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The Expert View: Centrica, HSBC and Go-Ahead
Our daily roundup of analyst commentary on shares, also including William Hill and Lancashire.
by Michelle McGagh on Feb 19, 2016 at 05:00
Centrica has divi covered due to strong cash flow
British Gas owner Centrica (CNA) is expected to weather low commodity prices thanks to its healthy operating cash flow.
Jefferies analyst Peter Atherton retained his ‘buy’ recommendation and target price of 250p. The shares rose 6.9% to 207.4p yesterday.
‘Full-year 2015 results in-line with expectations with strong operating cash flow generation. [The] announcement suggests operating cash flow for 2016/18 will remain in the c.£2 billion range even with current low commodity prices,’ he said.
While the full-year dividend is down on the previous year, payouts are now covered 1.4 times.
‘The key takeaway from the 2015 results is that the dividend will remain covered by the operating cash flow even at current low commodity prices,’ said Atherton.
‘The main threat to this remains the outcome of the ongoing Competition and Markets Authority energy market investigation, with provisional results in March 2016.’
Go-Ahead hits a bump in the road
Caution abounds around train and bus operator Go Ahead (GOG) as trading remains tough in the bus division.
Liberum analyst Gerald Khoo retained his ‘hold’ recommendation and target price of £27.50 on the shares, which jumped 6% to £23.84 yesterday.
‘The results were broadly in line with our forecasts, although somewhat flattered by the reversal of a past impairment in the rail division,’ he said.
‘Trading conditions in bus appear to remain tough, with headwinds from demand in the regions and roadworks/congestion in London and Oxford. Management’s full-year expectations are unchanged, which should see consensus estimates underpinned.
‘We remain cautious on the outlook and recommendation remains “hold”.’
HSBC: forecasts reduced ahead of results
HSBC (HSBA) is set to deliver its results on 22 February and Deutsche Bank analyst David Lock still has some concerns.
Lock retained his ‘hold’ recommendation and reduced the target price from 580p to 500p. The shares fell 1.8% to 448.9p yesterday.
‘We forecast stated profit before tax for the quarter of $1.9 billion and adjusted profit before tax of $3.1 billion with $80 million of UK customer redress and $1.1. billion of restructuring and related costs,’ he said.
‘Key issues for HSBC remain the outlook for revenues amidst a more difficult market environment , cost reductions – we remain cautious given past performance and potential revenue offset – and capital progression.
‘We have rebuilt our HSBC model, which has triggered material negative changes to forecasts.’
He added that key upside risks include ‘improvement in emerging markets outlook, lower-than-expect loan losses, better-than-expected outcomes for regulation, [and] lower costs’ while key downside risks are ‘regulatory change, legacy liabilities, and a slowdown in emerging markets’.
Lancashire shares undervalued
Lancashire (LRE), the specialist insurer that focuses on aviation, marine and terrorism risk, has reported ‘remarkable’ performance despite disappointment from some about the lack of special dividend.
Shore Capital analyst Eamonn Flanagan reiterated his ‘buy’ recommendation but does not have a target price on the shares, which fell 12p to 617p yesterday.
‘Lancashire reported 2015 results which were comfortably ahead of both our and the market’s expectations in respect of profits and net asset value,’ he said. ‘However, there appeared to be some in the market that had expected another special dividend despite pretty clear indications from the group that this was unlikely… the overall performance of Lancashire in 2015 was quite remarkable, in our view.’
Flanagan said the strength of the firm’s underwriting and capital discipline made it a target for ‘corporate predators’ and the shares were undervalued.
‘Trading at c.1.8x our 2016 net tangible asset value of 355p with a c.7.8 % forward yield we view the shares as undervalued,’ he said.
William Hill to pick up momentum in 2016
Bookmaker William Hill (WMH) is expected to restore momentum this year after a period of suffering.
Numis analyst Ivor Jones retained his ‘add’ recommendation and target price of 425p on the shares, which dipped 1.4% to 377.6p yesterday.
‘It is a good job, in our view, that William Hill made a fairly full trading statement on 14 January. This gave it the opportunity to get into the public domain some management changes and an acknowledgement that some key product launches had not gone to plan,’ he said.
‘As a result, the prelims next week should give management a platform from which to deliver a positive forward-looking message.’
Jones added: ‘We believe that momentum will be restored in 2016 after a period of suffering from self-inflicted wounds as well as tough changes to regulation and duty. However, it may take a while to convince investors that the management team is stable, the product is competitive and the Australian business is finally on the right track.’
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Look up the shares
- Centrica PLC (CNA.L)
- William Hill PLC (WMH.L)
- Go-Ahead Group PLC (GOG.L)
- Lancashire Holdings Ltd (LRE.L)
- HSBC Holdings PLC (HSBA.L)