Broker tips: Sainsbury, BAE Systems, Shire

17th Jun 2009 13:05

Sainsbury's fund raising plans knocked the share price for six on Wednesday morning but broker Charles Stanley believes the supermarket chain's plan to accelerate expansion plans is a sensible strategic move.'Management believes now is a particularly good time to be accelerating space growth, given attractive opportunities in the property market and reduced build / fit-out costs,' Charles Stanley analyst Sam Hart said. Hart reckons some small earnings downgrades may occur as a result of the capital raising, and this may result in share price weakness which investors should take advantage of, given the 'undemanding' valuation of the shares which is 'underpinned at current levels by asset backing arguments.'BAE Systems' shares are down more than 10% over the last month on concerns that a reduction in military operations in Iraq and Afghanistan will depress orders, but Evolution Securities is bullish on the stock in the wake of the Paris air show.Evolution investment analyst Nick Cunningham met with BAE's management at the air show and said the message from the top was 'strong visibility of long term profits in the UK, stability at high levels at worst in the US and very strong upside from the Saudi Typhoon programme.'Cunningham points out that orders from the UK account for only 20% of sales, so fears over a decline in orders from the home market are overblown. Meanwhile, in the US 'binary negative risks on the FMTV truck programme are balanced by binary positive risks on the M-ATV for Afghanistan,' Cunningham observed.In relation to its US peers BAE trades at a discount based on Evolution's projected 2010 earnings.'Our sum of the parts valuation of around 440p still includes -25p of pension liability though most of that could be recovered from defence customers (think about regulated utilities). Our forecast includes little Saudi profit though, but we expect that to grow strongly and could add 50-60p to our 440p valuation. Together that could give over 500p a share," Cunningham concludes.Problems at biotech firm Genzyme, which has ceased production at its Allstan plant in Boston until at least the end of July, could prove a boon to Shire Pharmaceuticals, which has a product which competes outside the US with Genzyme's Fabrazyme.Citigroup has calculated that Shire's Replagal could generate up to $85m of additional revenue on the assumption that Genzyme loses three months of supply of Fabrazyme.'Assuming a 60% contribution margin, we estimate every $10m of incremental Replagal sales (taxed at 23%) would add 1% to 2009 earnings per share,' Citi said.Swiss bank UBS is also bullish on the stock, claiming it has been oversold on concerns about lower than expected sales of Adderall XP in the second quarter.'While we expect weak second quarter 2009 numbers for Adderall XR, we believe this fear is overly priced in the current share price, which offers an appealing buying opportunity,' UBS said.