The Expert View: Centrica, ARM Holdings and Capita

Our daily round-up of analyst recommendations and commentary, featuring Centrica, ARM Holdings, Capita, Serco and BG Group.

Key stats
Market capitalisation	£17,990m
No. of shares out	5,196m
No. of shares floating	5,179m
No. of common shareholders	not stated
No. of employees	39432
Trading volume (10 day avg.)	8m
Turnover	£22,824m
Profit before tax	£442m
Earnings per share	8.50p
Cashflow per share	26.22p
Cash per share	10.55p

*Correct as at 5 Feb 2013

Centrica’s investor-pleasing arsenal is depleted

Pedestrian earnings growth, and an uninspiring plan ‘centred on acquisitions and with heightened reinvestment risk’ will constrain Centrica (CNA.L) shares, Bank of America Merrill Lynch analysts say, cutting their rating on the British Gas owner from ‘neutral’ to ‘underperform’.

After Centrica pulled out of plans to Build British nuclear power plants, saying it would return £500 million of surplus capital to its shareholders, the focus now shifts to a strategy day at the end of February, analyst Fraser McLaren says.

But it doesn’t look pretty. McLaren, who has a target price of 320p for the shares, continues: ‘Given persistent challenges in several markets and mixed success in delivering previous targets, we fear that the strategy message on 27th February could be underwhelming.

‘North America is likely to be a particular focus and there is a danger that utility investors could become disillusioned if upstream ambitions are enhanced. Centrica may have already used most of its investor-pleasing arsenal, and reinvestment risk could now dominate.’

Shares in the group closed at 348.3p on Tuesday, down 0.7p or 0.2%.

Key stats
Market capitalisation	£12,861m
No. of shares out	1,379m
No. of shares floating	1,369m
No. of common shareholders	not stated
No. of employees	2368
Trading volume (10 day avg.)	4m
Turnover	£492m
Profit before tax	£113m
Earnings per share	8.19p
Cashflow per share	9.14p
Cash per share	25.60p

*Correct as at 5 Feb 2013

Impressive ARM's still fully valued

Investec analyst Julian Yates says chipmaker ARM Holdings (ARM.L) has once again proved it is the standout stock in the tech sector by delivering a forecast-busting set of results.

Full-year revenues were up 17% year-on-year to £576.9 million. Costs ended up higher than Yates had expected, but this was because of bonus payments as a result of the stronger sales.

The analyst has put his target price under review in the wake of the results, but he retains his 'hold' recommendation for now on valuation grounds.

Paul Morland of Peel Hunt agreed, saying that although the group is ‘shooting out the lights’ its valuation again means it's only a 'hold' for him.

Shares in the group closed at 930p on Tuesday, up 38p or 4.3%.

Key stats
Market capitalisation	£5,151m
No. of shares out	654m
No. of shares floating	647m
No. of common shareholders	not stated
No. of employees	46500
Trading volume (10 day avg.)	1m
Turnover	£2,930m
Profit before tax	£238m
Earnings per share	39.07p
Cashflow per share	61.75p
Cash per share	12.15p

*Correct as at 5 Feb 2013

Buy Capita ahead of annual results, JPM urges

Now's the time to buy Capita (CPI.L) shares, JP Morgan analyst Robert Plant says, ahead of what he expects to be encouraging full-year results at the end of the month.

'We believe that Capita’s rating is ultimately determined by the direction of organic revenue growth and a possible improvement in growth could both lead to estimates being raised and a prei to earnings ratio (PER) re-rating,' he said.

'In particular, we believe that Capita is benefiting from a pick-up in UK public sector activity which we think will build all the way to the 2015 UK General Election.'

The shares used to trade at a PER of 24x, he noted, but this has fallen to 13.7x since organic growth started to decline. The group's annual results come out on 28 February.

Shares in the group closed at 784.9p on Tuesday, up 0.5p or 0.06%.

Key stats
Market capitalisation	£2,789m
No. of shares out	498m
No. of shares floating	485m
No. of common shareholders	not stated
No. of employees	76670
Trading volume (10 day avg.)	1m
Turnover	£4,646m
Profit before tax	£175m
Earnings per share	35.08p
Cashflow per share	52.23p
Cash per share	51.23p

*Correct as at 5 Feb 2013

Buying opportunity in Serco, Shore Capital says

The recent rough patch for Serco (SRP.L) presents investors with a buying opportunity, according to Shore Capital analyst Robin Speakman.

The analyst acknowledged that the US market remains a source of pain for the company, and margins are likely to remain flat this year. However, he said the shares trade at a discount to the group's rivals, and last year's contract win record of £5.6 billion offers grounds for optimism.

'We would observe that while the positives remain in more constant fashion, over the course of 2013, much of the negative headwinds are likely to ameliorate and fade, others such as cash and accounts presentation are within management’s power to challenge,' he said. 'We retain a BUY stance on the valuation opportunity.'

Shares in the group closed at 556.5p on Tuesday, up 3p or 0.5%.

Key stats
Market capitalisation	£38,795m
No. of shares out	3,402m
No. of shares floating	3,390m
No. of common shareholders	not stated
No. of employees	6625
Trading volume (10 day avg.)	7m
Turnover	13,431m USD
Profit before tax	2,700m USD
Earnings per share	0.79 USD
Cashflow per share	1.24 USD
Cash per share	0.68 USD

*Correct as at 5 Feb 2013

Charles Stanley backs BG Group

Investors should keep faith with oil explorer BG Group (BG.L), accoding to Charles Stanley analyst Jeremy Batstone-Carr, even though it has reduced its profit and production forecasts for the year ahead.

Fourth-quarter earnings of $1.03 billion were in line with estimates, up 3% year-on-year, but 2013 LNG profit guidance of $2.5-2.7 billion was below market expectations of $3.2-3.5 billion.

In October BG shocked investors with a reduced production profile for 2013, and the rerating of the shares since then strengthens the case for an 'accumulate' recommendation, Batstone-Carr said.

'with a focus on Upstream and LNG (ie. no refining business) and still a positive growth outlook, the share still deserves a higher rating to the other oil & gas majors,' he said.

Shares in the group closed at £10.81 on Tuesday, down 22.4p or 2%.