Broker tips: BT, Dixons, Rotork

26th Nov 2010 13:40

Exane BNP Paribas has upgraded the target price for BT on Friday following the announcement of an Indian deal.The broker has hiked its target price for the UK telecoms giant by 20% on the day the group agreed to sell a 5.5% stake in Indian IT outsourcing company Tech Mahindra to Mahindra & Mahindra. Currently BT has a 29.9% shareholding in the group.Exane says that following a strong first half performance, it has upgraded earnings before interest, tax, depreciation and amortisation by around 3%, and earnings per share by around 18% for 2012 and 2013. Free cash flow estimates are also upgraded by 8%. "We continue to expect line loss to improve and revenue to stabilise", the broker said.The broker reduces its dividend expectations by 5% for the current year "reflecting the company's pursuit of a credit rating upgrade and the associated financial flexibility".However, the dividend forecasts are increased by 40% to 12.9p from 2013, equivalent to a forward dividend yield of 8%.The target price is raised by 20% to 265p and the stock is given the broker's 'outperform' rating.With Dixons Retail's growth momentum in the Nordic region persisting, and the group apparently gaining market share in its homeland, Nomura prefers the group over other electrical retailers.The electrical retailing group's second quarter like-for-like sales in the UK businesses were down just 1% year on year, in a market down around 10%, suggesting that the group continued to take market share."Some 60% of sales are now trading through refitted stores, positioning Dixons for further share gains over peak, supported by gross margin [0.3 percentage points increase in first half] suggesting cash profit growth year-on-year," said analyst Christopher Walker.The broker has a positive outlook for the Nordics, predicting further opportunity for growth as the region continues to outperform. Like-for-like cash profits saw a 1% increase, with gross margins being 0.7 percentage points ahead.While finance costs were lower than expected in the first half, the broker says Dixons still requires an improved macro environment to help drive cash conversion. The stock is rated 'buy' with a target price of 49p.Despite upping the target price for engineering firm Rotork, Panmure Gooden does not think it is steep enough to justify a change from its 'hold' rating."Comfort levels concerning revenue and margin growth are on the up for Rotork and, accordingly, we increase earnings estimates through to 2012E", says analyst Oliver Wynne-James.Following a meeting with Rotork, the broker says it is more comfortable over its revenue prospects and raises estimates by 1%, 3% and 7% for 2010, 2011, and 2012 respectively.Net cash forecasts have been maintained despite the earnings increases, as the broker has increased its capital expenditure assumption and "given some resource back to working capital"."We increase the target enterprise value to sale rating from 2.7 to 2.9 to reflect the margin improvement and the upside from investing its cash", Wynne-James says.While the target price is increased to 1,670p from 1,530p, the broker cannot build a valuation case to change the 'hold' recommendation.