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The Expert View: AA, Dixons Carphone and WPP

Our daily roundup of analyst commentary on shares, also including Standard Life Aberdeen and Paysafe.

by Michelle McGagh on Aug 15, 2017 at 05:00

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Key stats
Market capitalisation£1,150m
No. of shares out610m
No. of shares floating608m
No. of common shareholdersnot stated
No. of employees7454
Trading volume (10 day avg.)8m
Profit before tax£74m
Earnings per share12.15p
Cashflow per share23.32p
Cash per share30.85p

Don’t write-off AA, says Liberum

Although AA’s (AAAA) shares have had a tough time after the breakdown service’s executive chairman was fired for gross misconduct, Liberum is confident that things can be repaired.

Analyst Joe Brent retained his ‘buy’ recommendation and target price of 300p on the stock, which was trading down 1%, or 1.9p, at 185p at the time of writing. The shares reacted negatively after full-year forecasts were lowered in early August.

‘The engine may be misfiring but it is not a write-off,’ said Brent. ‘We are confident that the full year 2018 dividend per share can be paid and can be paid thereafter.’

He said the earnings before interest, tax, depreciation and amortization (Ebitda) of 6.5x is ‘unquestionably geared’ but AA would have to suffer a more than a 40% reduction in cashflow and a 40% increase in debt service cost to trigger a breach.

‘The company does not need to raise money,’ Brent added.

Key stats
Market capitalisation£2,877m
No. of shares out1,158m
No. of shares floating943m
No. of common shareholdersnot stated
No. of employees43883
Trading volume (10 day avg.)5m
Profit before tax£291m
Earnings per share25.20p
Cashflow per share41.30p
Cash per share12.75p

Deutsche: Dixons Carphone concerns priced in

Shares in electronics retailer Dixons Carphone (DC) have de-rated on the back of concerns about profitability and a weaker economy. However, Deutsche Bank believes the bad news has been priced in.

Analyst Warwick Okines retained his ‘buy’ recommendation and target price of 400p after a sharp de-rating over the past few months. The analyst pointed to mobile profitability, the quality of last year’s earnings, director share sales, and broader concerns about the UK economy as reasons why the shares have disappointed.

‘We believe these valid concerns are priced in, particularly as we see a number of levers which can be pulled to control profitability,’ he said.

‘We expect the company to report a reassuring set of first quarter sales on 7 September: a relatively unimportant trading period but nevertheless, important for sentiment. The stock trades on 2017 price/earnings of 7.4x against the UK general retail sector, which trades on circa 13x.’

At the time of writing shares were trading up 1.5%, or 3.8p, at 248p.

Standard Life Aberdeen shares look cheap, says Numis

Shares in the newly formed Standard Life Aberdeen (SLA) look relatively cheap, according to Numis.

However, analyst David McCann expects the real catalysts for share price rises are unlikely to come through until next year.

The analyst retained his ‘add’ recommendation and target price of 462p on the stock, after the merger between Standard Life and Aberdeen Asset Management completed. The stock was trading up 1.6%, or 6.8p, at 417p at the time of writing.

McCann said asset management giant will be better positioned for industry challenges.

‘While we are positive on the medium to long term outlook for the group and regard the shares as relatively inexpensive, we see the next six to 12 months as a period of transition as the strategy develops - and structures, leadership and teams are aligned,’ he said.

‘We therefore maintain our “add” [recommendation], as we believe the main catalysts for share price appreciation will only start to come through in 2018 and beyond.’

Key stats
Market capitalisation£2,836m
No. of shares out485m
No. of shares floating471m
No. of common shareholdersnot stated
No. of employees2116
Trading volume (10 day avg.)5m
Turnover769m USD
Profit before tax109m USD
Earnings per share0.22 USD
Cashflow per share0.34 USD
Cash per share0.42 USD

UBS downgrades Paysafe after £3bn bid

UBS has downgraded Paysafe (PAYS) following a £3 billion bid for the mobile payments company by CVC Capital Partners and Blackstone.

Analyst David Mulholland downgraded his recommendation from ‘buy’ to ‘neutral’, but increased the target price from 575p to 590p. This places the target price in line with the bid offer.

While he sees potential for 15% upside, he thinks there isn’t a compelling case to buy the shares from a risk/reward perspective.

‘Having gained some disclosure on what value is being generated from the Asia Gateway business, we would see the offer of 590p as fair,’ he said.

‘It values Paysafe excluding Asia Gateway on between 16.5x-18x 2018 price/earnings compared to the sector on 18.4x...We envisage an upside scenario of +15%, while downside risk to the share price of the deal not completing we would see as -14%.’

At the time of writing, the shares were trading up 0.3%, or 2p, at 585p.

Key stats
Market capitalisation£20,131m
No. of shares out1,273m
No. of shares floating1,225m
No. of common shareholdersnot stated
No. of employees198000
Trading volume (10 day avg.)4m
Profit before tax£1,400m
Earnings per share108.00p
Cashflow per share148.87p
Cash per share190.26p

WPP interims could spell bad news, says Shore Capital

Shore Capital has warned that WPP’s (WPP) interim results next week could spell further bad news for the advertising giant.

Analyst Roddy Davidson retained his ‘hold’ recommendation on the stock, which was trading up 0.7%, or 11p, at £15.82 at the time of writing.

While he is positive on WPP’s ‘underlying attractions’, such as the quality of its operations and brands, he is concerned that next week’s interims may not be very positive.

‘On this basis we retain our “hold” recommendation, although we note that the group’s share price has drifted back by circa 5% since we moved our recommendation from “buy” and has underperformed the market by 8% over three months,’ he said.

‘When combined with its modest valuation, this weakness appears to suggest that the market is already factoring in a deteriorating outlook.’

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  • Dixons Carphone PLC (DC.L)
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