Broker tips: Mothercare, Autonomy, ServicePower

A recent meeting with company management has reassured KBC Peel Hunt about the medium term prospects for mother-and-baby products seller Mothercare, but the broker believes current year earnings forecasts could be under threat.

"Management has already flagged a more competitive pricing proposition for peak trading in toys, and this is expected to deliver 100 bps [basis points] reduction in full-year achieved gross margins. Given the inflationary pressure from commodity and freight costs, we see little opportunity for Mothercare to outperform on this metric," said Peel Hunt analyst John Stevenson.

"While management remains confident of current-year guidance and profit expectations, we believe there remains a risk of further pressure on forecasts for FY2011E [fiscal 2011], with Peel Hunt profit forecasts c5% below consensus. However, the medium-term opportunity remains attractive, driven by international and wholesale opportunities," Stevenson believes.

"The company is holding an investor and analyst trip to Delhi in December, and we hope this will provide further insight and detail behind the performance and structure of the overseas revenue streams. In the meantime, we believe wider concerns over UK retailing and the company's premium PER [price/earnings ratio] rating (15.8x FY2011E) will leave the shares unlikely to make much progress in the short term," Stevenson concluded.

The broker is sticking with its "hold" recommendation and 550p price target.

Panmure Gordon thinks that the extension of the Advertising Standards Authority's remit to cover the internet will be good news for Autonomy.

The extension of the powers of the Advertising Standards Authority (ASA) will add considerably to the agency's workload, though, as ever, it will have members of the public operating as its eyes and ears, and reporting perceived misdemeanours to the ASA.

Panmure Gordon analyst George O'Connor thinks the ASA, and the online industry itself (which wants to remain self-regulating) could also make use of Autonomy's Intelligent Data Operating Layer (IDOL). "Autonomy IDOL can be configured to understand the meaning and concepts behind data. The offer could be driven either by understanding corporate websites, social networks and mobile applications or indeed by doing some kind of exceptions management (this is good/this is bad) or simply profiling good and bad sites - this is more like the early days of filtering technology. Clearly there will be time required to develop the taxonomies,"

The broker rates the shares a "hold" and has a target price of 1975p.

Interim results from field engineer software specialist ServicePower have left the battered share price unmoved but house broker FinnCap thinks they represent the first indication that management has been successful in its turnaround strategy.

"Whilst the market for ServicePower's software and managed services remains challenging, the new business pipeline is the strongest in the company's history. Revenue visibility is also increasing although predicting the timing of software license income remains difficult," FinnCap said in a "buy" note on the company.

FinnCap analyst Paul Cornelius has a 7p price target for the company, representing 75% upside to the current share price.

"Our fair value estimate remains at 7p which reflects EV [enterprise value]/Sales of 0.8. We therefore expect the current discount to its peers to decrease rapidly once management has illustrated the turnaround strategy has been successful and SVR achieves break-even to fiscal 2010," Corneliuss said.