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The Expert View: Centrica, AO and Severn Trent

Our daily roundup of analyst commentary on shares, also including Babcock and Ferguson.

by Michelle McGagh on Nov 24, 2017 at 05:00

If you would like to receive news alerts on any of the stocks mentioned in The Expert View, click on the star icons below to add them to your favourites.
Key stats
Market capitalisation£7,725m
No. of shares out5,596m
No. of shares floating5,585m
No. of common shareholdersnot stated
No. of employees38278
Trading volume (10 day avg.)24m
Profit before tax£2,402m
Earnings per share31.19p
Cashflow per share48.18p
Cash per share34.51p

Centrica divi growth unlikely, says Jefferies

Jefferies believes dividend growth is off the table for Centrica (CNA), following a ‘tough year’ for the owner of British Gas.

Analyst Ahmed Farman retained his ‘hold’ recommendation and target price of 190p on the stock, which was trading down 15.6%, or 25.5p, at 138.1p at the time of writing. Markets were upset by news that the company had lost 823,000 domestic UK customer accounts between June and October after British Gas raised standard electricity prices by 12.5%.

The company warned that full year earnings per share would also fall short of expectations as a result of problems in its North America division.

‘2017 is on track to be another tough year for Centrica,’ said Farman. ‘The company has indicated that full-year 2017 earnings per share would be 12.5p, a substantial 19% miss at consensus, due to tough operating conditions.

‘Although there appears to be a commitment to pay 12p dividend per share - similar to 2016 - the negative trajectory in earnings would disappoint many,’ he said.

He added that dividend growth looked unlikely - even though the full year dividend is underpinned. This is because earnings-per-share is expected to be 26% lower year-on-year.

‘This suggests to us that dividend growth is unlikely in 2017, and it likely to be in line with 2016 dividend of 12p. This means the stock currently trades on 7.5% dividend yield.’

Key stats
Market capitalisation£556m
No. of shares out459m
No. of shares floating208m
No. of common shareholdersnot stated
No. of employees2506
Trading volume (10 day avg.)1m
Profit before tax£-6m
Earnings per share-1.57p
Cashflow per share-0.33p
Cash per share6.98p

Peel Hunt welcomes AO brand plan

Online white goods retailer AO (AO) has managed to grow its market share in spite of tough trading conditions which shows the company ‘is doing something right’, according to Peel Hunt.

Analyst James Lockyer retained his ‘buy’ recommendation and target price of 145p on the company, which was trading up 3.6%, or 4.3p, at 121.5p at the time of writing.

‘AO’s ability to maintain or grow its market share while still holding or increasing its margin during a tough consumer backdrop implies that it is doing something right,’ he said.

‘However, communication and brand awareness are still AO’s overriding issues. While a big TV campaign is logically sound, with these specific types of big ticket purchases, AO should attempt to be a bigger part of a customer’s overall discovery process, scattered across the internet, high street and consumer magazines as well as TV.’

Lockyer added that he is looking forward to hearing more about AO’s new brand and communications plan.

Key stats
Market capitalisation£5,055m
No. of shares out236m
No. of shares floating235m
No. of common shareholdersnot stated
No. of employees7634
Trading volume (10 day avg.)1m
Profit before tax£845m
Earnings per share139.49p
Cashflow per share278.43p
Cash per share18.60p

Severn Trent delivering for investors, says Hargreaves

Severn Trent (SVT) is on track to reap the rewards of its decision to improving customer service, according to Hargreaves Lansdown.

The water supplier reported full-year profit before interest and tax of £287.8 million, up 4.4% compared to last year. The interim dividend was raised to 6.2% to 34.63p.

At the time of writing shares were down 0.94%, or 20p, at £21.40.

Analyst Nicholas Hyett said Severn Trent’s efforts to improve customer services is delivering results.

‘In the monopolistic world of water suppliers, improved service can’t be recognised by new customers. Instead the government offers bonuses for hitting targets, and Severn Trent’s efforts look set to be rewarded this year,’ he said.

‘It’s a second half of good news in quick succession, coming close on the heels of the decision to upgrade the dividend policy to RPI plus 4% increases. That has started delivering for investors.’

Key stats
Market capitalisation£3,454m
No. of shares out506m
No. of shares floating498m
No. of common shareholdersnot stated
No. of employees35750
Trading volume (10 day avg.)3m
Profit before tax£443m
Earnings per share61.71p
Cashflow per share103.03p
Cash per share37.86p

Babcock attractively valued, says Shore Capital

The current valuation of engineering support services company Babcock (BAB) does not take into account a number of long-term tailwinds, according to Shore Capital.

Analyst Robin Speakman retained his ‘buy’ recommendation on the stock, which was trading down 3%, or 21p, at 682.5p at the time of writing.

He believes the company looks cheaply valued, given its ‘sustained strong performance in tough markets’ and balance sheet strength.

‘The business appears stable to us, with positive long-term industry trend tailwinds delivering mid-single digit underlying growth,’ he said.

‘With material share price underperformance afflicting Babcock, the shares trade on a full-year 2019 price-to-earnings ratio of 7.9x with a free cashflow yield of 10%.’

Numis upgrades ‘safe haven’ Ferguson

Plumbing specialist Ferguson (FERG), previously known as Wolseley, is Numis’s top pick in the plumbing sector.

Analyst Howard Seymour retained his ‘hold’ recommendation and raised his target price to £57.20 on the stock, which was trading up 1.6%, or 85p, at £53.55 at the time of writing.

He has made a 10% upwards revision to his target price on the back of a forecasted 4% earnings increase. This accounts for the share buyback that was announced in its full-year results back in October and a strengthened balance sheet following the Stark disposal.

‘This provides Ferguson with serious firepower for both acquisitive growth and further share buybacks,’ he said.

‘We believe underlying trading is sound and Ferguson’s low UK exposure and balance sheet strength make it a safe haven. The target price is not enough to move from our “hold” rating but does underpin our view that Ferguson remains the preferred option to Travis Perkins in the context of the two largest companies in the sector.’

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Look up the shares

  • AO World PLC (AO.L)
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  • Centrica PLC (CNA.L)
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  • Severn Trent PLC (SVT.L)
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  • Babcock International Group PLC (BAB.L)
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  • Ferguson Plc (FERG.L)
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