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Citywire Top Stocks: Next! this month's risers and fallers

Five new companies break into Citywire Top Stocks this month, while four stocks have left the core holdings of the fund managers we track.

by Harry Brooks, Caelainn Barr on Oct 09, 2012 at 12:11

Next blazes a trail into Citywire Top Stocks®

The figures are in so we're ready to take a look at what's changed this month in Citywire Top Stocks®, our complilation of the top 10 holdings of five leading UK fund managers, whose funds feature in Citywire Selection’s list of investment recommendations.

Note that the changes in Top Stocks are based on new data of the funds' top 10s at the end of August, not this month.

The entrants are Drax Group (DRX.L), Galliford Try (GFRD.L), Lupus Capital (LUP.L), Next (NXT.L) and Reed Elsevier (REL.L).

Bowing out, meanwhile, are Rolls-Royce (RR.L), Rotork (ROR.L), Vedanta Resources (VED.L) and Virgin Media (VMED.L).

Overall, the funds' allocation to industrials increased by 3.1% to 23.5% in August, while the consumer goods allocation increased by 1.7% to 11.72%. The allocation reduced for basic materials by 2.3% to 5.86%, consumer services fell 0.8% to 6.66%, and oil and gas fell 0.7% to 16.27%.

As well as identifying which of our top managers have bought or sold the shares, we've included forward price-to-earnings (P/E) ratios for each stock. For more information on what these figures mean, read Smart Investor's take on P/E ratios.

Next: Next
Key stats
Market capitalisation£5,796m
No. of shares out164m
No. of shares floating154m
No. of common shareholdersnot stated
No. of employees28685
Trading volume (10 day avg.)0m
Turnover£3,441m
Profit before tax£434m
Earnings per share251.48p
Cashflow per share320.73p
Cash per share40.83p

*Correct as at 8 Oct 2012

Next

Clothes retailer Next is back in Top Stocks this month as a result of its inclusion in Nigel Thomas's AXA Framlington UK Select Opportunities fund.

The shares dropped about 7% in the middle of last month following a cautious half-yearly trading update.

Although pre-tax profits rose 10.2% to hit £251 million, the group's forecast was decidedly gloomy: ‘August and early September sales have been disappointing during what has been an unusually quiet period. We remain cautious about the economic outlook,' it stated.

Oriel analyst Eithne O’Leary reiterated her 'hold' recommendation on the shares after the announcement, noting that while the retailer’s management always erred on the side of caution, these comments marked a departure. ‘To describe sales in August and September as disappointing will unsettle investors,' she said.

However, the shares have regained ground over the past month, and are now more or less back to where they were before the update.

Next shares trade at nearly 13 times forecast earnings for next year and offer a 2.6% dividend yield, according to Reuters.

Next: Drax
Key stats
Market capitalisation£1,897m
No. of shares out365m
No. of shares floating364m
No. of common shareholdersnot stated
No. of employees1150
Trading volume (10 day avg.)1m
Turnover£1,836m
Profit before tax£465m
Earnings per share126.42p
Cashflow per share141.99p
Cash per share63.81p

*Correct as at 8 Oct 2012

Drax Group

Electricity provider Drax Group claims a place in Citywire Top Stocks having re-entered the top 10 holdings of Richard Buxton's Schroder UK Alpha Plus fund.

The reappearance of Drax as one of the fund's top holdings doesn't come as a complete surprise as Buxton revealed in a Citywire interview in September that he had recently added to his position.

He cited plans to convert part of the group's coal-fired power plant in North Yorkshire into a biomass plant as a positive for the group. 'We think the opportunities that produces are going to be very significant in terms of profit growth,' he said.

The original plan was to co-fire biomass and coal in all six of the plant's units, but changes to government policy mean it's now looking to run half the units on biomass alone.

Angelos Anastasiou of Investec warned that this change of tack could create problems: 'The plans may well be challenging to achieve. We still believe that there are significant risks here,' he warned, reiterating his 'hold' recommendation.

Drax shares trade at 7.5 times forecast earnings for next year and offer a forward dividend yield of just over 5%, according to figures from Reuters.

Next: Galliford Try
Key stats
Market capitalisation£599m
No. of shares out82m
No. of shares floating77m
No. of common shareholdersnot stated
No. of employees4230
Trading volume (10 day avg.)0m
Turnover£1,504m
Profit before tax£49m
Earnings per share59.71p
Cashflow per share63.95p
Cash per share117.04p

*Correct as at 8 Oct 2012

Galliford Try

Homebuilder Galliford Try is also back in this month as a top 10 holding in Ed Legget's Standard Life Investment UK Equity Unconstrained fund.

The group's annual results were released on 18 September, showing an 80% year-on-year rise in pre-tax profits to £63.1 million. The company cited the success of the group's three-year transformational plan as the driver of the impressive results.

Writing after the figures were released Peel Hunt analyst Robin Hardy, who has a 'buy' recommendation on the shares, said the possibility of increasing profit margins mean there's still scope for the shares to appreciate: 'When the new strategy to add an extra 300 basis points to the margin was first unveiled, we hinted that successful delivery could add another 100p to the target price.

'This still holds true, and is further supported by the higher dividend element within the income element of the equity valuation. Therefore, while we hold our 825p target price for now, we would expect this to rise materially.'

Galliford Try shares trade at just over 12 times forecast earnings for next year and on forward dividend yield of slightly more than 4%, according to figures from Reuters.

Next: Lupus Capital
Key stats
Market capitalisation£211m
No. of shares out130m
No. of shares floating125m
No. of common shareholdersnot stated
No. of employees1880
Trading volume (10 day avg.)0m
Turnover£230m
Profit before tax£8m
Earnings per share6.18p
Cashflow per share18.29p
Cash per share18.78p

*Correct as at 8 Oct 2012

Lupus Capital

Windows and doors specialist Lupus Capital re-enters our Top Stocks tally this month as another top 10 holding of Ed Legget's Standard Life Investment UK Equity Unconstrained fund.

Half-yearly results released at the start of last month showed group revenues up 3.3% year-on-year, with underlying pre-tax profits up 23%. It also announced the £14 million acquisition of hardware maker Fab & Fix, and an exit from its loss-making composite doors operations.

Michael O'Brien, analyst at Canaccord, reiterated his 'buy' recommendation following the results, saying growth opportunities in the US should offset weakness in Europe.

'With 49% of H1 sales coming from the US, we retain our view that Lupus offers an attractive operationally geared play on US housing activity. Although US profits increased, we are more encouraged by tendering activity, which appears to reflect the improving fundamentals in both US new build and remodelling activity and is likely to translate into activity over coming years,' he said.

Lupus Capital shares are currently priced at just over three times next year’s forecast earnings and trade on a 2.8% dividend yield, according to Reuters data.

Next: Reed Elsevier
Key stats
Market capitalisation£7,310m
No. of shares out1,213m
No. of shares floating1,195m
No. of common shareholdersnot stated
No. of employees16135
Trading volume (10 day avg.)4m
Turnover£3,175m
Profit before tax£402m
Earnings per share33.45p
Cashflow per share58.49p
Cash per share-9,999,999.00p

*Correct as at 8 Oct 2012

Reed Elsevier

Business publisher Reed Elsevier is back in Citywire Top Stocks as a top 10 holding in Derek Stuart's Artemis UK Special Situations fund.

Writing at the start of this week Investec analyst Steve Liechti reiterated his 'buy' recommendation on the shares, ahead of the group's Lexis Nexis Legal/Professional investor seminar on Thursday.

Liechti expects the shares, which have gained about 16% over the past three months, to gain following the seminar. 'We see two positive catalysts for REL shares as a result: 1.) More investor friendly focus/transparency can boost rating further; 2.) Legal was a problem in the recent past, so focus/attention suggests it is better/on track,' he said.

Although the analyst said the legal publishing market remains subdued following a big fall in 2009, it looks like things may be looking up in the sector. 'We forecast about +1% like-for-like sales growth, but a recent HBR Consulting study suggested 2012 worldwide legal spend looks about +5% (ex US +9%),' he added.

Reed Elsevier shares trade on 14.7 times next year’s forecast earnings with a 3.6% dividend yield, according to Reuters.

Next: Rolls Royce
Key stats
Market capitalisation£16,410m
No. of shares out1,872m
No. of shares floating1,855m
No. of common shareholdersnot stated
No. of employees42300
Trading volume (10 day avg.)5m
Turnover£11,124m
Profit before tax£850m
Earnings per share45.33p
Cashflow per share66.99p
Cash per share70.56p

*Correct as at 8 Oct 2012

Rolls-Royce

Global engineering company Rolls-Royce (RR.L) has dropped out of Citywire Top Stocks this month as it leaves the top ten holdings of Richard Buxton’s Schroder UK Alpha Plus fund.

The group aims to double revenues in the next ten years and so far this year its civil aerospace division, which accounts for half of its revenue, has continued to perform well. However, its marine division was weaker than expected in the first half and defence aerospace is coming under pressure as government budgets, particularly in the US, remain uncertain.

Rolls-Royce shares are priced at 13.5 times next year’s forecast earnings and trade on a 2.2% dividend yield, according to figures from Reuters.

Jonathan Jackson, head of equities at Killik & Co, commented: ‘We remain positive on Rolls-Royce, which remains a global leader positioned to benefit from the long-term themes of increased air travel, rising oil and gas production, increased demand for power generation and more stringent environmental legislation.’

Next: Vedanta Resources
Key stats
Market capitalisation£2,888m
No. of shares out273m
No. of shares floating104m
No. of common shareholdersnot stated
No. of employees32179
Trading volume (10 day avg.)1m
Turnover8,681m USD
Profit before tax37m USD
Earnings per share0.13 USD
Cashflow per share5.90 USD
Cash per share15.65 USD

*Correct as at 8 Oct 2012

Vedanta Resources

Miner Vedanta Resources (VED.L) also takes a leave of absence from Citywire Top Stocks as it exits the top ten holdings of the Standard Life Investments UK Equity Unconstrained fund, managed by Edward Legget.

Vedanta has battled against output challenges at its Indian mines, however analysts believe it could be on track for a turnaround of fortunes and Ash Lazenby, analyst at Liberum Capital, named the stock as ‘one to watch’.

However, Tom Dobell, manager of the M&G Recovery fund who also sits on our Top Stocks panel, disagrees, recently describing big miners such as Vedanta as ‘frightful’.

Vedanta shares have risen 7.5% this year and, according to Reuters, trade at 11.4 times forecast earnings for next year and on a forward dividend yield of 3.5%.

Next: Rotork
Key stats
Market capitalisation£2,071m
No. of shares out87m
No. of shares floating86m
No. of common shareholdersnot stated
No. of employees2192
Trading volume (10 day avg.)0m
Turnover£448m
Profit before tax£80m
Earnings per share92.58p
Cashflow per share103.09p
Cash per share55.97p

*Correct as at 8 Oct 2012

Rotork

Valve-maker Rotork (ROR.L) is also out after slipping from the top ten of Nigel Thomas’ AXA Framlington UK Select Opportunities fund.

The group has grown from a small engineering workshop in Bristol, to a multi-national industrial business and went through a period of rapid expansion with a series of acquisitions in 2010 and 2011.

However, analysts have noted that the group may find it difficult to expand further without diluting its returns. Ben Bourne, analyst at Liberum Capital, said: ‘Interim results reveal management have walked away from four potential acquisitions in the first half.

‘This shows good discipline, however it may also highlight difficulty in expansion without eroding returns. Return-on-capital-employed has already peaked. Acquiring businesses to bolster the new Instruments division will also increase cyclicality. The relative-strength-index indicates the shares are vulnerable to profit taking.’

Data from Reuters show the shares trading at 20 times next year’s forecast earnings with a forward dividend yield of 1.9%.

Next: Virgin Media
Key stats
Market capitalisationna
No. of shares outna
No. of shares floatingna
No. of common shareholdersna
No. of employeesna
Trading volume (10 day avg.)na
Turnoverna
Profit before taxna
Earnings per sharena
Cashflow per sharena
Cash per sharena

*Correct as at 11 Sep 2012

Virgin Media

Television and broadband services group Virgin Media (VMED.L) falls out of Top Stocks after leaving the ten biggest holdings of Richard Buxton’s Schroder UK Alpha Plus fund.

Virgin Media’s revenues grew 3.3% and its free-cash-flow fell back 3.2% in the in the first half of the year. However, the group reduced its customer churn in the first six months and is attracting customers into different areas of the business across its TV, broadband and mobile services.

Patrick Yau, analyst at Peel Hunt, commented: ‘Growth on the consumer side is being balanced by progress at Virgin Media Business (VMB), which accounted for 36% of the revenue growth in the second quarter. We like the continuing improvement in the customer base and revenue mix across the business and believe the shares remain good value at current levels.’

Virgin shares trade on just over 12 times forecast earnings for next year with a dividend yield of just 0.6% for next year, according to Reuters.

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  • Drax Group PLC (DRX.L)
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  • Galliford Try PLC (GFRD.L)
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  • Lupus Capital PLC (LUP.L)
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  • Next PLC (NXT.L)
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  • Reed Elsevier PLC (REL.L)
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  • Rolls-Royce Holdings PLC (RR.L)
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  • Rotork PLC (ROR.L)
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  • Vedanta Resources PLC (VED.L)
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  • Virgin Media Inc (VMED.L)
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