Market Report: Heady times forecast for Enterprise Inns
Thursday 21 May 2009
Enterprise Inns strengthened last night, rising by almost 4 per cent, or 6p, to 158.75p after Credit Suisse said the stock had room to trade higher, despite having more than tripled in value since early March.
Pubs companies were hit hard last year as operators sold out, spooked by the combination of tougher trading conditions and mountains of debt in parts of the sector.
The recent market rally has seen a number of leading players bounce back sharply as the prospect of recovery in the wider economy came to the fore. The pubs sector's overall market capitalisation has almost doubled since the beginning of this year, bolstered by improved beer volumes, stronger trade during the key Easter period, growing disposal activity and news of better-than-expected levels of leverage in recent updates.
The picture is likely to get better, according to Credit Suisse, which said that Enterprise, for example, might yet re-rate further. The current valuation, when measured against the broker's forecast of more stable trading conditions, success with asset disposals and the implementation of certain debt repurchases, imply too high a probability of default, or a dilution of equity, and suggests that the stock is primed to climb higher.
"Each of our valuation approaches (discounted cash flow, net asset value per share analysis, historical multiple analysis) offers share price upside potential," the broker said yesterday, initiating coverage on Enterprise with an "outperform" rating.
In the wider sector, Credit Suisse was also positive about JD Wetherspoon, which rose 3.1 per cent, or 12.7p, at 425.25p, and Punch Taverns, which gained 4 per cent, or 5.5p, to close at 143p. Credit Suisse was less keen on Mitchells & Butlers, which eased back 4.8 per cent, or 13.2p, to 261.25p after being given an "underperform" rating.
Overall, the FTSE 100 closed 13.84 points lower at 4,468.41, while the FTSE 250 was up 35.69 points at 7,734.01 after a relatively quiet session.
Miners dominated the upside, as bargain-hunters continued to pile in following the recent run of weakness. Lonmin was the strongest performed, gaining 8.1 per cent, or 95p, to 1,267p as platinum prices firmed up. Vedanta Resources was just over 7 per cent, or 101p, ahead at 1,539p, and Kazakhmys climbed 32p to 711.5p, an increase of 4.7 per cent.
Elsewhere, RBS reiterated its "buy" stance on the security services group G4S, which hosted a capital markets day earlier this week. The broker said the event "highlighted and developed [on] the broad range of growth drivers in the G4S business". At close, the stock was 1.5p firmer at 220p.
Lloyds Banking Group was the weakest of the blue-chip companies, falling by 8 per cent, or 6.1p, to 70.5p as the deadline by which investors could buy new shares at a substantial discount passed. Besides the technical factors, the stock was also hit by concerns about possible European regulatory hurdles over its participation in the Government's insurance scheme for troubled bank assets.
Marks & Spencer was almost 6 per cent, or 17.7p, behind at 294p as analysts revised their recommendations in light of the retailer's full-year results, which were published on Tuesday.
Bernstein moved the stock to from "outperform" to "market perform", while Exane BNP Paribas downgraded M&S from "outperform" to "neutral". Deutsche Bank, on the other hand, felt better following the results and moved its rating from "sell" to "hold", while JP Morgan, which stuck to an "overweight" stance, raised its target price for the stock from "sell" to "hold".
Further afield, Dairy Crest, which also posted its results in Tuesday's session, fell by 6.1 per cent, or 19.5p, to 299.75p after RBS moved the stock to "hold" from "buy".
"The current year has begun satisfactorily and we raise our earnings per share forecast on lower interest," the broker said. "However, the dividend has been re-based and we see the lower yield capping the scope for near-term share price performance."
Among other retailers, Debenhams was 6.7 per cent, or 6p, ahead at 95p and Carphone Warehouse held firm at 169.25p, up 0.25p, while the entertainment group HMV retreated by 3.2 per cent, or 4.25p, to 128.75p after Morgan Stanley said that, for investors seeking exposure to the UK's general retail sector, it preferred Debenhams and Carphone Warehouse to HMV. "We think the near-term benefits of [HMV's] two major rivals leaving the market is fully priced-in," the broker said, reducing its target for the company's stock to 95p from 105p.
Among the smaller companies, the sportwear group JD Sports was 7.3 per cent, or 33.5p, ahead at 491.5p after announcing its entry into the French market through an acquisition of Chausport, a sports footwear chain. JD Sports paid €8m (£7m) before fees, and will inherit a net debt of €2m at the French company, which recorded turnover of €40.7m (£35.8m) in 2007.
Miner Dwyka Resources gained 17 per cent, or 1p, to close at 6.88p after it confirmed it was considering an acquisition. The company said it was conducting due diligence on an unnamed third party which may or may not lead to an offer by Dwkya.
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