Davis can offer growth opportunities

Mar 22 2010 by Andrew Miller, The Journal

Davis Service Group – We are reiterating our buy recommendation on Davis Service Group and retaining our DCF-derived fair-value estimate of 458p.

We think the shares offer a good mix of cyclical growth opportunities with added support from the more defensive parts of the business.

We also think the fact that the group has managed to maintain year-on -year growth in the midst of a deep recession is a reflection of effective management.

While the outlook for the group is still somewhat muted, we believe recent acquisitions reflect some optimism from management. At the same time, we view management's 2010 guidance as overly conservative.

Prudential – We are retaining our outperform recommendation on Prudential ahead of the details of the rights issue. The shares will also remain within the model portfolio. However, given the size and complexity of the deal we will keep the situation under review.

We think the main reason for the sharp reaction to the deal is the price tag of AIA being higher than many analysts had pencilled in. However, the price paid is in line with recent transactions in the region. This is important as the proposed combined entity will be almost a pure Asian life company.

The challenge for management will be to handle both the execution and news flow surrounding the integration sufficiently well that this value is realised.

Whitbread – We are retaining our outperform recommendation on Whitbread following a strong Q4 trading statement. We see significant upside potential to earnings on a two to three-year view.

This is associated with corporate activity, which could accelerate the expansion programme. However, we still find the valuation attractive even in the absence of such activity. We have raised forecasts following the recent trading statement and increased our fair value to 1700p although it may go to 2000p.

Andrew Miller is regional office manager of Barclays Wealth in Newcastle