Broker Tips: Associated British Foods, ITV and Marks & Spencer

ITV, Associated British Foods and Marks & Spencers are amongst the FTSE companies in today's Broker Tips. The three companies have all been covered in recent notes by securities firm Nomura and British bank, RBS.

"Associated British Foods 3Q trading has continued the strong momentum reported in 1H. Primark appears to be doing better-than-expected on margins, but this is offset by a weak sugar performance. As a result, our forecasts are unchanged, as is our Hold recommendation given the full valuation of the shares." Said RBS' Julian Hardwick.

"We have initiated coverage of ABF with a BUY rating and TP of 1,160p (20% potential upside). Domestic expansion and a more aggressive international roll-out agenda for Primark along with margin uplift opportunities in food should deliver better-than-expected profit growth over the next few years." Said Alex Smith of Nomura on Associated British Foods.

"As the market increasingly recognises international growth prospects for Primark and warrants it with an international peer group premium rating, the implied food discount to peers at 35% looks too great for a business that should deliver short-term double-digit profit growth." He added.

"We value Primark at £3.9bn. Assumptions include +4% LFL sales growth and an acceleration in space growth to 11% over the next three years. This equates to 9.3x EBITDA, still a 7% discount to H&M."

"FY 2011/12 EPS estimates 4% and 6% ahead of consensus."

The British foods company, posted a Q3 sales rise of 13 pct driven by a strong performance in Primark. Consensus opinion is a 'strong hold'.

ITV meanwhile are a buy on consensus due to the strong advertising rebound expected:

"We set out our 1H forecasts ahead of ITV's interim results (due 4 August). We forecast group revenue up 9%, driven by a 17% increase in advertising revenue, and 2.0p of EPS. We expect management to give a strategic update, and to announce around £100m of extra programming spend (in our forecasts).

"Media buyers are currently forecasting ITV group advertising revenue to be up 20-30% in July, up 5-10% in August and up 4-6% in September (which is a key month, usually the biggest of the year). This puts ITV on course to achieve the 10% advertising growth we forecast for 2010 (note consensus is also now at 10% according to the company). Our forecasts assume a slowdown from 26% growth in 2Q (vs guidance from the company in May for 22% growth), to 12% growth in 3Q, and flat growth in 4Q." said RBS.

Previewing their half year results, RBS analyst, Paul Gooden said:

"We forecast ITV NAR (net advertising revenue) up 17% in 1H, which implies 2Q growth of

26%. The production business will have a slower 1H, due to the tough yoy comparison (I'm A Celebrity was produced for several geographies in 1H 2009 vs none in 1H 2010). Overall we forecast group revenue up 9% to £995m, group operating profit up three-fold to £156m, and EPS of 2.0p (vs -0.5p in 1H 2009).

"Our programming budget forecast for 2010 assumes management overshoots guidance by around £50m, while we assume the £70m of savings indentified for 2011 by the previous management team are reinvested." He added.

In a note on July 8<sup>th, Nomura also highlighted advertising strengths at ITV at the moment:

"ITV's H1 results are on 4 August, and by the time that date arrives we expect ITV to point to continued strength in the TV advertising market beyond the World Cup and into September, which is the key month in Q3. ITV management previously sparked some profit taking with its warning that H2 was facing a highly uncertain outlook given tougher comps and the post-election economic outlook."

"We have raised our Q2 advertising forecast from 24.5% to 26.8% and Q3 from 7% to 13.2% including now September up 10%. This raises our FY forecast from 9.6% to 11.5%. Our 2011 forecast is reduced from 3.4% to 1.1% given the absence of the XFactor which should slip into 2012 and we have raised our growth rate for 2012 accordingly. We have not yet taken the view that 2011 will see negative revenue owing to the government's austerity measures. We also believe that with EPS over 4p for 2010 and our net debt forecast at c.£470m investors will shortly initiate the discussion on dividend restoration, which is not currently priced into the stock. With equity FCF at c.£200m it could be argued a 2p DPS (4% yield) could be justified. In conclusion, there is a case for some short-term relative uplift in ITV shares." Said Nomura analyst, Matthew Walker.

For M&S however each broker gives a different view. Nomura which has a 'buy' rating on the group says:

"M&S 1Q sales were at the top end of market expectations, but this wasn't enough to drive upgrades or to drive further outperformance of the stock. The reason for this, in our view, is the dilemma investors face between sales growth at M&S and the recent pull-back in consumer confidence. In our view, what is different now from the last few years is the rate of market share improvement (50bp over the 12 weeks to end May). This is being driven by improved ranges, marketing, innovation and brands and may have some way to run.

Whilst RBS offer a 'sell' rating with the reasons that 'Declining returns, greater competition, a stretched balance sheet and a pension deficit of £1.3bn are negative against the backdrop of a cash-constrained UK consumer.'

"A cash-constrained balance sheet, coupled with future capital tied up in M&S's 20/20 plan leaves little room for strategic manoeuvres. The ongoing and radical overhaul of M&S's information technology, supply chain, sourcing and distribution platforms has never been attempted in unison in the company's 125-year history. We do not underestimate the task ahead, which is likely to involve double running costs, plus execution and trading risk, at a time when retailer cost pressures look set to rise and consumer spending is likely to weaken."

"Five months is a long time in retail. We must to wait until 9 November for recently appointed CEO Marc Bolland to announce his strategic business review. Meanwhile, diminishing returns, increased competition in Food and General Merchandise, a stretched balance sheet, an unconvincing International business, an outgoing finance director and chairman, and a pension deficit of £1.3bn, should keep Bolland busy. We are cautious on the UK consumer market, from which Marks & Spencer (M&S) generates 90% of its sales and 83% of its profit (FY10). We initiate coverage with a Sell recommendation and 290p target price." said RBS retail analysts.

"We initiate coverage with a Sell rating and a 290p target price." they concluded.