Broker tips: Unilever, Pubcos, Johnston Press

13th May 2009 13:08

Food and household products giant Unilever was one of the best performing blue-chips on Wednesday morning, helped by a positive note from Charles Stanley.The broker said it is upgrading its 'long-held negative recommendation' on the Anglo-Dutch company following the group's first quarter results and the positive impression created by Unilever's new chief executive, Paul Polman.The broker has raised its recommendation to 'accumulate' from 'sell'. It stopped short of upgrading to 'buy' because it still sees problem areas, such as weak volumes in Western Europe and Asia Africa CEE (emerging markets).However, Charles Stanley analyst Batstone-Carr has more confidence in the new management than it did in the old.'The company appears increasingly able (and willing) to understand and meet consumer needs in specific local markets without necessarily competing purely on price. This represents a significant a cultural change as is the increased focus on the global roll-out of key brands,' the broker said. A Parliamentary report calling for the reform of the business model adopted by pub companies has sent the sector into a tailspin.'Previous reviews have concluded the beer tie delivers advantages and that if the wet rent [revenue from tied sales] fell, pubcos could legitimately recover lost revenue through an increase in ordinary rent. If (big if) there were to be a review it could come to a different conclusion this time: the wet rent could be seen as an unfair way of sustaining overall rental income which would otherwise be in decline,' says Nigel Parson at Evolution Securities.Parson was bearish on Punch Taverns (sell) and Enterprise Inns (reduce) prior to the publication of the report and believes the uncertainty caused by the investigation will weigh on shares in the sector until it is resolved.An independent survey commissioned by the MPs found that almost two-thirds of lessees did not think pubcos added any value.Blue Oar Securities analyst Mark Brumby makes the case, however, that even if the Competition Commission does launch an investigation, it does not necessarily follow that it will recommend that the tied-house system be abandoned.'Even if the tie were outlawed, dry rents would presumably rise such that the incomes of both lessee and property owner were broadly unchanged. Indeed, because dry rents do not vary with turnover and wet rent does, the lessees could find themselves taking on extra risk,' Brumby notes.Shares in Johnston Press were in freefall Wednesday morning after the regional newspaper publisher said 2009 operating profit will be towards the lower end of current market expectations.The company has also yanked the proposed disposal of its Irish titles after it did not receive offers that matched its valuation. Without the expected proceeds from the sale, the company believes there is a 'strong likelihood' that it will breach its debt covenants.The company has made some progress on debt reduction, trimming net debt by £29m since the start of the year to £448m, but broker Investec was disappointed that the company did not give a fuller statement on its refinancing progress.'While there is no specific announcement on debt here it says it expects discussions to conclude before results in late August,' Investec said.The broker regards this as a 'small positive' but still believes the shares should be sold at this price, given the structural issues faced by the business.Numis Securities is more sanguine about the publisher's prospects and has a 'hold' rating.'We are reducing our target price to 20p (from 26p). We believe Johnston remains a high risk investment given its leveraged balance sheet, but do expect it to refinance successfully by its interims,' Numis said.