Broker tips: Entertainment One, Pearson, Imagination Technologies

Peel Hunt downgraded Entertainment One to ‘hold’ from ‘buy’ and cut the price target to 260p from 340p, as the rights issue is digested by shareholders.

The brokerage noted that Entertainment One has increased its exposure to Peppa Pig at a cost of £140m through the purchase of ABD and has raised £193.6m by way of a rights issue.

“On balance, we are of the view that a sale of the existing stake in Peppa Pig would have been strategically better, a route the company should still consider. The overfunding will dilute earnings and the EPS growth rate reduces,” it said.

Peel said the value of Peppa Pig to a broad-based brand owner will peak soon, maybe even as soon as now.

"We hope that Entertainment One will look to realise that value for the benefit of shareholders in the near future,” it said.

The purchase of ABD may facilitate that sale although raising cash through equity dilutes the benefit of this deal, the brokerage said.

Peel added that the Marwyn sale, alongside the overfunded rights issue, will take some time for the market to absorb.

“This indigestion prompts the ‘hold’ recommendation."

Credit Suisse downgraded Pearson to ‘neutral’ from ‘outperform’ and slashed the price target to 970p from 1,455p following the company’s third-quarter trading update last week.

It said the update showed weak underlying revenue and the general message was one of a strong competitive performance more than offset by industry-wide struggles.

“Whilst we continue to see the potential for longer-term upside for the group as it makes the digital migration, we believe these results demonstrate that it is no longer possible to have any meaningful conviction in the group's short-medium term trading and as such we no longer believe its assets deserve a premium to its more stable professional publishing peers.”

The bank cut its 2015 and 2016 adjusted earnings per share estimates by 6.3% and 14.3%, respectively, as it takes more conservative assumptions for the group given the lack of clarity.

This takes CS’s 2015 forecast adjusted EPS to 70p, in-line with company guidance for "around the bottom end" of the group's 70-75p range.

Imagination Technologies will have to think quick if it wants to avoid the multiple headwinds bearing down on it, one of the City’s top brokers said on Wednesday.

The company, which designs microprocessors and then licenses the resulting technology patents, will see profit margins drop and licencing revenues fall, with its high debt levels compounding matters, broker Liberum said.

Its operating margins are likely to shrink by 4% in the first six months of 2016, having grown by 27% in the same period of 2012, pressured by R&D growing quicker than revenues, now at 73% of sales.

“The company’s strategy is too skewed towards long-term investment, which could put the group at risk near—term,” the analyst went on to explain.

Lambe downgraded his recommendation to ‘hold’ from ‘buy’ and his price target to 250p from 275p.