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The Expert View: FirstGroup, Lloyds and Just Eat

Our daily roundup of analyst commentary on shares, also including Barratt Developments and Bunzl.

by Michelle McGagh on Feb 22, 2018 at 05:00

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Key stats
Market capitalisation£1,028m
No. of shares out1,209m
No. of shares floating1,182m
No. of common shareholdersnot stated
No. of employees100891
Trading volume (10 day avg.)2m
Profit before tax£721m
Earnings per share9.23p
Cashflow per share43.51p
Cash per share33.20p

FirstGroup will shake ‘distressed’ label, says Shore Capital

Bus and train operator FirstGroup’s (FGP) position as a ‘distressed’ stock is unlikely to last as it refinances its bond debt, says Shore Capital.

Analyst Martin Brown retained his ‘buy’ recommendation despite FirstGroup trading behind expectations as it has refinanced $275 million (£197 million) of debt, saving c.£14 million a year in interest. The shares tumbled 12.1% to 84.4p yesterday.

‘Prior to any changes to our forecasts, FirstGroup is trading on a March 2018 price/earnings of 7.4x... importantly net free cashflow yield is forecast to rise to 11.4% in March 2019,’ he said.

‘FirstGroup continues to trade as a distressed stock, with cash generation now kicking in, the bond refinancing underway and a likely imminent return to the dividend list, the current valuation is unlikely to last for long.’

Key stats
Market capitalisation£50,481m
No. of shares out72,151m
No. of shares floating71,856m
No. of common shareholdersnot stated
No. of employees70255
Trading volume (10 day avg.)155m
Profit before tax£11,821m
Earnings per share2.91p
Cashflow per share6.74p
Cash per share103.78p

Lloyds results positive but economic concerns remain, says Hargreaves

Lloyds (LLOY) full-year results are positive, with the bank planning a push into the pension market but Hargreaves Lansdown said it is still at risk from a domestic shock.

The bank posted an 8% rise in underlying profits to £8.4 billion in 2017 despite an extra £600 million of payment protection insurance (PPI) compensation costs. It also used its full-year results to unveil a three-year strategy, including expansion into financial planning and retirement markets, targeting one million new pension customers by 2020.

Analyst Laith Khalaf said there ‘was a lot to like’ in the numbers ‘with profits rising, costs under control, and prodigious amounts of cash being thrown off to shareholders’.

However, the bank will have to ‘sharpen its toolkit’ if it wants to be a serious contender in the pension market and Khalaf expects Scottish Widows to play a ‘pivotal’ role in its pension expansion.

The biggest risk to Lloyds is a change in the benign economic environment, said Khalaf.

‘A shock to the domestic economy would be keenly felt by the bank,’ he said. ‘However, the combination of the dividend and the new share buyback scheme means shareholders are getting a pretty tasty 6% return on their investment, which offers some compensation for the chance that Brexit may unfold in a messy manner.’

The shares rose 2.8% to 69.7p yesterday.

Key stats
Market capitalisation£5,969m
No. of shares out680m
No. of shares floating586m
No. of common shareholdersnot stated
No. of employees1621
Trading volume (10 day avg.)3m
Profit before tax£112m
Earnings per share10.55p
Cashflow per share14.08p
Cash per share19.25p

Peel Hunt: Just Eat no longer just a takeaway retailer

Online takeaway service Just Eat (JE) will continue its upwards trajectory as it gains market share and monetises new parts of the business, says Peel Hunt.

Analyst James Lockyer retained his ‘buy’ recommendation and increased the target price from 895p to £11.99. The shares were trading at 878.8p yesterday.

‘Given Just Eat’s strong performance to date, continual market share gains as the market moves online, and the company’s potential to monetise its data and buyer power position, we increase our target price,’ he said.

Lockyer said Just Eat ‘continues to be a solid investment’ and expectations for new chief executive Peter Plumb, formerly of Moneysupermarket, are high.

‘Hungryhouse is likely to bring £26.9 million incremental revenue and £20.2 million earnings in 2018. Thus, the time is ripe for a major technological investment in this newly crowned FTSE 100 company, taking it from a perceived ‘takeaway retailer’ to a software company, providing profit margin enhancing managed services to its 78,700 restaurants worldwide,’ he said.

Key stats
Market capitalisation£5,748m
No. of shares out1,013m
No. of shares floating982m
No. of common shareholdersnot stated
No. of employees6193
Trading volume (10 day avg.)4m
Profit before tax£812m
Earnings per share60.69p
Cashflow per share61.11p
Cash per share77.87p

Numis upgrades Barratt but says better value in mid-caps

Numis has upgraded Barratt Developments (BDEV) as ‘spring selling’ picks up, creating a buying opportunity at the house builder.

Analyst Chris Millington upgraded his recommendation from ‘hold’ to ‘add’ with a target price of 667p on the shares, which rose 2p to 564.6p yesterday.

‘Barratt’s update confirms that the all-important spring selling is gathering strength and we think that this, against the backdrop of falling share prices in the sector, has created a good buying opportunity,’ he said.

Barratt has said it plans to improve margins through build efficiency and controlled administration costs, however, Millington said he ‘struggles to give the group credit for this potential’.

‘With the shares trading on 1.5x profit/net total asset value, an 8.1% yield, and 8.3x price/earnings for December 2018, we think they look good value on an absolute basis, although we see greater upside in the faster growing and cheaper mid-cap housebuilders,’ he said.

Key stats
Market capitalisation£6,699m
No. of shares out336m
No. of shares floating328m
No. of common shareholdersnot stated
No. of employees16285
Trading volume (10 day avg.)1m
Profit before tax£553m
Earnings per share79.68p
Cashflow per share112.26p
Cash per share84.15p

Bunzl share price weakness ‘undeserved’, says Barclays

Outsourcing group Bunzl (BNZL) has seen its share price hit by the threat of Amazon but Barclays believes the concerns are undeserved.

Analyst Paul Checketts retained his ‘overweight’ recommendation but reduced the target price form £26.00 to £25.00. The shares fell 5p to £19.95 yesterday.

‘Amazon has been casting a shadow over distribution companies that now hangs over Bunzl,’ he said. ‘We believe all business-to-business distributors should be concerned about Amazon’s intentions. But we think some of the reasons given for Bunzl being vulnerable ignore key characteristics of the business model and service proposition that will give it a high degree of protection.

He added that the recent share price weakness was ‘undeserved…and offers an opportunity to buy one of the best businesses in the sector at an attractive valuation’.

‘The shares are trading on 15.5x 2019 price/earnings…with a 2.5% dividend yield and a 6.3% free cashflow yield,’ said Checketts.

‘This is the lowest levels since 2013 and back in line with the average since 2000. We think this is attractive for a business that should reliably deliver high-single digit earnings growth.’

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Look up the shares

  • FirstGroup PLC (FGP.L)
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  • Lloyds Banking Group PLC (LLOY.L)
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  • Just Eat PLC (JE.L)
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  • Barratt Developments PLC (BDEV.L)
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  • Bunzl plc (BNZL.L)
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