Broker tips: M&B, Debenhams, Meggitt

Panmure Gordon has strongly reiterated its 'buy' recommendation for Mitchells & Butlers (M&B) after the pubs group's latest disposal of non-core assets.

The broker concedes that the latest batch of disposals is likely to dilute earnings initially, but the money raised will give M&B ammunition to speed up its expansion into the faster growing areas of the informal dining market.

KBC Peel Hunt is also a fan of the deal despite estimated net dilution of 6% of projected fiscal 2011 earnings. It calculates gross dilution of earnings at about 12% but "this should be counteracted by higher growth from the remaining core estate (it historically performs 1% stronger in life for like revenue terms), and by accelerated conversions, reducing net dilution to 6%."

KBC analyst Paul Hickman called the disposal "a major step" that came "faster than most expected".

"It should facilitate the conversion of existing outlets to the six core brands as well as acquisitions of suitable assets at higher returns," Hickman believes.

Elsewhere on the UK high street, KBC Peel Hunt has raised its profit forecasts for department store group Debenhams after a recent meeting with the retailer's management.

"With the prior-year comparatives hit by the significant shift in product from concession to own bought for autumn/winter 2009, we expect Debenhams sales trends to have improved in LFL [like for like] terms since the last interim management statement," writes KBC analyst John Stevenson.

Overall, KBC expects full-year LFL sales growth in the UK to be marginally below breakeven, with gross margin gains of more than a full percentage point driving full-year and second half profits forward.

The broker is sticking with its adjusted profit before tax (PBT) of £143.6m for the current financial year, while 2011 estimated PBT is upgraded by £15m to £155.3m. It has made no further changes to 2011 estimates and its forecasts remain below market consensus. "Indeed, we forecast a LFL sales decline of -1%, vs market consensus of +1%, reflecting our view that retail sales will suffer due to lower levels of disposable income in 2011."

Despite the lower sales forecast, the broker thinks the group is well placed to deliver profit growth.

"The recommencement of the refurbishment programme is progressing well, with the Manchester store completed and Glasgow nearing completion. We understand the customer response to Manchester has been so strong as to deliver accelerating sales during the process, rather than disruption," he added.

The broker rates the shares a "buy" and has a target price of 80p.

"Debenhams continues to deliver attractive cash generation and remains on track to reinstate the dividend" from the first half of the next financial year. KBC is predicting a yield of greater than 4% when the divi is restored, based on a payout that is covered three times by earnings.

The commercial aerospace recovery is gaining momentum, Nomura Securities believes, and the recent market pullback provides a good opportunity to buy into some of the mid-cycle aftermarket names that should see good earnings momentum in the second half of this year, the broker believes.

Meggitt is its new top pick in the sector, with the broker expecting the group's sales to rebound strongly in the second half of this year. The stock's recent underperformance represents an attractive buying opportunity, the broker claims.