Broker tips: ASOS, Dignity, iomart

Despite current trading levels remaining positive and potential seen for strong growth, KPC Peel Hunt is downgrading ASOS to a sell as it believes the current shares to be overvalued."In terms of trading and forecast momentum, we believe the business is well placed to outperform over the Christmas peak", the broker said.As for performance, the internet fashion retailer continues to deliver strong levels of sales and profit growth, with Peel Hunt's forecasts pointing to an earnings per share (EPS) growth of 37%, with compound EPS growth of around 25% per annum over three years."The question that concerns us, is how best to value ASOS and how linear we perceive the growth to be", the broker said.However, concerns have been highlighted in terms of justifying ASOS's current share price, standing at around 1372p. Based on the broker's published forecasts, discounted cash flow points to a value of 900p.The broker believes that management's revenue target of £1bn by 2015 illustrates a "lack of breathing room for any slip-up". "In other words, while the next six months are likely to see strong growth and upgrades, we may then see a period of consolidation and we believe the current rating and market expectations do not support any slowdown in performance".Despite long-term growth being expected, ASOS will likely experience this in surges "rather than a linear progression". The broker has downgraded to 'sell' from 'hold', and confirmed a target price of 1,000p.Panmure Gordon expects acquisition activity to re-emerge ahead of Dignity's third quarter statement, and retains its 'buy' recommendation for the funeral home operator.Despite traditionally being the quietest period in the year, the broker still expects to see year-on-year growth, forecasting revenues of £44m compared with £41.7m last year. Earnings before interest and tax is also expected to rise to £10.9m from £10.4 implying margins 10 basis points (one tenth of a percentage point) ahead of that last year."Dignity has now completed its re-capitalisation following the £72m issuance of bonds implying a cash return to shareholders of 100p," analyst Mike Allen said. "This was done on more conservative gearing levels than before leaving room for acquisitions as and when activity levels pick up," he added.The impact of the cash return on earnings per share expected for 2011 is more prevalent than 2010, at 3.6% higher, and 7.4% more estimated in 2012. "Clearly, acquisitions on top of this when they materialise should enhance these forecasts further", Allen said.At current levels, Dignity trades at 13.5 times the 2011 expected earnings per share falling to 11.8 times in 2012, which the broker believes looks attractive given the quality of its operation and shareholder value delivered to date".The broker remains comfortable with its target price of 872p, and with a 30% upside potential, it has re-iterated its 'buy' recommendation in anticipation of the statement on 5 November.Broker finnCap sees potential in iomart's latest acquisition and retains its 'buy' recommendation.The data management, email and IT security services provider acquired Essex-based Titan Internet for a net consideration of £3.7m.The broker describes Titan as "a smaller version of iomart's own managed service business...offering a portfolio of managed hosting products in line with iomart's broader product base".Titan generates earnings before interest, tax, depreciation and amortization of £0.65m from £3.4m turnover, which analyst Andrew Darley thinks can be improved to £1.3m by March 2012, representing a 42% margin, "given available synergies"."The deal represents good value and continuing momentum to support the recent strong share price performance. Expect more deals to follow".The broker retains its 'buy' recommendation with a target price of 100p. Iomart ASOS