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The Expert View: Capita, M&S and Stagecoach

Our daily roundup of analyst commentary on shares, also including Sports Direct and Ocado.

by Daniel Grote on Dec 15, 2017 at 05:00

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Key stats
Market capitalisation£2,674m
No. of shares out667m
No. of shares floating661m
No. of common shareholdersnot stated
No. of employees74755
Trading volume (10 day avg.)3m
Turnover£4,898m
Profit before tax£641m
Earnings per share5.55p
Cashflow per share44.20p
Cash per share178.57p

‘Sell’ Capita as woes deepen

Shore Capital’s conviction in its ‘sell’ stance on Capita (CPI) has been reinforced by a subdued update from the troubled outsourcing group.

The shares tumbled 12.5% to 407.9p as the group warned the market for contracts was 'subdued' and flagged challenges for a number of its divisions.

The group warned of a 'higher level of contract and volume attrition' in its private sector partnerships business, while the end of two major software licences was likely to hit profits in its digital and software solutions division.

Performance improved in the public services partnerships division but the group flagged a £22 million contribution from the defence infrastructure organisation that will not recur next year, while a £9 million one-off supplier settlement in its IT services division also boosted the figures.

'We see little positive in Capita's full-year update this morning, with only 'thin' guidance for the likely performance of the group for 2018,' said Robin Speakman, analyst at Shore Capital.

'With a challenging environment still evident for Capita, in our opinion, we stick with a 'sell' stance.'

Key stats
Market capitalisation£5,050m
No. of shares out1,625m
No. of shares floating1,598m
No. of common shareholdersnot stated
No. of employees85209
Trading volume (10 day avg.)13m
Turnover£10,622m
Profit before tax£1,269m
Earnings per share7.18p
Cashflow per share42.54p
Cash per share29.73p

Jefferies: M&S survey offers food for thought

Jefferies has confidence that Marks and Spencer (MKS) is well positioned, despite the market’s jitters over the clothing and food retailer.

‘Marks and Spencer’s change in strategic direction, without giving many financial details, is causing uncertainty,’ said analyst Caroline Gulliver.

‘[The] share price has fallen 12% since early October highs in part due to concerns over management’s quest to tell the “unvarnished truth”. This led to acknowledgement that “food requires more work”.’

But the broker’s own analysis of customer perceptions of Marks and Spencer’s food offering showed a stronger rating than the major four supermarkets, with most thinking value and the shopping experience had improved over the last six months.

‘Whilst more can be done on availability, consistent prices, better value promotions and a wider range, Marks and Spencer’s innovative, own-label fresh food is still a favourite with UK consumers,’ she said.

Gulliver rates the company a ‘buy’ and has a 370p target price on the shares, which fell a penny to 310.1p yesterday.

Key stats
Market capitalisation£1,891m
No. of shares out542m
No. of shares floating195m
No. of common shareholdersnot stated
No. of employees17345
Trading volume (10 day avg.)1m
Turnover£3,245m
Profit before tax£245m
Earnings per share38.31p
Cashflow per share63.25p
Cash per share36.47p

Hargreaves berates Sports Direct’s lack of transparency

Hargreaves Lansdown is unimpressed by continued lack of transparency from Sports Direct (SPD), despite a 22.9% rise in underlying profits revealed by first-half results.

‘Sports Direct’s corporate governance practices continue to attract headlines for all the wrong reasons, with independent shareholders rejecting an £11m payment to Mike Ashley’s brother,’ said analyst Nicholas Hyett.

‘Unfortunately the lack of transparency also stretches to the “Selfridges of Sport” initiative. Mike Ashley has described trading at the new format stores as “spectacular”, but it’s difficult to see evidence of that in the numbers,’ he added.

‘Improved profits are being driven by cost cuts rather than sales growth – which is actually negative in the UK.’

Shares in Sports Direct fell 2.2% to 374.9p yesterday.

Key stats
Market capitalisation£968m
No. of shares out573m
No. of shares floating416m
No. of common shareholdersnot stated
No. of employees34000
Trading volume (10 day avg.)2m
Turnover£3,941m
Profit before tax£229m
Earnings per share5.52p
Cashflow per share31.33p
Cash per share54.62p

Stagecoach’s 7.1% yield compensates for risk

Liberum believes Stagecoach’s (SGC) 7.1% yield is more than compensating investors for the challenges facing the transport operator.

Analyst Gerald Khoo upped his target price from 170p to 185p and retained his ‘buy’ rating on the shares, which fell 1.7% to 166.6p.

Khoo acknowledged the short term challenges of weak demand in its bus division, subdued rail revenue growth and a tough environment for its US Megabus business. Over the longer term, regulatory pressures could hit its regional bus division.

But Khoo said there were signs of stabilisation and that investors were being compensated for the risks. ‘A 2018 dividend yield of 7.1% is the most immediate attraction in Stagecoach,’ he said.

‘We believe Stagecoach has the long-term earnings capacity to support not only its current dividend, but also modest growth.’

Key stats
Market capitalisation£2,235m
No. of shares out631m
No. of shares floating419m
No. of common shareholdersnot stated
No. of employees10930
Trading volume (10 day avg.)5m
Turnover£1,271m
Profit before tax£84m
Earnings per share1.96p
Cashflow per share11.90p
Cash per share7.70p

Ocado lacks drivers but not robots, says Numis

Driver shortages curbed sales growth at Ocado (OCDO) in the fourth quarter but prospects for the online grocer remain good as it looks for more supermarket clients following the recent contract win with Groupe Casino, says house broker Numis Securities.

Analysts Andrew Wade and Matthew Taylor maintained their ‘buy’ recommendation and 400p target price with choppy trading in the shares after the full-year trading update showed retail sales growth fell from 13.1% to 11.6% in the 14 weeks to 3 December.

Average orders increased 11.1% to 280,000, also down from 16%, while the average order size edged 0.3% higher to £106.1. The company blamed the slowdown on a shortage of drivers in London and the south-east.

‘We edge back our full-year revenue forecasts accordingly, and trim our FY17 ebitda [earnings before interest, tax, depreciation and amortisation] estimate by about £1 million to reflect the top-line shortfall,’ the analysts said, adding that they expected capacity constraints to continue to be a ‘headwind’ as a new customer fulfilment centre is built in Andover.

However, the construction of what will be the world’s biggest automated warehouse made the pair optimistic for Ocado’s prospects: ‘we continue to believe that Ocado is developing the most advanced and economic end-to-end platform for third party retailers – a view endorsed by the recent Group Casino deal – and expect Ocado to sign multiple deals in the coming years.

The shares closed 2p up at 343.6p. They have gained 36% in the past year, much of it since last month when the Group Casino deal was announced.

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Look up the shares

  • Capita PLC (CPI.L)
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  • Sports Direct International PLC (SPD.L)
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  • Stagecoach Group PLC (SGC.L)
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  • Marks and Spencer Group PLC (MKS.L)
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  • Ocado Group PLC (OCDO.L)
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