Broker tips: Xstrata, Marston's, Mouchel

18th Jun 2009 13:08

Shares in mining giant Xstrata are down 15% over the last week, bringing the shares down to a level which has attracted the attention of US investment houses Morgan Stanley and Citigroup.Morgan Stanley has upgraded Xstrata from "equal weight" to "overweight", noting that on a two to three year review, the stock represents "one of the most compelling risk-reward cases in our coverage, and could easily double again, in our view."Citi, meanwhile, has shifted its recommendation fomr "hold" to "buy", as concerns about the balance sheet strength ebb away. "Over the next six months we expect growth to come back on the agenda," the US bank said, adding that it expects the stock to outperform its sector peers in the event of an economic recovery."Of the UK majors, Xstrata has the greatest exposure to base metals. Base metals will take the lead in an economic recovery, providing Xstrata with superior earnings momentum," Citi said.A profits warning from support services firm Mouchel has changed KBC Peel Hunt's already cautious stance on the stock to a negative one."If we assume FY2010 earnings moving to 26.0p from 34.9p (including increased pension charge) this would put the stock on 9.5x . This is too rich, given the wider consulting group is on an average of 7x," KBC analyst Andrew Nussey believes. "We see would the shares falling to around 190p (7.3x FY2010E). We therefore move our recommendation to Sell from Hold," Nussey concluded.The share price may have tumbled dramatically in the morning trading session but the decision by pub owner and real ale brewer Marston's to raise £176m through a rights issue has been well received by two brokers."We see this [fund raising] as a positive move, putting the company in the forefront of those able to benefit from sector restructuring. It also brings more certainty to the dividend prospect," said long-time Marston's bull Paul Hickman at KBC Peel Hunt."We expect pre-tax profit could rise circa 20%, following use of expansion funds based on expected EBITDA (earnings before interest, tax, depreciation and amortisation) ROI (return on investment) of 15%. Benefits from bond repurchase would be additional to this," Hickman said.The broker retains its "buy" rating and 200p price target for the stock.Charles Stanley has a price target in the same ball park, at 190p, which would put the group on an enterprise value/earnings before interest, tax, depreciation and amortisation ratio of 9.9:1 for calendar 2010 based on the broker's earnings forecasts.The broker rates the stocks as a "hold", saying that it does not see much justification in chasing the shares beyond 190p, though on a discounted cash flow basis "there is support for a more aggressive price target."