price will be unwarranted,' reckons stockbroker finnCap.The broker notes that SSL currently trades on a full year consensus price/earnings ratio of 20.6x, while the Consumer Non-Durables Sector is on a PE of 14.7 and the Household & Personal Care Sector is on 16.1.'To be in-line with the Personal Care sector at 16x earnings, SSL's share price should be nearer 515p,' the broker adds.The bid premium of SSL is likely to disappear if Reckitt bids for anyone else, making SSL's shares a 'sell' in the eyes of finnCap.There were encouraging aspects to the recent quarterly trading update from Smiths Group but with the shares having risen by more than a fifth over the last three months, broker Charles Stanley rates the shares no more than a 'hold'.'We like SMIN's [Smith Group's] recurring revenue streams (2/3 sales are aftermarket at John Crane and consumables make up 80% of sales at Medical) and strong focus on self-help through restructuring and cost savings, which offer long-term benefits extending beyond any economic recovery,' the broker notes, adding that the stocks defensive properties means it should show resilience 'despite near-term weakness in challenging end markets.'The outlook for the company, is mixed, however, though there are some early signs of stabilisation. 'The better start to the year for Detection is encouraging and more medium-term dynamics for the division remain positive, but risk surrounds the general lack of visibility of order flow (increasingly variable) and potential for further contraction at John Crane and Interconnect (late cycle), Charles Stanley analyst Tina Cook suggests.As ever, speculation about a break-up of the diversified technology group should help underpin the share price, Cook adds.