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The Expert View: Burberry, Drax and Tullow Oil
Our daily roundup of analyst commentary on shares, also including Restaurant Group and Moneysupermarket.
by Michelle McGagh on Jan 19, 2016 at 05:00
Burberry under pressure after poor Asia sales
Forecasts have been downgraded for luxury retailer Burberry (BRBY) over concerns about sales in Asia and the US.
Liberum analyst Tom Gadsby retained his ‘sell’ recommendation and cut the target price from £10.50 to 925p. The shares were broadly flat at £11.22 yesterday.
‘We downgrade our low-end forecasts on concerns that headwinds will persist for Burberry,’ he said.
‘Despite a Q3 pick-up in mainland China, retail sales in Asia remain resolutely negative and flat in the US and we believe that wholesale orders are under pressure. Burberry has cut costs to meet 2016 forecasts but we see limited scope to continue this without damaging the business.
‘We cut 2017 earnings per share by 5.3% and 2018 by 6.5%.’
Drax share volatility expected to continue
Share price volatility continues at clean energy provider Drax (DRX) thanks to three factors.
Jefferies analyst Peter Atherton initiated coverage of the company with a ‘hold’ recommendation and target price of 210p. The shares fell 2% to 207.6p yesterday.
‘Drax’s share price has been hammered in recent times – falling 72% since January 2014,’ he said. ‘In our view, there are three principle reasons for this performance’ the sharp fall in UK power prices, the collapse in clean dark spreads [returns over fuel costs], and disappointment over policy changes for the support of biomass.
‘Given the dramatic fall in the share price and earnings forecasts, both are now highly leveraged to three key drivers: EU contract for difference (CfD) approval, UK power market, and UK government decisions on biomass support.’
Although Atherton expects the EU to approve the CfD pricing scheme for its third turbine he is more concerned about the UK power market and the government plans for biomass.
‘Without a sustained rise in UK gas prices the UK power price looks set to remain moribund especially as renewables continue to take market shares. However, an accelerated closure of coal generation ahead of next winter is one potential trigger that could push price up,’ he said.
A buying opportunity at Moneysupermarket
The market has overreacted to Moneysupermarket.com (MONY) full-year results, creating a buying opportunity at the comparison site.
Shore Capital analyst Roddy Davidson retained his ‘buy’ recommendation but does not have a target price on the stock. The shares tumbled 11% on Friday following the results, which showed weak insurance sales, but mounted a small recovery yesterday, up 2% at 320p.
‘We believe it is important to bear in mind the better than expected revenue and profit outturn for full-year 2015… and the fact that our headline expectations for full year 2016 have not changed,’ he said.
‘Admittedly, the mix of revenue sources looks likely to be different from previously envisaged, but we regard the group’s resilience even when one area of its business slows down as testament to the depth of its inventory and its ability to consistently deliver material savings to consumers across a range of products and services.’
He added that there was scope for expansion into other markets and ‘a substantial reduction in its founder’s stake (now 13%) makes an external approach more likely’.
‘Drawing these threads together, we view Friday’s share price reaction as anomalous and as having created an attractive buying opportunity,’ said Davidson.
Restaurant Group: worst end to the year since 2010
Restaurant Group (RTN), which owns Garfunkel’s and Frankie & Benny’s, has had its most disappointing end to the year since 2010.
Deutsche Bank analyst Geof Collyer retained his ‘buy’ recommendation but reduced the target price from 785p to 690p. The shares are down by more than 19% since last Thursday’s update, and were trading at 515.4p yesterday.
Collyer noted the good news in the full-year 2015 update as profit before tax remaining in the guidance range but like-for-like for the past seven weeks were down compared to 2014 ‘making the end of full year 2015 the worst closing period since 2010’.
‘The market had been expecting a better end to the year, driven by the group’s significant exposure to the cinema roster, especially the new Star Wars film,’ said Collyer.
‘Recent expectations were further heightened by the latest Barclaycard data suggestion restaurant spend was +13% for December – although that did suggest that pubs had outperformed restaurants.’
He added: ‘We have reduced the multiple used for deriving our target price from 16x to 15x to reflect the lower growth from the less ambitious rollout programme. However, there remains significant upside to our new target price and we remain buyers.’
Tullow Oil well positioned as oil prices fall
Financial flexibility means independent oil company Tullow Oil (TLW) is ‘well positioned’ despite the fall in oil prices.
Barclays analyst James Hosie retained his ‘overweight’ recommendation and target price of 300p on the shares, which fell 3.1% to 126.2p yesterday.
‘Our main conclusion from last week’s trading and operational update is that the decisive action taken to reduce costs and expenditure in 2015 leaves Tullow relatively well positioned to operate through a more prolonged downturn in oil prices,’ he said.
‘Although net debt is still forecast to rise during 2016, $1.9 billion (£1.3 billion) of financial headroom, substantial hedging and continued efforts to reduce expenditure provide reassurance that sufficient financial flexibility is in place.
‘That said, oil price sentiment is likely to continue driving near-term stock price performance. Beyond the oil price, the two key concerns for Tullow in 2016 are timely completion of the TEN development and retailing the support of its lending syndicate. These two issues are interlinked to a degree, and we believe steady progress on both can drive a rerating of the stock.’
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Look up the shares
- Drax Group PLC (DRX.L)
- Burberry Group PLC (BRBY.L)
- Moneysupermarket.Com Group PLC (MONY.L)
- Restaurant Group PLC (RTN.L)
- Tullow Oil PLC (TLW.L)