LONDON Broker tips: Travis Perkins, BSS, leisure, Electrocomponents

Date: Friday 28 May 2010

News that building materials retailers Travis Perkins and BSS Group are in merger talks has boosted the share price of not just the target (BSS) but also the prospective bidder, suggesting the market likes the idea of an alliance.

That’s a view shared by Panmure Gordon which says that a combination of the two would be “extremely positive” for Travis Perkins. However, it expects a rival bidder may emerge from the woodwork so despite the sharp increase in BSS’s share price in the wake of the revelation of merger talks the broker is staying positive on BSS and has upped its price target from 340p to 450p, a premium to the indicative cash plus shares offer which values each BSS share at around 433p.

“The press release does not contain much detail due to the ongoing discussions but a key point would be what happens to the BSS management team. If Travis Perkins succeeds at this level, we would view it as a very positive move for them,” Panmure Gordon concludes.

Nomura Securities has been casting its eye over the leisure sector and has come up with six picks where return on invested capital (ROIC) as a proportion of weighted average cost of capital (WACC) is in excess of the medium term enterprise value/invested capital ratio.

The six stocks that make the grade are caterer Compass, cruise operator Carnival, pubs group Mitchells & Butlers, hotels and coffee shops owner Whitbread and the two package holiday companies Thomas Cook and TUI Travel.

The latter pair have both been upgraded by Nomura from “neutral” to “buy”, with the price target for TUI also ramped up to 305p from 290p.

“Compass remains our core sector Buy, Whitbread is now our top hotel pick, Mitchells & Butlers remains our pub pick, and we prefer Travel stocks over Betting,” Nomura analyst Simon Larkin said.

Despite the company saying back in early April that it expected full year results to top market expectations investment analysts were still surprised at how good results from Electrocomponents were, but Singer Capital Markets continues to prefer sector peer Premier Farnell.

Singer believes Electrocomponents is “now in a cycle of upgrades”. As an operationally geared company “it is possible that forecasts could be upgraded steadily as the year unfolds,” Singer analyst Andy Murphy suggests.

“We have ECM [electrocomponents] on a Fair Value rating and although we believe consensus will rise, we prefer competitor Premier Farnell as its geographical exposure, notably to the US, is a major attraction,” the broker concludes.