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Citywire Top Stocks: one miner scrapes back in
There is one new entrant and four departures from Citywire Top Stocks this month.
Citywire Top Stocks: the latest moves
Citywire Top Stocks® is a unique compilation of the main share holdings of five leading UK fund managers whose stock picking skills we rate highly.
The fund managers on our panel are:
- Derek Stuart, Artemis UK Special Situations
- Nigel Thomas, AXA Framlington UK Select Opportunities
- Thomas Dobell, M&G Recovery
- Richard Buxton, Schroder UK Alpha Plus
- Edward Legget, Standard Life Investments UK Equity Unconstrained
Each month we update the list using new data showing the top 10 holdings of the managers' funds, as recorded at the end of the month before last. This month one new entrant has been added and four have been dropped leaving a total of 31 stocks. The change in line-up reflects movements in the funds' portfolios at the end of September.
The miner reported a sharp rise in first-half profits this month with a 49% increase in earnings before interest, tax, depreciation and amortisation as its Cairn India business and a weaker Indian rupee pushed up profits.
Analysts were positive on the stock after the results beat expectations. Amos Fletcher, analyst at Barclays, said: ‘The Vedanta investment case remains a balancing act between attractive valuation metrics, high leverage and constantly changing Indian legislation. The benefits of leverage have been seen in the last month with the shares gently outperforming a rising sector. Importantly, this has been assisted by increasing capital discipline/degearing as evidenced in these results.’
The stock has featured in the portfolio’s top 10 holdings many times since last September and made up 3.2% of Legget’s portfolio at the end of September. It has a price-to-earnings ratio of 23 and a dividend yield of 3.3%.
Temporary power provider Aggreko (AGK.L) has been dropped from the top 10 holdings of Thomas Dobell’s M&G Recovery fund this month. The company issued a profit warning in October as currency fluctuations and bad debts are expected to hit full-year profits by 2.5% despite a 13% sales increase in the third quarter.
However, the group benefited earlier this month as it stepped in to provide power to areas affected by Hurricane Sandy on US East coast and the company supplied the London Olympics this summer as part of a £37 million contract.
Mike Murphy, analyst, at Numis Securities, commented: ‘The warning reminds investors of the above average risk in the business and although we only have minor downgrades to our numbers the perceived higher risk results in a lower valuation and target price. However, we remain positive about the longer-term outlook due to the power demand/supply imbalance on a global basis.’
Aggreko entered Top Stocks for the first time in August before falling out during September. The shares have gained 16% in the past year and trade at 20 times forecast earnings with a dividend yield of just 1%.
The group recently published an upbeat first-quarter trading update, showing sales reservations up 7% year-on-year. Peel Hunt analyst Robin Hardy reiterated his 'buy' stance on the shares.
'The Q1 IMS shows continued positive trading in both housing and construction with a strong housing sales rate through the autumn selling season,' he said.
'The construction industry remains challenging but the group is finding plenty of opportunities, especially in affordable housing. We still see Galliford as offering the only substantial value in the sector and, with our recently raised target price of 900p, we still see this as our main pick in the sector.'
The shares trade at 11.5 times forecast earnings and yield 4.3%.
A few months back the group became one of Stuart's biggest holdings after he snapped up more shares in a two-for-one rights issue that was launched to fund the acquisition of German meter-maker Elster. The acquisition more than doubled the group's revenues, and propelled it into the FTSE 100.
However, recently things haven't been so positive. The shares plunged almost 15% last week after its interim management statement that ‘initial indications point to current revenue trends having slowed’.
Analyst Chris Dyett of Investec said of Melrose's statement: 'The only clarity is that there is not any.'
Nonetheless, Dyett added that the Elster acquisition still promises growth. 'Longer term, we still expect Melrose to offer above average revenue growth with the prospect of margin upside (predominantly from Elster).'
Melrose shares trade at nearly seven times forecast earnings for next year and offer a dividend yield of just over 3.1%.
Last month the shares dropped about 7% after the group warned of disappointing sales in the previous two months, but they've since recovered, with the third-quarter update at the start of the month narrowing full-year sales guidance towards the top end of the previous range.
Seymour Pierce analyst Kate Calvert raised her target price from £33.50 to £35 on the back of the encouraging update. 'While the share price performance is slightly behind the sector over the last one and three months, it has outperformed the All Share year to date by 20% driven mainly by a re-rating,' Calvert said.
'We believe the shares will consolidate around this level given the greater than expected slowdown in Directory and so maintain our hold recommendation.'
Next has a 12-month price-to-earnings ratio of 12.8x, and offers a 12-month dividend yield of 2.63%.
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Look up the shares
- Vedanta Resources PLC (VED.L)
- Galliford Try PLC (GFRD.L)
- Next PLC (NXT.L)
- Melrose PLC (NYN.L)
- Aggreko PLC (AGGK.L)