Citywire printed articles sponsored by:
View the rest of this gallery online at http://citywire.co.uk/money/gallery/a876054
The Expert View: Diageo, Hiscox and Safestyle
Our daily roundup of analyst commentary on shares, also including JD Wetherspoon.
by Michelle McGagh on Jan 26, 2016 at 05:00
If you would like to receive news alerts on any of the stocks mentioned, click on the star icons below to add them to your favourites.
Diageo: behind the scenes changes
Beverage company Diageo (DGE) is ‘getting its house in order’ and that should translate into operational wins.
Investec analyst Alex Smith retained his ‘buy’ recommendation and increased the target price from £21.00 to £22.30. The shares fell 1.2% to £18.36 yesterday.
‘While we expect few surprises in the H1 results, we look for signals that the changes taking place behind the scenes at Diageo will soon translate into better operational results,’ he said.
‘We back management to build on improving execution in the US, while emerging markets should offer greater visibility on conclusion of the painful destocking process. Longer term, as global leader of the premiumising and aspirational driven international spirits industry, Diageo is well positioned to benefit from nascent emerging market penetration rates.’
Hiscox downgraded on valuation concerns
Specialist insurer Hiscox (HSX) has been downgraded despite being expected to deliver strong premium growth.
Peel Hunt analyst Andreas Vanembden downgraded his recommendation from ‘hold’ to ‘reduce’ but increased the target price from 785p to 830p. The shares were flat at 958p yesterday.
‘We expect that Hiscox will deliver strong premium growth at attractive returns for 2015, driven by a balanced and diversified low risk reinsurance business model,’ he said.
‘Hiscox is gradually expanding across retail and direct distribution channels underpinned by US growth, helping absorb the effects of a soft cycle,’ he added, but cautioned the shares looked expensive.
‘The current valuation multiple on the stock assumes an ongoing benign claims environment and sustainable reserve releases, both of which we feel are unlikely,’ he said.
Safestyle marks strong start to 2016
Double-glazing companySafestyle (SFES) has had a strong start to 2016 and the valuation is ‘compelling’.Liberum analyst Charlie Campbell retained his ‘buy’ recommendation and target price of 280p on the shares, which rose 3.1% to 245.3p yesterday.
‘Safestyle’s full year trading update has revealed sales up 9.5% and profit before tax up 7% in line with expectations,’ he said.
‘The group has continued to significantly outperform the industry with volume growth over 10% stronger. Sales growth accelerated from 7% in H1 to 12% in H2 and strong momentum has carried into January. We find valuation compelling, especially the free cash flow yield of over 8.5% and a dividend yield of 4.7%, which could be augmented by capital returns over the coming years.’
JD Wetherspoon margins a concern
Discount pub chain JD Wetherspoon (JDW) is suffering another margin-driven downgrade following an interim management statement.
Deutsche Bank analyst Geof Collyer retained his ‘hold’ recommendation and target price of 585p on the stock following second quarter results. The shares rose 1.5% to 635p yesterday.
‘Over the past 15 years, JD Wetherspoon’s earnings margin will have fallen by 5.6%,’ he said.
‘Some of this has been driven by the significant movement in the sales mix. Lower gross margin food sales have growth at twice the pace of drink sales, while high margin machine income has dropped from 4.8% to 2.9% of the mix.
‘Higher wage costs due to the shifting sales mix as well as JD Wetherspoon’s own staffing strategy have taken 0.8% off the margin, with repairs accounting for a further 0.2% reduction.’
Collyer added the pub chain’s £450 million investment in development over the past four years, with forecast earnings for 2016 lower than those in 2012, was more worrying. ‘This, far more than the margin issue, is what troubles us and, we suspect, the investing community,’ he said.