Broker tips: Punch, Corin, Caledon

The strategy at debt-heavy pubs group Punch Taverns is working, according to KBC Peel Hunt, but it is doing so slowly.

"Progress is slow, with tenancy performance faltering slightly, and the balance sheet is still constrained by cash-trap status," the broker said, after Tuesday's pre-close statement from the company.

The broker has bumped up its target price from 60p to 75p reflecting the equity in the Spirit Group, which KBC values at £230m. The broker is sticking with its "hold" recommendation for the shares.

Piper Jaffray, the house broker of hip and knee replacement developer Corin Group says the company is delivering on its pledge to reinvigorate the product portfolio and reckons the stock's 20% discount to the orthopædic peer group is unjustified.

The broker is sticking with its "overweight" recommendation and 68p price target after the group announced constant currency revenue growth that was ahead of its expectations at 6%.

Piper Jaffray is expecting improved profitability in the second half based on a ramp up of sales and only a moderate increase in expenses. Australia is driving growth, the broker notes, with "other territories steady at best."

Brewin Dolphin is another broker advising its clients to add the shares to their portfolio. It has a target price of 67p.

"Results were largely as expected with the group reporting 9% top line growth (6% constant currency), which is a creditable performance in the face of relatively tough orthopædic markets, especially in hip resurfacing. The LARS [ligament system] product continues to sell well in Australia, which is now the group's largest market. German sales were weak and are expected to remain so until the launch of the new Knee system in 2012," Brewin Dolphin notes.

"Whilst the shares look relatively expensive on a P/E [price/earnings]basis, on an EV [enterprise value]/Sales multiple of 0.6x and Price-to-Book of less than 1.0x the recovery potential is apparent, provided new product launches justify the investment and group EBIT [earnings before interest and tax] margins rise significantly from the current mid-single digit levels," Brewin Dolphin said.

Singer Capital Markets, however, thinks the shares are fairly valued. "The results today do not change our view on Corin - while there continues to be concerns regarding metal-on-metal (MoM) and while Corin's new knee portfolio has yet to be trialled, we believe investors can wait to make a decision on the business," the broker said.

"Corin continues to pursue a me-too strategy of launching a decent range of standard implants - a tough strategy as differentiation to the majors comes down to the sales team and service. The innovative new knee, meanwhile, is still some time away and we would be reluctant to assign value to this until we can see how innovative it is," Singer said.

The broker has a target price for Corin of 61p.

Coking and thermal coal producer Caledon Resources may no longer be officially in play as a bid target but Westhouse Securities thinks another bidder could yet emerge for the company.

Last week the company announced it was no longer in an offer period as the indicative 68p per share offer it had received in mid-July had been withdrawn. The shares have recovered from the setback of failed merger talks with sector peer Polo Resources in June, but Westhouse thinks the shares still have further to go, and has set a target price of 77p.

As one of the few coking coal producers on the market Westhouse thinks Caledon will still be of interest to somebody, with the current high coking coal price of more than $220 a tonne reflecting the tightness in supply.

"Caledon's management has failed to deliver over the past few years and we expect them to fall short of their 700kt [kilotonnes] production target this year. However, with a shortage of available coal export capacity and good quality coking coal projects, we expect interest in Caledon to continue, especially if the company secures an export allocation at the Wiggins Island Coal Terminal (WICT),"

Despite the prospect of a fund raising through the issue of new equity, plus the company's exposure to the US dollar /Aussie dollar exchange rate, Westhouse thinks the bull case outweighs that of the bear's and has initiated coverage of the stock with a "buy" recommendation.