Broker tips: Babcock, Petra Diamond, Merlin Enetertainments

Babcock is in a sweet-spot strategically, given its growing market and “solid” barriers to entry, but at present there are “too many risks for comfort” around the investment case, analysts said.

In a research mote sent to clients, Citi analysts Ed Steele, Marc van’T Sant and Avinash Mundhra said they were adding top-line and succession risks to their previous concerns surrounding the company’s margins and cash-flow.

For those reasons, they trimmed their earnings per share forecasts for 2017 and 2018 by 2% each, lowered their target price on the stock to 1,000p and downgraded and slapped a ‘sell’ recommendation on them.

Analysts at Finncap greeted the decision by two of Petra Diamond’s lending groups to waive the measurement of two covenant tests relating to its operating profits for the year to 31 December 2015.

“This announcement effectively takes a considerable amount of perceived risk out of Petra and should reverse some of the negative sentiment,” analyst Martin Potts said in a research note sent to clients.

Potts retained his 191p price target and ‘Buy’ recommendation on the South Africa-focused diamond mining group.

Depending on the valuation model chosen, Merlin Entertainments's expansion plans could boost the value of the company's discounted cash flow by up to half, Shore Capital said in a research note sent to clients.

The broker explained that its 400p a share DCF valuation hinged on a forecast for only 33 Midway sites to be rolled out, versus the 100 envisaged by the company's director's

However, should Merlin manage to hit its target then that would be worth an additional 86p per share in terms of DCF.

As well, the firm was planning to open 20 Legoland parks, with a new one scheduled to open its doors between every 2-3 years. Each new site could be worth about 10p per share, analysts Martin Brown and Greg Johnson estimated.

"This implies that Merlin’s current expansion plans could be worth 150-200p a share over and above our core 400p DCF valuation."

Brown and Johnson stuck by their previous recommendation to 'buy' the stock.