Broker tips: Thomas Cook, HSBC, Drax

22nd Feb 2011 13:41

Panmure Gordon has downgraded travel firm Thomas Cook as the broker struggles to identify any near-term catalysts to the share price following the recent turmoil in the Middle East.Thomas Cook noted in its first quarter statement that the political unrest in Tunisia and Egypt would have an impact on the following quarter's profits by around £20m. Panmure Gordon responded by cutting its full year earnings per share forecast by 6.7% to 23.67p from 25.36p previously. Looking at earnings multiples, the shares trade at a 23% discount to sector peer TUI Travel but both companies appear to be in the same boat - or aeroplane, if you prefer. "Unrest has since spread to Bahrain, Libya and Morocco, the latter a particular concern given its increasing prominence as a winter sun destination," says the broker.Furthermore, the travel firm warned in the report that rising fuel prices are of concern. These have since increased by an additional 8% due to the geopolitical backdrop, creating further pressure on 2012 margins if elevated prices are sustained.Thomas Cook's rating is cut to a 'hold', from 'buy', a target price of 203p is confirmed. Nomura maintains its cautious stance on banking titan HSBC, saying that growth prospects in 2011, which could lead the new management to revise what the broker sees as ambitious growth targets.The lender appears to be facing headwinds to margin and revenue in the 2011 fiscal year given continued balance sheet reduction, HSBC Finance run-off and the geographic mix, according to the Japanese broker.Some argue that gearing up the balance sheet will boost revenue, as the bank is a relative beneficiary of rising yields because of its high liquidity. However, analyst Robert Law says the increases here are unlikely to be sufficient to transform the revenue outlook.Nomura's pre-tax profit forecast for 2010 is under the $20.6bn consensus figure by more than $2bn, after management indicated that the third quarter run-rate was down on the first half. Additionally, the fourth quarter is often softer than the third."We expect minimal revenue growth at the group level, with negative operating leverage. Impairments are likely to be the bright spot; we estimate a near 50% fall, with improvements at HSBC Finance and the on-going operations," Law predicted.A 'neutral' rating and 725p target price are retained.The ability to respond flexibly to demand created by the colder weather at the end of 2010 was the key driver to power provider Drax's better than expected 2010 results, says financial services firm Matrix. "Despite being strongly contracted, the company has retained the flexibility to benefit from marginal demand and increased output 17% from 22.6 terawatt-hours (TWh) to 26.4TWh," says analyst Adam Forsyth. This increase has driven strong underlying earnings per share, up 10% to 64p, compared with a consensus estimate of 61.5p."Our 'buy' case is driven by the company's ability to use its flexibility to add value in spite of the current forward curve," says Forsyth. The group is to ready expand renewable biomass capacity with appropriate regulatory support, but "government policy in this area remains unsettled," Forsyth notes. "We expect greater clarity in the coming year," he added.The broker has a target price of 463p for the stock.