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Broker round-up: Whitbread has room(s) for growth

Last updated: 13:40 11 Oct 2013 BST, First published: 12:40 11 Oct 2013 BST

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It is just over a month since Whitbread (LON:WTB) disappointed the market with a trading update but shares have already recovered.

With the Costa Coffee owner’s share price looking a lot more perky, the chance to buy on the dip has passed, but that has not stopped heavyweight broker Citi from advising clients to wake up and smell the coffee.

Citi has upgraded Whitbread to ‘buy’, though it is the Premier Inns budget hotels division rather than the coffee chain that is driving the upgrade.

”Improved sentiment around the European economies suggests that we could be at the start of a renewed upgrade cycle for European focused hotel names,” Citi reckons.

It thinks demand for rooms may come back into balance with supply next year and may exceed supply growth the year after and beyond.

Purchasing manager indices have stabilised in much of Europe, which Citi says bodes well for improved occupancy levels.

The proof of the pudding will come from upcoming third quarter results from the likes of Whitbread and peers Accor and InterContinental Hotels Group (LON:IHG). Citi thinks all three will show “some tentative improvement in trading”.

The price target for Whitbread has been raised to £37.50, while the ‘buy’ rating for IHG has been reiterated, although Citi has trimmed its earnings forecasts for the latter by 1-3% to reflect foreign exchange headwinds.

Household goods giants Unilever (LON:ULVR) and Reckitt Benckiser (LON:RB.) are set to release third quarter trading statements soon. Unilever has already received a shoeing after a profit warning at the end of September, and now Credit Suisse has gently put its immaculately polished and buffed boot into Reckitt.

Unilever has rather taken the wind out of the sector's sails with its pre-announced Q3 slowdown, though in truth several (including Reckitt) had been flagging slower Emerging Markets [EM] already. We'd expect EM growth to be a tad slower in Q3, but not dramatically so,” the Swiss bank said in a preview of Reckitt’s sales update, due on 22 October.

Credit Suisse (CS) is expecting organic growth of 4.3% in the core business, which excludes the pharmaceutical division.

“Europe/North America sales we still expect to be positive (+1.5%), rather slower than the +3% seen over the last four quarters, that were helped by strong cough/cold sales. The recent Nielsen data suggests a progressive slowdown in the markets, and from Q4 the comparatives also get rather tougher (we have +3% organic growth in the Core in Q4 as a result),” CS said.

WH Smith’s (LON:SMWH) trick of growing earnings while sales decline continues to please some – but not all - members of the broking community.

Cantor Fitzgerald reiterated its ‘buy’ recommendation and bumped up the price target from 900p to 950p after the newsagents chain announced pre-tax profits of £108mln on Thursday, a 6% year-on-year improvement.

Though the stock has risen by more than 30% over the last year, outperforming the All-Share by 17%, it is still trading on a discount to the sector, with a price/earnings ratio of 11.6, and an attractive dividend yield of around 4%, the broker asserts.

Citigroup is another broker raising its price target from 900p, in its case to 1,000p. It thinks the High Street bear case is overplayed and that profits are at least sustainable over the medium term.

For some brokers, though, it is hard to break the habit of expecting retailers to chase top-line growth.

Oriel Securities said the results showed the value of gross margins and cost management, but would like to see some positive momentum in like-for-like (LFL) sales before it changes its ‘reduce’ stance. The group’s LFL sales were down 5% on the previous year.

Away from High Street matters and on to the Irish Atlantic margin, where exploration work at its potentially company-making licences is running a year ahead of schedule, Europa Oil & Gas (LON:EOG) said today.

Partner Kosmos Energy brought forward the start of 3D seismic data acquisition and if this confirms the potential of its blocks, “by the summer of 2014 we could be committing to drill a playmaker exploration well in 2015,” Europa said.

finnCap said the next material news flow is expected from the Wressle exploration well, while further ahead, Europa will be hoping to secure a partner for the Berenx licence.

The broker has a risked net asset value estimate of 55.8p, which it says is dominated by three projects – Berenx [France] shallow (14.2p), Kiernan (11.5p) and Mullen (22.3p) [Ireland] – each of which can deliver more than 10 times upside potential to the current share price in a success case.

Northland adds it was an excellent year for Europa, which is not reflected in the current rating of Europa shares.

“The speed at which Kosmos has moved on the Irish Porcupine Basin assets is impressive and, whilst ambitious, a 2015 well is talked about to test potentially world class targets.”

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