Broker tips: Travel companies, Intertek, Fuller's

20th Nov 2009 21:21

Package tour giants Thomas Cook and TUI Travel were the two worst performing blue-chip stocks on Friday morning after Morgan Stanley downgraded both stocks.Thomas Cook has been cut to 'underweight' from 'equal weight' and its price target chopped to 230p from 270p, while TUI Travel has been downgraded to 'equal weight' from 'overweight', and its price target reduced to 290p from 320p.The US broker thinks that both companies face a tougher year next year having squeezed out most of the juice to be had from their respective mergers (Thomas Cook with MyTravel and TUI with First Choice).Of the two, Morgan Stanley prefers TUI, where it sees larger scope for margin recovery and greater opportunity to expand in niche markets.Testing and inspections firm Intertek's decision to buy the business assurance division of Det Norske Veritas (DNV) with a large chunk of its own shares has been given the thumbs-up by the broking community.'The news this morning that Intertek is in talks over the potential acquisition of a leading global systems certification provider is likely to be encouraging to shareholders,' said Altium Securities, which thinks the acquisition will generate 'good cross-selling opportunities.'Seymour Pierce is also upbeat about the deal, suggesting it will add around £200m to sales and about £30m to earnings before interest, tax and amortisation (EBITA).'The consideration will be settled with shares. We estimate that this will require Intertek to issue approximately 11% of new shares making DNV its largest shareholder, and resulting in an exit multiple of around 15x [15 times annual earnings of the acquired business]. At this level, the acqusition would be marginally earnings dilutive in 2010,' the broker calculates.'However, the deal does have a strong strategic logic and it does demonstrate that Intertek still has growth avenues despite the organic slowdown that it reported earlier this week,' Seymour Pierce said.The broker has an 'outperform' rating for Intertek and a 1400p price target. Pre-tax profits at London Pride brewer Fuller, Smith & Turner were higher than KBC Peel Hunt had expected, prompting the broker to upgrade the pub chain owner to 'buy'.'Fullers is making the most of its Punch acquisitions as well as its excellent beer branding,' KBC Peel Hunt analyst Paul Hickman opined. The company has made a number of acquisitions from cash-strapped pubs group Punch Taverns this year.Following the release of Fuller's interim figures the broker is revising its full year earnings forecasts upwards by 3%, giving a predicted profit before tax figure of £24.5m and an earnings per share estimate of 31p.Even on the revised estimates Fuller's trades on a price/earnings ratio of 15.7, which the broker notes is high for the sector, but with the company's focus on London - an 'increasingly strong environment,' in the broker's view - and the probability of sterling's weakness continuing to attract tourists to the nation's capital, KBC reckons the share price could rise as high as 540p over the next 12 months. Previously it had a price target of 510p.