AZ Electronics may on Thursday have agreed to be purchased by German outfit Merck KgaA. However, analysts at Numis believe the bid was unsolicited and unexpected.
The purchase price represents a 53% premium to Wednesday´s closing price and is equivalent to a price-to-earnings multiple of 20.4 times´ 2014 estimates. In terms of enterprise value/earnings before interest, taxes, depreciation and amortisation [EV/EBITDA] the company is being valued at 11.2 times´ next year´s estimates.
For Numis those ratios represents a strong price given the short term challenges at the firm.
However, given the low cost of debt financing for large conglomerates at present
this type of offer always seemed a possibility, they go on to explain.
What´s more, now that the company has come on to the selling block it may attract the attention of other possible buyers. In fact, the broker attaches a 25% probability to a 10% improvement in price as a result of a rival offer.
Other potential bidders for AZ are Samsung affiliated Cheil Industries, Dow Chemical, Shin-Etsu Chemical and Platform Acquisition Holdings (a chemicals industry roll-up vehicle).
Numis has upgraded AZ Electronics´target price to 414p from 270p while lifting its recommendation to 'Hold' from 'Reduce.'
It has been a remarkable year for the General Retail sector, with the UK index´s 33 per cent rise comfortably outstripping gains in the rest of the market. However, 2013 has also seen high single-digit downgrades across the space. That has left valuations (the average price-to earnings multiple sits now at 15 times´ next year´s forecast profit) quite stretched, wrote Credit Suisse on Friday.
Nevertheless, only a modest recovery in consumption is expected for next year. Furthermore, in the US spending is likely to shift towards deep cyclical consumer durables in response to the housing market, which may tend to substitute for spending in apparel.
On the bright side, bottom-up estimates for several metrics, such as sales growth rates, EBIT and EPS growth all point to a notable acceleration over the next two years, the Swiss broker has calculated. EPS is expected to expand by more than 10% for all stocks in the sector during that period, except for one in 2015.
As a result Credit Suisse believes that 2014 should favour companies such as Kingfisher or those with potential for self-help, such as H&M.
However, UK data points for M&S in the third quarter had been tracking below forecasts. Hence, the broker has cut its forecasts for clean PBT to £636m or flat year-on-year. The analysts added that their expectation is for transition costs to continue to outweigh the benefits for at least another year.
They chose to maintain their 12-month forward price target of 425p and 'underperform' rating on the company.
N+1 Singer Equity Research has maintained a 'hold' rating and 550p target price for pizza delivery group Domino's, saying that the resignation of Chief Executive Lance Batchelor creates "further uncertainty".
Domino's announced on Friday that Batchelor is to stay with the group until the end of April 2014, at which time he will join an undisclosed private equity backed company in a non-competing sector.
"Further senior management change so shortly after news of the Finance Director leaving is not good news for market sentiment," said analyst Sahill Shan.
"Given some valid question marks over the pace of UK expansion possibly slowing down, and what that effect may have on operational gearing going forward, coupled with Germany related issues, today's news just creates further uncertainty."
Shan said that with the stock trading at 19.4 times earnings, it is "susceptible to any negative news".
The analyst said that a de-rating towards a price-to-earnings multiple of 17.5 on 4% lowered forecasts would imply fair value of around 460p.