Thursday, June 24, 2010

LONDON Broker tips: Glaxo, Micro Focus, DSG

Date: Thursday 24 Jun 2010

If GlaxoSmithKline pulls the trigger and launches its Lucozade brand in the US, it could be the key to unlocking shareholder value and rectify the stock’s underperformance relative to fellow pharmaceuticals giant AstraZeneca, Panmure Gordon reckons.

The size of the US market for soft drinks is around $65bn, of which isotonic and energy drinks represent just 6% though, importantly, the market is growing fast.

Panmure analyst Savvas Neophytou notes that the stock has “derated some 12.5% year to date” and has underperformed the FTSE 100 index by 8.2% and Astra by 16%. “To boot, the company's dividend yield of 6% is relatively secure and the company should benefit from tail winds given sterling's weakness this year against the US dollar.”

The broker believes that with the majority of its patent expiries now out of the way, most of the risks are adequately reflected in the price. It has reiterated its “buy” recommendation and is sticking with its 1400p target price.

Results from software house 
Micro Focus were robust but the market appears to have taken fright at the departure of finance director Nick Bray so soon after the appointment of a new chief executive officer.

The two events are related, Panmure Gordon suggests, and though the broker said Bray will be missed it thinks an experienced replacement with knowledge of the sector should not be hard to find.

Singer Capital Markets said Bray’s departure “will clearly be a disappointment to investors who would have wanted to see some continuity with recently appointed CEO [chief executive officer] Nigel Clifford, who is meeting analysts for the first time today, and because of Nick’s strong track record whilst he was at Micro Focus.”

According to Panmure Gordon, the chairman of Micro Focus thinks a replacement could be in place by the end of the summer.

Despite the departure of the well regarded Bray, Singer says the company is fundamentally “still one of the strongest companies in the sector.” Though the stock trades at a premium to its peers – or at least it did before the share price dived following the trading update – the broker continues to advise its clients to buy the stock.

Panmure Gordon is also a fan of the stock and laments that “the investment community has it wrong on Micro Focus and underestimates the importance of the application modernisation opportunity – our view is that the development of cloud computing makes ‘all’ applications legacy and thereby further widens the opportunity.”

Panmure analyst George O’Connor thinks the 12.1 price/earnings ratio is “undemanding” while the free cash flow yield of 9.2% is “impressive”.

He has nudged up his price target to 626p from 624p and reiterated his “buy” recommendation.

Results from electricals retailer 
DSG International - which we can soon go back to calling Dixons – were better than expected but Killik believes investors looking to maintain retail exposure would be better off looking at Tesco

“Although the shares are not overly cheap on near-term PEs [price/earnings ratios], the rating falls sharply as the benefits of restructuring come through, while the EV [Enterprise Value]/Sales multiple (0.13x) is very depressed. However, there are risks,” Killik’s head of Equities, Jonathan Jackson, warns.

“In addition to the threat of increased competition from Best Buy and the supermarkets, the main concern is the economy. The outlook for consumer spending in many of the group’s markets remains difficult,” Jackson said.

On the plus side, the group’s restructuring efforts are delivering cost savings and the store revamp programme is generating increased sales. Jackson thinks it will prove difficult in the current environment for the Currys and PC World owner to continue to drive sales, and therefore earnings, higher in the current environment.

“For investors looking to maintain some retail exposure, we would recommend Tesco (TSCO.L, 399p), which offers a 3.5% yield and has a growing international footprint and substantial level of property backing,” the broker advises.

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