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The Expert View: Compass, Babcock & BT

Our round-up of analyst commentary on shares, including Kingfisher and BGEO.

by Michelle McGagh on Nov 23, 2016 at 05:01

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Key stats
Market capitalisation£21,821m
No. of shares out1,643m
No. of shares floating1,634m
No. of common shareholdersnot stated
No. of employees515864
Trading volume (10 day avg.)5m
Turnover£17,590m
Profit before tax£869m
Earnings per share52.16p
Cashflow per share74.61p
Cash per share17.17p

Compass points to growth slowdown, says Numis

Numis Securities expected a negative reaction to Compass (CPG) after the world’s largest catering group used its full-year results to warn of slower growth in the first half of its new financial year.

Analyst Wyn Ellis retained his ‘hold’ recommendation and share price target of £14.50 as the shares fell 4.6%, or 65p, to £13.26. Operating profits for the year to September came in at £1.445 billion, just short of forecasts of £1.448 billion and with signs of slowing organic growth.

Compass blamed ‘incredibly tough’ trading conditions in its remote sites business, which operates big worker accommodation camps for mining and oil groups.

‘With some evidence of slowdown in Q4, and Compass suggesting that full-year 2017 growth will be weighted to the second half, we expect an unenthusiastic response from the market,’ said Ellis.

‘However, Compass is a high quality business, with attractive cash-flow dynamics and a proven track record. Currency translation will be a substantial tailwind in full-year 2017 and while the full-year 2017 multiple of 18x is demanding, in our view, investors should consider increasing weightings if there is any material weakness in the shares.’

Key stats
Market capitalisation£4,779m
No. of shares out506m
No. of shares floating499m
No. of common shareholdersnot stated
No. of employees35050
Trading volume (10 day avg.)1m
Turnover£4,158m
Profit before tax£287m
Earnings per share56.84p
Cashflow per share97.75p
Cash per share36.87p

Liberum: Babcock too cheap to sell

Babcock International Group (BAB) is ‘too cheap to sell’ after a 14% slide in the engineering support services company’s shares since early September, said Liberum Capital.

Analyst Joe Brent retained his ‘hold’ recommendation and share price target of £10.50 after Babcock’s half-year results hit expectations but the shares fell 4.6% following recent profit warnings from fellow outsourcers Capita and Mitie.

Brent said the results showed the anticipated 3% boost to earnings from the weak pound. Underlying earnings before interest and taxation (EBIT) and profits before tax both rose 7% to £269.7 million and £228.4 million respectively. However, net debt of £1.229 billion was higher than he liked given the £261 million pension scheme deficit.

He added that defence and security was weaker than expected but there was improved outlook for nuclear new build in the support services division.

‘Current year 2017 price/earnings of 11.6x is too cheap to sell,’ he said. ‘2017 free cash-flow yield of 5.6% is attractive.’

The shares shed 46p to 945p.

Key stats
Market capitalisation£36,516m
No. of shares out9,957m
No. of shares floating8,293m
No. of common shareholdersnot stated
No. of employees102500
Trading volume (10 day avg.)24m
Turnover£18,909m
Profit before tax£2,588m
Earnings per share29.70p
Cashflow per share59.88p
Cash per share39.30p

Jefferies concerned about Amazon threat to BT

BT (BT) has tried to allay analyst fears that Amazon Prime could pick off the best programmes and undermine its expansion into broadcasting.

Jefferies analyst Jerry Dellis retained his ‘hold’ recommendation and share price target of 400p after a meeting with the company in which it refused to discuss its clash with regulator Ofcom over its wish for the group to spin off its infrastructure division Openreach.

‘With BT declining to comment on Ofcom/Openreach, [our] meeting concentrated on how consumer growth can be sustained,’ he said.

‘The Champions League auction was still a focus. UEFA hasn’t informed BT of auction structure/timing – early 2017 is assumed. [Chief executive of BT consumer John] Petter acknowledges the Amazon bid risk but sees the need to build a 24/7 schedule around core rights as an impediment. We see the Amazon Prime model as cherry-picking key content and that creating a 24/7 schedule is not necessary.’

BT shares added 4.9p or 1.3% to 366.5p.

Key stats
Market capitalisation£8,058m
No. of shares out2,244m
No. of shares floating2,226m
No. of common shareholdersnot stated
No. of employees74000
Trading volume (10 day avg.)10m
Turnover£10,441m
Profit before tax£412m
Earnings per share17.77p
Cashflow per share28.12p
Cash per share34.84p

Kingfisher turnaround won’t be easy, says Hargreaves Lansdown

B&Q owner Kingfisher (KGF) is being revamped under chief executive Veronique Laury but Hargreaves Lansdown has warned it won’t be plain sailing.

Third quarter results from the company showed positive momentum in the UK, especially around Screwfix, but sales in France are declining. Hargreaves analyst George Salmon said performance ‘continues to diverge’ between France and the UK, with the former ‘heading in the wrong direction’.

‘While the British and French businesses are similar, at present there is little cross-over in product range, meaning that the group isn’t taking advantage of its significant scale,’ he said. ‘Understandably…Laury is planning to change this, and is targeting efficiencies that will see a £500 million per annum uplift to profits by 2021.

‘However, it won’t be plain sailing from here. Previous Kingfisher bosses have tried and failed with similar plans, and just now trading conditions look challenging. UK builders have reported tougher conditions, and the French economic outlook is uncertain.’

The shares fell 11.7p or 3.2% to 358p.

Key stats
Market capitalisation£1,194m
No. of shares out39m
No. of shares floating37m
No. of common shareholdersnot stated
No. of employees18,045
Trading volume (10 day avg.)1m

Peel Hunt upgrades BGEO as bank holds investor day in Tbilisi

BGEO Group (BGEO), formerly Bank of Georgia, has been upgraded by Peel Hunt on the back of an ‘attractive valuation’ of the shares.

Analyst Stuart Duncan raised his recommendation from ‘hold’ to ‘add’ and placed his £26 share price target under review after the company held an investor day in Georgia’s capital Tbilisi a day after its third quarter (Q3) results.

The shares jumped 12% to £31.35.

‘BGEO delivered another positive set of results, with underlying Q3 profit before tax up 19% year-on-year,’ he said.

Duncan expected the company to reiterate its medium-term targets including delivering on the ‘4x20’ pledge to generate a 20% return on equity in banking, 20% growth in retail loans, a 20% internal rate of return and a maximum 20% profit contribution from the investment business.

He added: ‘The shares trade at 2017 estimated price/earnings ratio of 7.8x and 2017 estimated price/net asset value of 1.2x. We move our recommendation to “add” from “hold” given the attractive valuation and the level of return on equity generated and targeted.’

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  • Compass Group PLC (CPG.L)
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  • Babcock International Group PLC (BAB.L)
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  • BT Group PLC (BT.L)
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  • Kingfisher PLC (KGF.L)
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  • BGEO Group PLC (BGEO.L)
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