Broker tips: British Airways, Hikma, Hunting

29th Oct 2010 13:06

Despite an 'excellent improvement' in profits and an upgraded target price, Panmure Gordon is sticking with its 'hold' recommendation for British Airways (BA) due to economic uncertainty.Half-year turnover for the airline rose by 8.4% to £4.4bn. BA also swung to a pre-tax profit of £158m from last year's loss of £292m. Basic earnings per share improved from 18.8p to 9.3p.However, next week's increase in air passenger duty to 55% "is clearly not helpful, particularly in the more price sensitive long haul fare categories", analyst James Cooke said.Despite recent momentum in the share price propelled by an improvement in the revenue environment, the future charges have seen its trading outlook become subject to uncertainty.Cooke upgraded the target price from 225p to 275p. The purchase of a multi-source injectables business by Hikma Pharmaceuticals looks a good one 'at first glance' and has prompted KBC Peel Hunt to up its price target for Hikma, but not by enough to justify changing its neutral stance on the stock. The biotechnology and pharmaceuticals company announced Friday it has acquired the business from Baxter Healthcare for $112m.The purchase includes a warehouse and distribution centre specifically designed to handle pharmaceutical products, and a high-quality manufacturing facility for Drug Enforcement Agency-controlled substances, which complement Hikma's growing oncology product range.Peel Hunt analyst Paul Cuddon expects the deal to add around $10m in adjusted pre-tax profit in 2011, equating to an 8% earnings per share upgrade to 64c, from 60c. That puts the shares on a projected earnings multiple of 18, which the broker thinks is fair value.However the broker's enthusiasm for the deal "is tempered by Hikma's relative valuation against peers, where it trades in line with the five highest rated Indian generic peers on PER [price/earnings ratio] despite delivering lower returns on equity (12% for Hikma vs 20% on average for peers)", said Cuddon.The broker suspects consensus forecasts will rise by around 8% as a result of the deal.The price target has been raised to 720p from 640p. The broker's 'hold' rating is maintained. Broker finnCap has upgraded its earnings forecasts for Hunting after the oil services group announced a 'very positive trading update' on Friday.Analyst David Buxton said the update signalled that "trading is well positioned to exceed forecasts for the current year".The acquisition of Innova-Extel, the Texas-based supplier of 'harsh environment' electronics technology, has performed better than expected with strong demand in the directional drilling area.Additionally, "the Well Construction division continues to rebound, boosted by strong shale gas drilling activity", Buxton said. Well Completion has also seen improved conditions and should experience a strong fourth quarter."Well Intervention boosted by acquisitions...continues to outperform expectations and has a strong order backlog," the broker said.After the group increased its earnings guidance, the broker upgraded its forecasts for 2010 from a pre-tax profit of £38.8m to £45.2m, which gives an earnings per share of 21.4p - a 17% increase from the broker's previous forecast of 18.2p.Buxton said that the trading update "paints an upbeat picture of demand recovery in most of its markets", and has increased the target price to 700p while maintaining the 'buy' rating.