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The Expert View: G4S, Old Mutual and PayPoint
Our daily roundup of the best analyst commentary on shares, also including Breedon Aggregates and JD Wetherspoon.
by Sam Antrobus on Mar 14, 2016 at 05:00
Credit downgrade may lie in wait for G4S
A potential credit rating downgrade is just one of a number of potential hazards security services company G4S (GFS) faces.
Jefferies analyst Kean Marden maintained an ‘underperform’ rating, with a target price of 160p on the shares, which rose 2.3p to 183p on Friday.
‘Balance sheet issues have emerged earlier than expected. Despite management’s commendably swift action we think a move to BBB-/Negative is highly likely and a nervous equity market will likely price in a dilutive disposal programme and a wider credit spread,’ he said.
‘What if G4S can’t divest non-core businesses rapidly? What if the bid pipeline decline is the precursor to emerging markets slowdown? This uncertainty is amplified by a third year of complex results which cloud assessment of underlying momentum.
‘Risks include political changes, delayed bid timetables, contract mobilisation and dislocation in some emerging market countries as global carry trades unwind.’
Breedon Aggregates supported by cyclical recovery
Berenberg analyst Robert Chantry feels that Breedon Aggregates’ (BREE) exceptional growth and lack of direct peers leaves the UK’s largest independent aggregates company in a strong position for the year ahead.
He maintained a ‘buy’ recommendation, with a target price of 80p on the shares, which fell 1.2p to 67.2p on Friday.
‘Breedon reported very strong 2015 numbers on 9 March and provided an encouraging outlook for 2016. We continue to believe Breedon is a differentiated long-term roll-up story in the aggregates sector, currently supported by the cyclical recovery in construction activity,’ he said.
‘Breedon’s strong 2015 numbers beat consensus estimates by 10% at the earnings per share level. The macro environment remains supportive, albeit at a more modest rate than that seen in 2014 and H1 2015.
‘Furthermore, the outlook for UK aggregate demand looks promising, with the Mineral Products Association forecasting an increase in aggregates demand of 3-5% in 2016.’
Old Mutual to reap rewards from restructuring
Shore Capital believe Old Mutual’s (OML) decision to restructure the business heralds a positive step in the right direction.
Analyst Eamonn Flanagan upped his recommendation from ‘hold’ to ‘buy’. The shares which fell 9.3p to 176p on Friday.
‘Old Mutual has announced a separation of the group into four distinct businesses: Old Mutual Emerging Markets; Nedbank; Old Mutual Wealth and Old Mutual Asset Management (in US). The aim is to unlock the value currently trapped within the four units, a view we fully concur with,’ he said.
‘There is clearly much to achieve in this strategy with the group targeting the end of 2018 for completion.
‘A basic sum-of-the-parts calculation on the stock gets us to circa 215p, which we view as quite conservative, but offering excellent upside potential on the stock.’
Special dividend may come to fruition at PayPoint
Although regulatory moves to reduce the price of pre-pay energy meters could harm payment system company PayPoint (PAYP), a potential special dividend announcement looks likely.
Liberum analyst Joe Brent offered a ‘buy’ recommendation, with a target price of £10.00 on the shares, which rose 1p to 734p on Friday.
‘On Thursday [March 10] the Competition and Markets Authority proposed measures that may reduce pre-pay prices by 8%. Pre-pay meters are circa 25% net revenues in PayPoint’s operationally leveraged business,’ he said.
Following the sale of its online payments business to Capita in January, Brent said management was still confident it could sell the company’s mobile payments business by May – something that could trigger a special dividend.
‘Given that management wants to keep sufficient cash available for a non-Class 1 transaction, with a value of perhaps £90 million, and they have a revolving credit facility of £45 million, we believe that all of the proceeds of the mobile sale, and perhaps more could be distributed, perhaps by another special dividend.’
Positive trading masks margin worries at JD Wetherspoon
While trading may be positive at pub chain J Wetherspoon (JDW), Peel Hunt analyst Nick Batram warns of a range of hazards to the company’s operating margins.
He offered a ‘sell’ recommendation, with a target price of 616p on the shares, which rose 8p to 700p on Friday. ‘Positive like-for-like trading (+2.9%) had a negligible impact on the margin as higher costs and a lack of price increases reduced back operating margins at 6.3% vs 7.4% in the previous year. Underlying profits before tax of £32.2 million was 14% lower than the previous year, but in line with our forecast [excluding a one-off property gain],’ he said.
‘Current trading is positive at +3.6%, although this is helped by easier comparatives. The real metric to watch will be the operating margin decline, which has fallen 110 basis points from the prior period, and with a lower gross margin and higher wage costs still to come, this will continue to be a key focus.’
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Look up the shares
- G4S PLC (GFS.L)
- Old Mutual PLC (OML.L)
- PayPoint plc (PAYP.L)
- Breedon Aggregates Ltd (BREE.L)
- J D Wetherspoon PLC (JDW.L)