Broker tips: Tesco, De La Rue, KCOM

28th Jan 2011 14:20

Nomura says that while Tesco's international operations are widely acknowledged as under-appreciated, the same can be said of its position in the domestic market as the retailing giant has the headroom to double the number of its UK compact hypermarkets.Analyst Nick Coulter says that Tesco has scope to double its 'Extra' store portfolio to around 400 stores in the long term, "thereby underpinning mid-single digit space growth for much of the next decade." The Japanese broker estimates that this expansion would add over £2bn to 'pure' non-food sales, to approach around £6bn in the long term."A strong performance in the exceptionally weak category of electricals, and a weak performance in a robust clothing market have acted as a drag on sales. We see improved performance in the key clothing category as a catalyst," Coulter says.The expected non-food and services performance, along with its hyperspace expansion and UK efficiencies, prompts the broker to retain its 'buy' rating and target price of 500p.Panmure Gordon says that De La Rue's interim management statement suggested no further deterioration in trading since the last update, but as a result, the broker makes no further changes to its expectations, as 'no news' isn't necessarily 'good news'.The banknotes and passports printer said that banknote paper volumes for the year were 10,000 tonnes, which the broker highlights as a material shortfall given capacity of 16,000 tonnes, and a geared impact on profitability at banknote paper production as a result."While we factor in some overall improvements to March 2012, we see little to get too optimistic about, given ongoing uncertainties regarding the size of the contribution from the large currently suspended banknote paper order," the broker says. "The good news is that there appears little knock-on effect from reputational damage, and cash flow appears as management expected."However, with the shares looking expensive at current levels, Panmure Gordon retains its 'sell' rating, and confirms a target price of 566p.Numis Securities rates the stock a 'hold', however, with a target price of 650p."With Oberthur not able to make a bid until the end of July (unless another bid emerges), attention is returning to trading valuations, though the potential for Oberthur to return is likely to keep some premium in the DLR [De La Rue] share price," the broker reckons."The next news is the end March pre-close, an update on India (the company say they will put out an RNS [regulatory news statement] as soon as there is closure), but the real news will be in May with the strategic review when the market will hopefully get a fix on timing and scale of the profit recovery and clarity on the dividend policy," Numis said.With the shares trading around 12 times Numis's estimated mid-cycle earnings, based on circa £82m pre-tax profit, the broker thinks the current market valuation is "probably about right".A bold statement from management on the growth possibilities of its communications integration arm, plus a still-attractive yield, has prompted finnCap to reiterate its "buy" rating for telecoms group KCOM.KCOM won several contracts during the third quarter, notably: applications integration for Virgin Atlantic; new contracts with Sky Bet and Volkswagen; and the renewal of a managed services contract with Admiral. "Not bad for a summary of one quarter's business wins," notes analyst Andrew Darley."Expected performance delivers the dividend, significantly improved by guidance in the interims; importantly, the dividend supports the share price currently while the company continues to advance its reformed strategy," Darley adds.Management of KCOM, the group, believes that Kcom, its national communications integration unit, can double both revenue and margin in the next half decade, doubling the size of the group.Darley notes that the management's track record in restoring the fortunes of the company since 2008 is noteworthy, and shareholders should be comforted by the extension of Bill Halbert's tenure as executive chairman until the annual general meeting (AGM) in 2012; previously, it was only set to last until the July 2011 AGM."Halbert's prolonged presence should provide reassurance of the correct continuing strategic decisions, while the operational team is clearly delivering on new contract wins from the stated target base. Having controlled and reduced debt, quantified pension liabilities, offloaded the financial burden of the network and significantly increased the dividend, there should be continuing development and appreciation from the investor base," the broker concluded. The target price is upped from 60p to 65p.