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The Expert View: Aviva, Next and AstraZeneca
Our daily roundup of analyst commentary on shares, also including Sage and Diploma.
by Michelle McGagh on Mar 25, 2016 at 05:00
Disappointment coming for Aviva investors
Insurer Aviva (AV) is an expensive stock and analysts can see ‘disappointments looming’.
Berenberg analyst Trevor Moss retained his ‘sell’ recommendation and target price of 440p on the shares, which fell 3.3% to 457.1p yesterday.
‘Aviva’s reported figures have been heavily flattered in recent years,’ he said. ‘While it is true that restructuring can bring one-off benefits, by definition these eventually run out and should not be included in price/earnings or sustainable return on equity calculation. In our estimations, underlying earnings for Aviva have actually been going backwards. We cannot foresee any significant improvements.’
Moss added that Aviva’s ‘very mature book means it is running fast to stand still’ and he ‘does not buy into the capital return story’.
He said the stock is expensive and also ‘expensive against peers, both UK life companies and European composites’.
‘Even on consensus earnings numbers, the European composites look better value. We continue to see disappointments looming and believe that the downgrade cycle for this stock has only just begun.’
AstraZeneca dented by drug trial failure
The latest trial for heart drug Brilinta has ended in disappointment for pharmaceutical giant AstraZeneca (AZN).
Deutsche Bank analyst Richard Parkes retained his ‘buy’ recommendation and reduced his target price from £57.00 to £56.00. The shares fell 1.1% to £39.09 yesterday.
‘Failure of the Socrates trial of Brilinta in the post stroke setting is a dent to the prospects of one of AstraZeneca’s key growth franchises,’ he said.
‘As a result we have reduced our 2020 Brilinta sales by $350 million to $1.9 billion, which lowers our outer year earnings per share forecasts by 1%-2% and our target price to £56.00.‘Although the news is a disappointment, we see limited read through to Brilinta’s other approved or development stage settings and we will forecast the company to deliver a 2017-2020 earnings per share compound annual growth rate of 16% as it emerges from its 2017 nadir.
‘We believe the shares’ recent pullback presents an opportunity for investors, as the current price seems to give little or no benefit for AstraZeneca’s potential for a return to above peer group growth or its pipeline.’
Upside potential at Diploma
Engineer Diploma (DPLM) has reported lower than expected margins but there is still upside potential.
Jefferies analyst Will Kirkness retained his ‘buy’ recommendation and increased the target price from 825p to 835p. The shares rose 1% to 737p yesterday.
‘The interim pre-close shows group organic growth of 1%-2%, in line with expectations but earnings margins -100 points year-on-year is a little worse than feared,’ he said.
‘We leave our valuation methodology unchanged, applying a 14x enterprise value/earnings multiple to current year 2016 earnings per share which drives an 835p price target.
‘This multiple is more in line with premium operators in the sub-sector given superior returns, margins and free cashflow dynamics.
‘We believe there is potential upside to our forecasts from better organic growth and further acquisitions.’
Next downgraded after 2016 warning
High street stalwart Next (NXT) has warned about its prospects for 2016, prompting a downgrade.
Peel Hunt analyst John Stevenson downgraded his recommendation from ‘hold’ to ‘reduce’ and lowered the target price from £70.00 to £64.00. The shares fell 15.1% to £56.55 yesterday.
‘Next’s final results were in line with softened market expectations. The mood music is much more cautious, even by Next’s standards,’ he said.
‘While management has highlighted macro concerns, such as the increasing levels of disposable income being channelled into leisure and travel, we are also conscious that the underlying growth rates for Next will also be much slower in future, particularly for Directory.
‘Next still has outstanding standards of retail execution and cash generation, but total shareholder return is likely to drop to mid-single digit levels. We downgrade our recommendation to “reduce” to reflect this; investors wanting growth or income from the retail sector are much better served from the growth mid cap stocks.’
Sage Group: good prospect but more execution needed
Prospects for business software marker Sage Group (SGE) are strong but there is still a lot to do in terms of development.
Numis analyst David Toms retained his ‘add’ recommendation and target price of 680p on the shares, which fell 1% to 616.5p yesterday.
‘We spent the day with Sage in Newcastle for an update on products and to enhance our overall understanding of the business,’ he said.
‘Our key takeaways are that the culture of the business has changed significantly since the arrival of (chief executive Stephen) Kelly and (chief financial officer Steve) Hare, the move to subscription on existing products clearly has strong momentum and should be a good near-term driver of growth, but strategically there seems to be a lot riding on Sage Live, which is still relatively early stage technically and commercially,’ he said.
‘Payments remain an important area strategically, but we sense some ambivalence about whether the current product set is appropriate. Our view remains unchanged – there is a very significant opportunity for Sage, which could create material value for shareholders, and while momentum is clearly strong, there is still much to do from an execution perspective.’
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Look up the shares
- Aviva PLC (AV.L)
- Next PLC (NXT.L)
- Sage Group PLC (SGE.L)
- AstraZeneca PLC (AZN.L)
- Diploma PLC (DPLM.L)