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The Expert View: British American Tobacco, Bellway & Biffa

Our roundup of analyst commentary on shares, including Legal & General and Horizon Discovery Group.

by Michelle McGagh on Jun 15, 2017 at 05:01

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Key stats
Market capitalisation£101,594m
No. of shares out1,864m
No. of shares floating1,778m
No. of common shareholdersnot stated
No. of employees85335
Trading volume (10 day avg.)3m
Profit before tax£4,648m
Earnings per share249.22p
Cashflow per share287.67p
Cash per share119.02p

Wait for vapour to clear at BATS, says Jefferies

Jefferies remains bullish on British American Tobacco (BATS) but does not believe the shares will be re-rated until its merger with Reynolds American completes next year.

Analyst Owen Bennett retained his ‘buy’ recommendation and target price of £64 after the company issued a first half trading update showing a 3.3% fall in sales. Bennett said this was expected against a tough comparison with a year ago and also reflected a difference in the timing of cigarette shipments.

‘BAT remains our top long-term pick with the [price/earnings] multiple remaining attractive in our view,’ he said, adding. ‘Despite our long-term bullishness, we do think the multiple could be contained into the back end of the year, or at least until the Reynolds deal is closed.’

The analyst added that BATS also needed to provide detailed information on its progress with e-cigarettes. Vapour products like Glo had apparently done well in Japan but until it published ‘tangible data’ like rival Philip Morris, it would not receive the benefit in its share price.

The shares added 62.7p, or 1.2%, to £54.76 on Wednesday.

Key stats
Market capitalisation£3,713m
No. of shares out123m
No. of shares floating121m
No. of common shareholdersnot stated
No. of employees2366
Trading volume (10 day avg.)m
Profit before tax£403m
Earnings per share327.96p
Cashflow per share330.44p
Cash per share48.06p

Bellway proves buoyancy of housing, says Hargreaves

Expectations for increased completions at builder Bellway (BWY) impressed the market yesterday and underlined the resilience of the housing market.

Bellway shares jumped £1.24, or 4.4%, to £29.74 after it revealed reservations of its new homes rose 13% between 1 February and 4 June. It told analysts to expect around a 10% increase in completions for the year.

Hargreaves Lansdown analyst George Salmon said there was an ‘arm wrestle’ within the UK’s housing market as statistics showed prices falling and political uncertainty adding to concerns.

‘However, the housebuilders have released a relentless string of positive updates, and these numbers from Bellway are very encouraging too. Reservation rates are impressive, and its guidance for the future is upbeat to say the least,’ he said.

‘Results like these add weight to the argument that, barring a sudden rise in interest rates, demand for new homes will remain buoyant. After all, the fires of demand are being stoked by supportive government policies and a sharp supply-demand imbalance,’ Salmon added.

Key stats
Market capitalisation£484m
No. of shares out250m
No. of shares floating236m
No. of common shareholdersnot stated
No. of employees7585
Trading volume (10 day avg.)m
Profit before tax£-5m
Earnings per share-2.04p
Cashflow per share28.00p
Cash per share49.40p

Don't waste the opportunity at Biffa, says Peel Hunt

Biffa (BIFF) has reported its first set of full-year results and dividend since coming to the market last October, with both confirming the waste management company as a strong ‘value play’ in the eyes of Peel Hunt.

Analyst Andrew Shepherd-Barron retained his ‘buy’ recommendation and target price of 250p after the company reported underlying profits of £137.7 million for the year to 31 March, 12.6% up on the previous year. It declared a 2.5p per share dividend which Shepherd-Barron believed could easily rise to 10p in time.

‘With its earlier first interims and now its first full-year in line, Biffa is steadily building investor credibility,’ he said. The analyst explained his target price of 250p was based on forecast earnings for next year being valued at 6.5 times the business’ embedded value with a free cash-flow yield of 8%, both of which he said were undemanding assumptions.

‘We like Biffa for its cash-generation, attractive return, good earnings momentum, proven history of value-enhancing external growth and strong management.’ The shares slipped 1.4%, or 2.75p, to 193.25p.

Key stats
Market capitalisation£15,356m
No. of shares out5,955m
No. of shares floating5,833m
No. of common shareholdersnot stated
No. of employees8253
Trading volume (10 day avg.)17m
Profit before tax£1,258m
Earnings per share21.13p
Cashflow per share22.17p
Cash per share431.88p

Barclays: give Legal & General some credit

Barclays believes the ability for insurer Legal & General (LGEN) to manage its credit exposure is underappreciated and the stock is trading too low.

Analyst Alan Devlin reiterated his ‘overweight’ recommendation and target price of 280p after LGEN held a capital markets day in the City.

He said credit was the largest risk at L&G but believed the insurer had ‘two major competitive advantages’ as its annuities, or pension contracts, were managed by its asset manager whose managers were rewarded on the basis of minimising defaults on loans and bonds, not on maximising yields.

The company also has access to direct investments ‘where L&G can get a lower risk asset for the same yield’. ‘We believe L&G’s ability to manage its credit exposure is underappreciated, and the stock is attractively valued on 11 times our full-year 2017 estimates, with a forward dividend yield of 5.9%,’ said Devlin.

The shares edged just over a penny higher to close 0.4% up at 259.5p.

Key stats
Market capitalisation£m
No. of shares out97m
No. of shares floating84m
No. of common shareholdersnot stated
No. of employees247
Trading volume (10 day avg.)m
Profit before tax£-11m
Earnings per share-12.09p
Cashflow per share-7.87p
Cash per share5.85p

Numis: value of Horizon Discovery becoming more visible

Horizon Discovery’s (HZD) gene-editing capabilities are coming to the fore following a progress announcement from the group, says Numis Securities.

Analyst Paul Cuddon retained his ‘buy’ recommendation and target price of 262p following an announcement detailing the progress of its gene and cell therapy platform in therapeutics.

‘Horizon is using its suite of gene-editing technologies to edit stem cells and immune cells and is working with three undisclosed companies in pre-clinical development that will generate more than $2 million in revenue in 2017,’ he said.

The group is also working on an off-the-shelf universal cell-therapy platform to treat cancer, immunology, metabolic, neurological and blood disorders.

‘With gene-therapy specialist Sangamo securing a collaboration agreement with Pfizer with a $70 million upfront, and up to $475 million in future milestones, the potential strategic value of Horizon’s gene-editing capability is becoming more apparent,’ said Cuddon.

The shares added 1.5p, or 0.8%, to 190p.

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Look up the shares

  • British American Tobacco PLC (BATS.L)
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  • Bellway PLC (BWY.L)
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  • Biffa PLC (BIFF.L)
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  • Legal & General Group PLC (LGEN.L)
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  • Horizon Discovery Group PLC (HZDH.L)
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