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Broker tips: SSE, Rentokil, Cove Energy

Date: Friday 02 Mar 2012

Trading floor; Trading screen; trading; traders; markets

Credit Suisse has raised its target price for gas and electricity group SSE from 1,400p to 1,450p, saying that the CO2 floor price should drive up the group's profitability.

The broker sees the CO2 floor price as a potential positive for SSE, as it should benefit from the high power prices that it would bring. "Positive action by other UK utilities to offset the impact of lost free CO2 emission permits may provide further upside."

"While more expensive than pan-European integrateds, SSE trades in line with fixed-cost generators and regulated utilities, which we believe are its closer comparators. SSE has exposure to more favourable fundamentals, on our analysis, and hence should trade on a premium to peers in our view." An outperform rating is retained.

Panmure Gordon has maintained its sell rating and 62p target price for business service company Rentokil Initial after its fourth quarter and full-year results missed consensus estimates.

Rentokil announced a £116.2m loss before tax for the fourth quarter of 2011, while for the full year the company’s red ink came to £50m, primarily due to the goodwill write-downs incurred to reflect the poor financial performance of its City Link unit.

"We maintain our forecasts ahead of the analyst meeting, but believe there remains downside risk to consensus and maintain a sell recommendation, especially in light of the strong share price performance of late."

Merchant Securities has warned investors of east Africa-focused oil and gas group Cove Energy to watch the developments in Mozambique closely, after the firm confirmed the possibility of a tax charge levied by the government.

"This is very upsetting news with very serious ramifications for explorers across Africa. By the standards of oil & gas tax-grabs, taxes on capital gains are the worst possible type and they are also the rarest," said Merchant analyst Brendan Long.

"This is worse than a retroactive modification of the tax parameters because it goes against the principles of tax agreements between oil companies and host governments and leaves companies with effectively no visibility," he said. Nevertheless, the broker maintained its buy rating on the stock but warned investors to "watch this very closely".



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