Broker tips: Greene King, Hikma Pharmaceuticals

Goldman Sachs reinstated its ‘buy’ rating on Greene King with a 1,060p price target, saying it expects the company to deliver consistent earnings growth given its exposure to accelerating UK consumer discretionary spending, execution of synergies post its Spirit acquisition and investment in its estate.

The bank also said it reckons earnings before interest and tax margin expansion from consolidation should more than offset cost headwinds, particularly increased minimum wage inflation due to the introduction of the UK National Living Wage from April next year.

GS expects the company to achieve £37.5m in synergies from its acquisition of Spirit over the next three years, around £12m of which will be from a reduction in corporate overhead and £26m from procurement savings.

It noted that the stock trades at a discount to pub peers despite above-average growth.

It added that while Greene King’s returns are slightly below peers, this differential should continue to compress over time.

Goldman also highlighted the stock’s attractive dividend yield and 25% upside to the bank’s 12-month price target.

“Greene King’s leverage is already the lowest of its asset-based pub peers, and we expect it to fall further, with excess cash being used largely for dividends,” said GS.

Hikma Pharmaceuticals got a boost after Jefferies upgraded the stock to ‘buy’ from ‘hold’ and raised its price target to 2,615p from 2,134p as it integrates the company’s “transformational” deal with Roxane Laboratories.

“In our view Hikma is transitioning to a period of remarkable growth as it executes on recent acquisitions and we expect share price momentum to continue despite the 12% rally,” it said, adding that Hikma is now its preferred name in the EMEA generics sector.

Jefferies said the acquisition of Roxane, at $2.65bn, is a game-changer for Hikma in the US and provides a platform and pipeline to grow its business with opportunities to create further value from potential synergies and diversify its revenue base.

It noted that Roxane has 88 differentiated products across specialised segments which are highly complementary to Hikma’s existing US business. The combination will create the number 6 player in the US generics market, from 20 previously, said Jefferies.

It raised its 2016 earnings per share estimate by 4% and 2017 by 14%, saying it believes the integration of Roxane combined with solid market fundamentals should improve Hikma’s earnings power despite higher interest charges and equity dilution to shareholders.