Broker tips: Xstrata, Talvivaara, Genus

11th Nov 2010 13:19

Panmure Gordon has updated its Xstrata estimates to reflect stronger actual commodity prices but has retained a 'hold' recommendation for the mining giant.The continued strength of the South African rand has also had an impact on the broker's projections. Analyst Alison Turner said that with investors chasing yield, the South African rand remains stubbornly strong despite rising political risk and inflationary pressures. The broker's forecasts for the second half of 2010 are for the rand to strengthen 10% against the US dollar."Given that just 12-13% of Xstrata's earnings before interest, tax, depreciation and amortisation (EBITDA) is generated in South Africa...the impact on group EBITDA is limited," says Turner.The broker's estimated 2010 EBITDA is increased by 3.8% to $9.2bn, but figures for 2011 and 2012 have been trimmed by 1% and 0.2% respectively.Estimated earnings per share for 2010 are expected to rise by 5.5% to $1.58.A 'hold' recommendation is retained, albeit with a target price of 1,050p that is nearly £4 below the prevailing market price for Xstrata.Despite Talvivaara's maiden net profit of €25m significantly beating finnCap's estimates, the broker recommends a 'sell' for the nickel and zinc miner as the shares carry a "speculative premium".Analyst Joe Lunn notes that focus continues to be on the seemingly high cash operating costs and the "potential difficulty in reducing it in the future". The broker calculates Talvivaara's cash operating costs to be €12,700 per tonne of nickel (t Ni) in the third quarter with the average quarterly selling price being tonne €17,652t Ni.Lunn says that a 28% gross margin may not be sufficient to prevent a cash call if a strengthening dollar causes nickel prices to fall.Lunn reiterates a target price of 470p, expecting the shares to "retreat to this approximate level if the macro picture changes, causing the speculative premium to be priced out."Take profits, is his advice, confirming a 'sell', as he believes the current premium to be unsustainable. KBC Peel Hunt is bullish on Genus, claiming the animal genetics company is well positioned to deliver strong growth.The group said that profits in the first four months of its financial year were "well ahead of last year", with the Americas showing a strong performance, particularly in the porcine genetics sector."Semen sales in China improved, but profits were held back by continued low pig prices", said the broker.Analyst Charles Hall notes that market conditions have improved, with pig producers enjoying good performances and milk producers starting to see better pricing."Higher feed costs will have an impact on farmer profitability in the short term, but future prices point to improving margins next year", Hall said.The period saw the group announce a commercial agreement with the only private stud in India, acquire a bovine production facility in Russia and achieve a government licence for its stud in China. "We expect the contribution from emerging markets to continue to increase from the current 30% of profits," the broker said.Major investment plans and strong underlying cash generation have seen net debt fall to £79.7m from £95.2m.Based on Peel Hunt's projected earnings per share for the year to June 2011, the shares are trading on a price/earnings ratio of 20.7, leaving "limited short-term upside" for the share price, "but the long-term story remains compelling," the broker believes.The broker has increased the target price to 900p from 800p.