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The Expert View: Centrica, WPP and IWG

Our daily roundup of analyst commentary on shares, also including Melrose and Diploma.

by Michelle McGagh on May 15, 2018 at 05:00

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Key stats
Market capitalisation£8,331m
No. of shares out5,609m
No. of shares floating5,597m
No. of common shareholdersnot stated
No. of employees34901
Trading volume (10 day avg.)23m
Profit before tax£2,127m
Earnings per share5.97p
Cashflow per share22.16p
Cash per share47.66p

Hargreaves: fears of divi cut at Centrica persist

A trading update from British Gas-owner Centrica (CNA) shows it is sticking to its targets but markets are still fearful of a dividend cut, says Hargreaves Lansdown.

A trading update ahead of its annual general meeting shows Centrica maintaining guidance for the year ahead but analyst George Salmon said so far this year it has been ‘a case of one step forward, one step back’.

‘The Beast from the East provided a much-needed boost to the group,’ he said. ‘However, some of the extra volumes were offset by customer unrest following a higher number of boiler breakdowns. All the while, intense competition means account numbers continue to fall.’

He said Centrica’s holding of the dividend at 12p would ‘boost confidence to a degree’ and the ‘prospect of an 8%-plus yield will be attractive to some’.

‘But the market is wary the pressures on the group could mean a repeat of recent dividend cuts,’ said Salmon.

Key stats
Market capitalisation£16,446m
No. of shares out1,265m
No. of shares floating1,221m
No. of common shareholdersnot stated
No. of employees134413
Trading volume (10 day avg.)5m
Profit before tax£2,552m
Earnings per share126.24p
Cashflow per share169.96p
Cash per share188.31p

WPP may not look far in search for new boss, says Liberum

Advertising giant WPP (WPP) is in the market for a new chief executive and Liberum believes an internal candidate could be the best bet.

Analyst Ian Whittaker retained his ‘buy’ recommendation and target price of £17.50 on the shares, which fell 12p to £13 yesterday.

Several potential successors to Martin Sorrell have been mentioned, including Unilever’s Keith Weed and ex-AOL chief executive Tim Armstrong.

‘We also think Jerr Buhlmann at Dentsu Anegis should be added to the list,’ said Whittaker. ‘However, we think there may be an argument for saying that WPP should go down the internal route to minimise the risk of disruption.

‘In that case, [chief operating officer] Mark Read would appear the favoured candidate.’

Whittaker added that there was also speculation that Sorrell is interested in being involved in acquiring WPP’s market research division Kantar ‘and we think a tie-up with private equity is the most likely option if he does make this step’.

Key stats
Market capitalisation£2,820m
No. of shares out911m
No. of shares floating676m
No. of common shareholdersnot stated
No. of employees8788
Trading volume (10 day avg.)3m
Profit before tax£383m
Earnings per share12.31p
Cashflow per share35.30p
Cash per share6.04p

Peel Hunt upgrades IWG on takeover potential

Peel Hunt has upgraded IWG (IWG) on hopes of a bid war for the serviced office provider.

Analyst Andrew Shepherd-Barron upgraded his recommendation from ‘hold’ to ‘buy’ and increased the target price from 260p to 300p after three rival bidders emerged with takeover approaches. The shares jumped 23% to 309.3p on the news.

US property and buyout firms Starwood Capital and Lone Star made approaches for the business, alongside UK private equity investors TDR Capital.

That follows the collapse of takeover talks with Canadian investors Onex and Brookfield Asset Management in February.

Shepherd-Barron said the new interest ‘suggests much greater scope for competitive tension than the December 2017 proposal, and we now see IWG’s going private as likely’.

‘IWG is back in play,’ said Shepherd-Barron. ‘Approaches from multiple parties suggest that this time IWG is going private, ending 17 years of chequered experience on the stock market. Much depends on the attitudes of founder Mark Dixon and the board, but with a competitive auction in sight, we see a 320p-350p exit price as achievable.’

Key stats
Market capitalisation£2,298m
No. of shares out995m
No. of shares floating954m
No. of common shareholdersnot stated
No. of employees8707
Trading volume (10 day avg.)4m
Profit before tax£55m
Earnings per share0.73p
Cashflow per share2.29p
Cash per share7.08p

Melrose-GKN: upside but patience requires, says Numis

Melrose’s (MRO) £8 billion takeover of GKN offers ‘attractive value creation’ but investors will need to be patient, says Numis.

Analyst David Larkam retained his ‘buy’ recommendation and target price of 280p on Melrose shares, which edged 2p lower to 231.2p yesterday.

‘We maintain our view that there is significant margin potential within the GKN businesses and some easy wins available,’ he said. ‘Key will be turning around the loss-making US operations.’

He said there was ‘attractive upside’ but added that investors ‘should be cognisant of the complexity and hence longer time frame than recent deals, and the possibility that, if either of the key businesses remains listed rather than sold, the disposal premium will be defaulted’.

Key stats
Market capitalisation£1,392m
No. of shares out113m
No. of shares floating111m
No. of common shareholdersnot stated
No. of employees1728
Trading volume (10 day avg.)m
Profit before tax£84m
Earnings per share41.99p
Cashflow per share55.86p
Cash per share19.69p

Diploma growth outlook strong, says Jefferies

Growth at industrial machinery group Diploma (DPLM) remains strong and mergers and acquisitions (M&A) present upside, according to Jefferies.

Analyst Will Kirkness retained his ‘buy’ recommendation and target price of £13.20 on the shares following interim results that were in line with estimates. The shares fell 1.7% to £12.25 yesterday.

‘Interim earnings are understandably in line given the pre-close, although margins are a touch better than guided,’ he said.

‘Encouragingly, the outlook for growth remains strong, with margins well underpinned as price increases appear to be sticking, which should continue to expose the operating leverage.’

He added that ‘confidence around M&A conversion has increased and represents the main source of upside risk to estimates in the near term’.

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  • Centrica PLC (CNA.L)
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  • Diploma PLC (DPLM.L)
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  • IWG Plc (IWG.L)
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  • Melrose Industries PLC (MRON.L)
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