Broker tips: Reckitt, Pace, RM Group

Second quarter results from household goods maker Reckitt Benckiser beat expectations but there remain 'underlying weaknesses that are niggling the market', Panmure Gordon avows.

Europe was one of those niggling worries, with sales declining by 1% in the second quarter versus Panmure Gordon's expectations of growth of 1% year on year. Fabric sales also continue to disappoint, with sales down 3% when the broker had expected them to be flat.

"The markets concerns about weak performance in Europe and Fabric (largely the same issue) are not going to be alleviated by these results, but Reckitt is clearly set to deliver, in our view, another year of double-digit growth, with the Suboxone hit now moving to 2011E [2011 earnings]," Panmure Gordon said.

"We believe 5% base sales growth in such tough conditions is perfectly respectable, and believe costs are largely covered for the year. We reiterate our Buy recommendation and 3800p price target," the broker concluded.

Broker KBC Peel Hunt did not find much to get excited about in the interim results from set-top box maker Pace but it likes the look of the acquisition of 2Wire, the US network router firm.

"The overriding story today is the acquisition of 2Wire, for a net $420m, which could add c30% to operating profit when synergies fully achieved, mid-FY2011 [fiscal 2011]. Our initial estimates suggest EPS rising from 23p (consensus) to around 27-30p on a run-rate basis coming out of FY2011, putting the stock on just 6-7x PER [price/earnings ratio]," KBC analyst Alex Jarvis suggests.

"Acquisition is subject to shareholder approval and debt facilities, but we see the move as strongly positive for the shares, particularly as concerns over growth paths were weighing on the share price. An opportunity to repeat the success of the Philips acquisition should be well received; it looks like a good deal and strategic fit, with exposure to fast growing markets (c17% CAGR [compound annual growth rate])," Jarvis adds.

Social housing firm Connaught may have been the most high profile early casualty of the government's spending cuts but educational information technology provider RM Group is feeling the effects of them too.

The company said in a trading update on Monday morning that full year results "will reflect exceptional costs of c.£1.5m related to actions taken in response to the Department for Education's (DfE) recently announced review of the BSF (Building Schools for the Future) programme".

Full year market profit before tax estimates range between £18.30m and £20.7m, and earnings per share (EPS) forecasts run from 15.40p to 16.50p, broker Daniel Stewart notes.

"The abrupt shift in government education policy and resulting abandonment of the BSF programme clearly impacts RM's long-term strategy. The promotion of Academies should in part offset this change, and also release working capital that would otherwise be tie up in the lengthy BSF bidding process. However, clarity on this new direction should not emerge until after the autumn spending review," Daniel Stewart's Mike Jeremy predicts.

"We expect RM to devote renewed attention to its overseas opportunities, notably in the US," Jeremy adds.

With the stock trading on an undemanding rating and with the yield at 4.6%, the broker is sticking with its "hold" rating.