Sunday share tips: Pennon, GKN, De La Rue

26th May 2013 16:45

Shares of UK water company Pennon are the least likely bid target within the sector. However, prospects for M&A will help to put a floor under the shares. The stock has been punished due to poor pricing for recyclate - recycled material - and following a profit warning last year at its unit dedicated to that business, Viridor. Recyclate prices have begun to recover, but Viridor needs the economy to get moving again before it can begin to perform. Nevertheless, there is long-term potential for the unit, not least because of a favorable legislative backdrop. Trading on a 2014 multiple of 17.2, falling to 15.8 and yielding 4.3 per cent, The Sunday Telegraph´s Questor team keeps a buy.Analysts left engineering outfit GKN´s capital markets day reassured despite the multiple threats the company faces. This is due to their optimism regarding the long-term trends which underlie its main business units, aerospace and power generation units for automobiles. Then there are the company´s expansion plans in China. The company recently unveiled plans for a new Driveline forging plant in Wuhan, Hubei province. Hence management´s confidence that margins will continue to expand in the 8% to 10% range, as profitability at its Driveline and aerospace units grows. Furthermore, emerging market growth, in general, is expected to make up for the subdued conditions in Western markets. With the shares trading on a 2013 multiple of 11.3, falling to 9.9, the shares are trading at a discount to engineers such as IMI. The shares are once again a buy, Questor says.It is not at all easy to predict where banknote printer De La Rue´s shares will head from here, given the company´s dependence on a few large government contracts, which makes for an inherent lumpiness in its revenues. Thus, the firm is now fighting to renew a contract with the Bank of England. This is more important than ever following the loss of its major client - the Reserve Bank of India - in 2011. That led to a two-thirds drop in profitability and the ouster of its Chief Executive coming, as it did, after a falsification scandal at the firm. When the company publishes its preliminaries, on Wednesday, it is expected to show that it has managed to recover a good part of its lost profits since then. Even so, analysts remain divided as regards the share price´s remaining potential, so "if you are not a holder yet, wait a few days more before diving in," says The Sunday Times´s Danny Fortson. Please note: Digital Look provides a round-up of news, tips and information that is impacting share prices and the market. Digital Look cannot take any responsibility for information provided by third parties. This is for your general information only as not intended to be relied upon by users in making an investment decision or any other decision. Please obtain a copy of the relevant publication and carry out your own research before considering acting on any of this information.AB