Broker tips: Barratt Developments, JD Wetherspoon, BSkyB

14th Jul 2010 13:06

KBC Peel Hunt has been bearish on the housebuilding sector for a long time and Wednesday morning's update from Barratt Developments has not persuaded it to change its view, though it does concede things are going better for the company."Update shows Barratt ahead in a number of areas - better margins, higher selling prices and lower debt should all please the market in the very short term," concedes KBC analyst Robin Hardy, who will be upping his earnings estimates for the current year as a result."The issue remains for us the poor returns on capital being delivered across the sector as a combination of poor near term margins and the carrying of too high an asset value. On this basis, we still believe that fair value is a discount to NAV [net asset value] not a premium as remains the prevailing view - the value destruction arising from the poor ROCE [return on capital employed] must be reflected somewhere and we believe that it needs to be deducted from the NAV," Hardy argues.That's not a view to which Panmure Gordon subscribes. "In our view, the stock is undervalued, trading on a 50% discount to its 2010E NAV. We reiterate our Buy recommendation and 180p target price," the broker said."The key area of outperformance for Barratt has been cash. The group has ended the year with £375m of debt, significantly better than ours or the market's expectations, which were for around £500m. This demonstrates that Barratt is in a much stronger financial position now and the negative sentiment surrounding the high level or gearing at the business (versus its peers) should now go away," Panmure suggests.On the other hand, the broker acknowledges that "the fact that the group took a lower level of write-downs than its peer group in the last downturn could leave them vulnerable to further impairments should house prices fall again."KBC Peel Hunt thinks a house price fall is on the cards, however. "The tone is still upbeat across the sector but as we move into H2 [second half of 2010] we believe that the autumn season will show signs of a weakening market as decisions to buy are deferred due to job fears and prices continue to decline in line with the 1.9% drop we have already seen in H1 from the Halifax index," the broker predicts."We hold the target at 100p but this could still be reduced," KBC's Hardy warned.Pay TV and internet service provider British Sky Broadcasting (BSkyB) is set to start delivering after a period of heavy investment, Nomura Securities reckons."For too long we think BSkyB has been regarded as the perennial 'jam tomorrow' story, a best-in-class business that keeps investing to keep ahead of the competition and where the promised cash flow is constantly deferred. We would argue that the recent News Corp proposal is a strong signal that at last the company is about to harvest that cash flow," Nomura analyst Matthew Walker said.News Corp, which already has a 39.1% stake in British Sky Broadcasting (BSkyB), has made an indicative offer for BSkyB shares of 700p a share but the independent directors of the TV outfit are holding out for at least 800p.Nomura, using a discounted cash flow model, has bumped up its target price from 700p, where the shares are currently trading, to 1,000p. As a result its stock recommendation moves from "neutral" to "buy"."We also factor in several important new drivers of EBIT [earnings before interest and tax] and cash flow not yet captured by consensus, and illustrate how News Corp can achieve high earnings accretion and ROIC [return on investmed capital] at higher prices for BSkyB," Walker added.Panmure Gordon has shaved its price target for JD Wetherspoon but that is more of a reflection of the broker's viewpoint on the economic environment than any reaction to the pubs group's trading update.The broker has shaved 1% or so of its fiscal 2010 earnings estimates and circa 3% from its fiscal 2011 and 2012 forecasts to reflect slightly harsher macro-economic conditions. The price target has been trimmed to 580p from 595p, though the "buy" recommendation has been maintained."The group appears slightly more positive on its prospects for FY 2011E [fiscal 2011 estimates], and is confident of a resilient performance despite the taxation and employment pressures in the economy as well as higher interest rates following the group's refinancing," Panmure Gordon said. The group "remains confident that there are substantial opportunities to acquire sites at reasonable prices," the broker added, noting in passing that it expects the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) to be around 2.8:1 at the end of the year.