Broker tips: Xstrata, Autonomy, Irish banks

The third quarter production update from Swiss miner Xstrata contained ‘some solid numbers’ but FinnCap thinks investors will be better off switching to one-time Xstrata merger target Anglo American.FinnCap reckons that Anglo American has a higher quality asset portfolio and should be able to outperform Xstrata over the next six months, though the broker predicts that the strength of the South African rand and the Australian dollar may well continue to squeeze the margins of both companies. Having seen off Xstrata’s unwanted merger overtures, Anglo American will be motivated to sweat its assets harder, FinnCap analyst Joe Lunn predicts.The market has punished the share price of data search software king Autonomy despite the company producing third quarter results in line with raised guidance. The crux is that the figures published were towards the lower end of the guidance parameters, while a slide in gross margin from 92% to 86% was more severe than anticipated, according to Panmure Gordon. The broker has retained its ‘buy’ recommendation but trimmed its target price from 1868 to 1790p. ‘We now anticipate EPS of US97.7c , reduced from 100.5c to reflect the lower Q3 [third quarter] gross margin. While Autonomy dismisses the gross margin pressure as a one–off we have allowed a lower gross margin in Q4,’ the broker said. Nomura Securities is prepared to take a chance on the battered Irish banking sector on the assumption that the government’s proposals for its bail-out vehicle, the National Asset Management Agency (NAMA), do not undergo significant changes before implementation. The Japanese broker has upgraded Bank of Ireland from ‘neutral’ to ‘buy’ and retained its ‘buy’ recommendation on Allied Irish Banks, which it regards as the riskier investment of the two, albeit the one that potentially offers the most upside. ‘We believe that NAMA puts the Irish banks on the road to recovery by addressing both asset quality and funding concerns in one go. By the time the NAMA transfers are completed by mid-2010, we believe the Irish economy is likely to be in modest expansion,’ said Nomura analyst Raul Sinha. The National Asset Management Agency is being established to take over the Irish banking sector’s €77bn of toxic assets.