Broker tips: Pru, Glaxo, Restaurant Group

Prudential this week announced the "truly transformational" acquisition of American insurer AIG's Asian business (AIA) for $35.5bn, but Charles Stanley worries that the price tag "looks to be full".

It notes that the UK firm is issuing shares at a discount to embedded value to purchase the business on 1.69x embedded value.

"Priced on an earnings multiple of 24.7x pre-synergies, the market will need to be confident that revenue synergies will be substantial," argues analyst Nic Clarke. "And importantly, with a substantial amount to be paid in shares, the degree of dilution will depend on the performance of the Pru's share price."

The company has lost a fifth of its value since the deal was confirmed on Monday and many traders think the slump may have made it a target for an opportunistic rival.

Charles Stanley is also concerned about a "very long period of uncertainty" given that the rights issue trading does not close until June.

"Given that we have had a positive stance on the stock it is somewhat frustrating that the robust 2009 results have been overshadowed by the AIA acquisition," says Clarke. "We believe that the strategic rationale for the deal is compelling. However, due to the high degree of uncertainty that will envelop the stock for the next few months until the cost of the deal becomes clearer we downgrade our recommendation from Accumulate to Hold."

An independent clinical trial has identified GlaxoSmithKline's Advair as the best drug for kids with asthma when 'first-line' therapy fails, prompting Panmure Gordon to repeat its 'buy' stance.

The medical journal New England Journal of Medicine (NEJM) says a component of Advair represents the most likely add-on therapy for children whose asthma is not controlled by inhaled corticosteroids (ICS).

Panmure recommends snapping up stock ahead of a Food & Drug Administration (FDA) advisory committee meeting on the use of asthma drugs on 10 March.

"GSK has undergone the majority of its patent expiries and emerged strongly, and can now focus on growth. It has a strong pipeline of products, led by Benlysta for lupus and which could reach the market in 2010 and provide a significant source of upside," says the broker.

"We believe that most of the risks are adequately reflected in the price," it added, keeping its £14 target price.

Charles Stanley has added The Restaurant Group to its menu after the Frankie & Benny's restaurant chain's full year underlying profits came in 5% ahead of the broker's forecast.

The broker has crunched the numbers and reckons that with full year sales showing a like for like (LFL) decline of 2% in 2009 that implies a 6% uplift in LFL sales in the final six weeks of the year.

The comments on the outlook were 'mildly more positive' which combined with a 1% increase in LFL sales in the first nine weeks of 2010 and indications that airport traffic numbers are picking up has prompted Charles Stanley to upgrade its earnings forecasts, change its recommendation from 'hold' to 'add' and bump up its target price from 220p to 245p.

Panmure Gordon is even more bullish on the stock, reiterating its 'buy' recommendation and nudging up the price target to 270p from 260p.

The group has made a better than expected start to 2010 and has lifted the upper end of the range for the number of restaurants it expects to open this year. The group now expects to open between 15 and 25 new outlets, though Panmure's earnings projections assume a net 15 units are added to the chain, and that LFL sales and margin growth will be flat.

Panmure is forecasting that underlying profit before tax in 2010 will hit £52.1m, an upgrade of around 4% on its previous estimate.