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The Expert View: Capita, Rolls-Royce and Serco

Our daily roundup of analyst commentary on shares, also including Restaurant Group.

by Michelle McGagh on Mar 08, 2018 at 15:37

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Key stats
Market capitalisation£1,043m
No. of shares out667m
No. of shares floating661m
No. of common shareholdersnot stated
No. of employees74755
Trading volume (10 day avg.)6m
Profit before tax£641m
Earnings per share5.55p
Cashflow per share44.20p
Cash per share178.57p

Shore Capital ‘unenthusiastically’ upgrades Capita

Shore Capital has upgraded outsourcing giant Capita (CPI) but with ‘no great enthusiasm’ on the back of share price falls.

Analyst Robin Speakman upgraded his recommendation from ‘sell’ to ‘hold’ on the stock.

Speakman said he was ‘fully behind’ the restructuring plan but fears ‘the group’s complexity and past growth by acquisition strategy hides myriad issues that may cost more and take longer to resolve than can yet be judged with any great visibility’.

‘We accept that long term value may emerge over the next few years with volatility likely in the short term,’ said Speakman. ‘We also feel investors still holding the shares are likely taking such a long term view, those with a mind to sell have probably done so by now.’

Key stats
Market capitalisation£17,112m
No. of shares out1,841m
No. of shares floating1,829m
No. of common shareholdersnot stated
No. of employees49700
Trading volume (10 day avg.)4m
Profit before tax£2,143m
Earnings per share-220.09p
Cashflow per share-174.78p
Cash per share149.01p

Hargreaves predicts increased divis at Rolls-Royce

Rolls-Royce (RR) is succeeding in its turnaround plan and Hargreaves Lansdown said shareholder returns look much improved.

Full-year results from the aircraft engineer came in ahead of expectations, with a final dividend held at 7.1p to give a fill year payout of 11.7p.

Analyst George Salmon said the numbers showed the turnaround strategy was working and gave credibility to the aim of increasing free cashflow from just £100 million last year to £1 billion by 2020.

‘Overall these results are good,’ he said. ‘Testing on the next generation UltraFan engines is going well, cost savings have come in at the top end of guidance and there’s extra efficiencies on offer from simplifying the business too.

‘Add in the £500 million or so likely to come in from the sale of the L’Orange fuel injection business, and it’s no longer panic stations on the dividend. Indeed, the chances of Rolls-Royce meaningfully increasing its returns to shareholders in the years to come look much better now.’

Key stats
Market capitalisation£1,007m
No. of shares out1,099m
No. of shares floating1,078m
No. of common shareholdersnot stated
No. of employees43176
Trading volume (10 day avg.)4m
Profit before tax£72m
Earnings per share-0.02p
Cashflow per share4.61p
Cash per share10.20p

Serco to reinstate divi next year, says Jefferies

Jefferies is relying on Serco’s (SRP) Americas business to restore growth and prompt a dividend reinstatement at the outsourcing group.

Analyst Kean Marden retained his ‘buy’ recommendation but reduced the target price from 168p to 123p on the shares.

‘After assessing Serco’s current bid pipeline and recent investments, we believe the Americas has the potential to offset lacklustre UK momentum and restore the group to modest organic revenue growth in full year 2019,’ he said.

‘We are less concerned with the recent bid pipeline decline as US bid processes tend to be swift and investment in local management and acquisitions should assist replenishment.’

Marden also predicted a return to positive free cashflow in 2019 that would enable the dividend to be restored.

‘Serco will return to a modestly positive free cashflow position in full-year 2019, albeit partially assisted by a low cash tax rate as UK losses are utilised,’ he said.

‘This is particularly important as positive free cahsflow is one of the necessary conditions for management to reinstate the dividend and we forecast a token 0.5p final payment in 2019.’

Key stats
Market capitalisation£525m
No. of shares out201m
No. of shares floating199m
No. of common shareholdersnot stated
No. of employees15570
Trading volume (10 day avg.)1m
Profit before tax£121m
Earnings per share-20.06p
Cashflow per share0.82p
Cash per share4.76p

Liberum: Restaurant Group ‘severely undervalued’

Restaurant Group (RTN) is in a better position than last year and although it has further to go, Liberum believes it is ‘severely undervalued’.

Analyst Wayne Brown retained his ‘buy’ recommendation and target price of 430p on the owner of Frankie & Benny’s and Chiquito restaurant chains.

‘The scale of the heavy-lifting in 2017 should not be underestimated,’ he said. ‘Restaurant Group is in a substantially better position now than this time last year. The fact full-year 2017 has come in marginally ahead of expectations and full-year dividend maintained is testament to management’s decisive actions.’

He said there was more investment to come in technology, site refresh and increased openings and the ‘market backdrop remains tough and given the timing of the price investments, full-year 2018 will have a second half bias’.

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  • Capita PLC (CPI.L)
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  • Rolls-Royce Holdings PLC (RR.L)
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  • Serco Group PLC (SRP.L)
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  • Restaurant Group PLC (RTN.L)
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