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The Expert View: ARM, Hikma and Redrow
Our daily roundup of analyst commentary on shares, also including Greene King and Marshalls.
by Michelle McGagh on Feb 11, 2016 at 05:00
ARM cash return silence disappoints investors
The failure of micro-chip maker ARM (ARM) to return cash to investors may be disappointing.
Liberum analyst Eoin Lambe retained his ‘sell’ recommendation and target price of 650p following fourth quarter results. Shares in ARM fell 2% to 921p yesterday.
‘Q4 2015 earnings before interest and tax is 4% below consensus excluding a one-off $9 million royalty catch-up payment,’ he said.
‘There is no announcement on cash returns, which may disappoint some. ARM’s outlook statement appears cautious and we would expect consensus revenue estimates to nudge down.
‘Operational expenditure for full-year 2016 is also expected to be higher than forecasts – c.$522 million versus consensus at $500 million. Investors tend to focus on ARM’s royalty revenue and the underlying miss may dampen sentiment.’
Greene King: analysts cheer potential profit uplift
Brewer Greene King (GNK) could realise ‘significant value’ from its balance sheet as its deal to buy the Spirit pub company provides a profit uplift.
Shore Capital analyst Greg Johnson retained his ‘buy’ recommendation but does not have a target price on the stock. The shares rose 2.7% to 857p yesterday.
‘Greene King has released a reassuring update with management’s full year expectations remaining unchanged,’ he said.
‘Greene King trades on a 2016 price/earnings ratio of 13x and earnings value/EBITDA of 9.2x. We have long argued that the Spirit deal could eventually deliver some £70 million of profit uplift which could increase earnings from the 68p forecast this year towards 100p over the medium term, with scope to realise significant value from the balance sheet.’
Hikma tumbles on Roxane reassessment
New information on the financials of Roxane has led Hikma Pharmaceuticals (HIK) to revise its acquisition price for the firm.
Jefferies analyst James Vane-Tempest retained his ‘buy’ recommendation and target price of £25.55 on the shares, which fell 14.1% to £17.14 yesterday.
‘Hikma has announced revised terms for the Roxane acquisition. New information received from Boehringer with regard to 2015 has reduced the near-term outlook for the business,’ he said.
‘Consequently, the gross cash consideration has been reduced by $535 million. The company stated they believe 2016 revenue will be negatively impacted and has reduced the revenue range for 2017 to $700-$750 million versus $725-$775 million.’
Vane-Tempest said ‘higher than expected rebates and increased cost of sales’ were the cause of the change in the financials.
Marshalls upgraded as shares slump 20%
Landscaping materials company Marshalls (MSLH) has been upgraded after a 20% fall in the share price.
Peel Hunt analyst Clyde Lewis upgraded his recommendation from ‘add’ to ‘buy’ and increased the target price from 350p to 355p. The shares rose 7.5% to 284.5p yesterday.
‘The shares have dropped by 20% since we pulled our recommendation back to “add” a month ago,’ he said.
‘Given the robust medium-term outlook for the UK construction market, operational gearing of the business and improvements in the street furniture, cladding and international activities, we believe this recent decline is overdone.’
He added: ‘Following this drop, the shares are now trading on a price/earnings ratio of c.15x for 2016 estimates and 12.5x for 2017 estimates, with an earnings value/EBITDA of 9.0x and 7.6x respectively.’
Redrow inexpensive but not the best value house builder
House builder Redrow (RDW) is inexpensive but there are still cheaper valuation elsewhere.
Deutsche Bank analyst Glynis Johnson retained her ‘hold’ recommendation and increased the target price from 481p to 497p. The shares rose 5.9% to 428p yesterday.
‘While H1 2016 earnings before interest and tax (EBIT) fell slightly short of Deutsche Bank estimates we left our full-year 2016 forecasts unchanged, but management guidance for average selling prices for full-year 2018 has driven 10% upside to our full-year 2018 EBIT estimates,’ she said.
‘Reflecting new company guidance we have increased our dividend estimates for both 2016 and 2017, however Redrow’s dividend yield (2.5%) remains short of sector average (4.5%). Post recent sector share price weakness, Redrow now trades at 1.1x 2017 price/NAV. Redrow, inexpensive for a stock achieving 21% return on capital employed.
‘However, with still cheaper valuations elsewhere for comparable growth profiles, but a lesser exposure to London and higher dividend yield, we maintain our “hold”.’
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Look up the shares
- Hikma Pharmaceuticals PLC (HIK.L)
- ARM Holdings PLC (ARM.L)
- Greene King PLC (GNK.L)
- Redrow PLC (RDW.L)
- Marshalls PLC (MSLH.L)