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Broker spotlight: Meggitt, Diageo, Legal & General, Dragon Oil, S&U...

Last updated: 22:01 06 Aug 2014 AEST, First published: 21:01 06 Aug 2014 AEST

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Results continue to dominate the thoughts of City scribes and it’s engineer Meggitt’s (LON:MGGT) turn to face the music after a dismal reception for numbers yesterday.

Cantor Fitzgerald says first half 2014 results were towards the bottom end of market expectations, though the group expects a strong second half recovery due to phasing of volumes and contracts. 

 “Essentially we feel that had it not been for FX (foreign exchange) the trends apparent would be sufficient to warrant reasonable optimism. “

All of the recent bid premium following speculation over United Technologies has now dissipated, it adds, so if anyone is interested, now would appear an opportune time to investigate before growth resumes next year.

The medium term outlook for Meggitt is promising as civil growth improves, energy overcomes its growth pains and military stabilizes, but the broker has cut its target price to 530p reflecting lower cash expectations. Buy remains its stance.

Deutsche Bank has reduced its target on Meggitt to 440p from 475p and says delivering second half growth remains the key challenge to rebuild confidence in the underlying trading story. 

Investec has downgraded to a hold, adding the first half will have shaken investor confidence with few short-term catalysts to rebuild it. 

M&A speculation will likely remain a support for the shares, it adds.

RBC Capital has cut its price target on spirits giant Diageo (LON:DGE) to £15 (£16).

The cut reflects the likelihood of higher than expected  capital expenditure in 2015/16  and the acquisition of a further 26% of United Spirits, taking Diageo’s stake to 55%. 

This stake will generate minimal net income in the short term at a cost of approximately £1.7bn, says the broker.  The shares are set to continue to underperform, it concludes.

Panmure Gordon says insurer Legal & General (LON:LGEN)  reported good first half results with IFRS operating profit at £636m close to consensus. The shares are undervalued, adds the broker, which has a top of the range target price of 276p per share and a buy recommendation.

Lender S&U (LON:SUS)  is forecast to grow profits by an aggregate 70% in the next 3 years, driven principally by further growth in motor finance. 

The business combines attractive lending margins, a high return on assets and conservative balance sheet leverage. 

“We see 23% upside to our 2,190p price target which excludes the benefit from the potential award of a bank licence (decision expected in 2015).” 

Dragon Oil (LON:DGO) has a strong balance sheet with cash of $1.8bn and, according to Northland, and is considering acquisitions in the US$1bn realm that would utilise significant additional funds (US$500m) for capex. 

If these do not materialise it will consider share buybacks or special dividends, the broker added. 

Current dividend support is reasonable, if not spectacular, at about 4% and the modest rating leaves scope for outperformance, added the broker.

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