Broker tips: Tesco, BT, Serco

16th Jun 2009 12:58

Broker Charles Stanley expects the market to leave its profit forecasts for Tesco broadly unchanged after the supermarket chain delivered an in-line trading update on Tuesday morning.Although like-for-like sales growth in the UK heartland picked up, rising to 4.3% in the company's first quarter from 3.7% in the previous quarter, it still lags behind sector peers such as Wm. Morrison and J. Sainsbury. Charles Stanley expects this state of play to continue, as Tesco has been 'more aggressive than peers' in competing on price and this 'is having a deflationary impact on sales.'Tesco's greater reliance on non-food sales will also act as a drag, but Charles Stanley believes the group's long term earnings growth prospects remain the best in the sector, 'given significant growth potential in Retail Serices (Tesco Personal Finance, telecoms, etc.) and International.'The broker advises clients to accumulate the shares.Long time BT sceptic Morgan Stanley has joined the BT fan club now that the worst seems to be over at the telecommunications giant's troubled Global Services division.The US bank has upgraded its rating of the shares from 'equal weight' to 'overweight' and lifted its price target from 130p to 140p on expectations of improved cash flow, driven by the company's cost cutting plans.'With management now focused on cash generation we think free cash flow could rise from £1.15bn in 2010 to £1.5bn in 2013, and long-term it could be £1.9bn or higher,' Morgan Stanley (MS) states.'The dividend could therefore grow strongly again from its re-based level - a reasonable near-term trading level could be a 6% yield of a likely 2010 estimated dividend of 7.0p,' MS reckons. 'If free cash flow were to stabilise at our 2014 estimated level, the sustainable dividend could double and the share price rise to 190p at an 8% dividend yield,' the US investment bank calculates.Support services firm Serco is set to benefit from the tighter budgets under which the public sector will have to operate in future, reckons UBS.UBS believes the company is well placed to land more contracts this year, particularly in the public sector, where those companies that can promise to reduce costs for local authorities will have an opportunity to win business.UBS has raised its price target from 365p to 450p and upgraded its recommendation from 'neutral' to 'buy'.