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The Expert View: Hargreaves, Royal Mail and Babcock

Our daily roundup of analyst commentary on shares, also including Greggs and Wincanton.

by Michelle McGagh on Oct 04, 2017 at 05:00

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Key stats
Market capitalisation£7,010m
No. of shares out474m
No. of shares floating259m
No. of common shareholdersnot stated
No. of employees1043
Trading volume (10 day avg.)1m
Profit before tax£212m
Earnings per share44.57p
Cashflow per share45.92p
Cash per share54.82p

Hargreaves is the winner from Barclays stockbroking fiasco, says Numis

Hargreaves Lansdown (HRGV) will be the largest beneficiary from the chaos that has surrounded the launch of Barclays’ launch of its Smart Investor website.

Analyst James Hamilton retained his ‘add’ recommendation and target price of £14.97 on the shares ahead of the online stockbroker’s first quarter update. The shares edged 3p higher to £14.78 yesterday.

Hamilton said Hargreaves could pick up disgruntled Barclays clients, after the overhaul to the former Barclays Stockbrokers services left some investors unable to access their accounts.

But he noted that ‘as well as clients not being able to log into their accounts, the exit process appears to be delayed’.

‘We expect a lag between clients choosing to move to Hargreaves and the assets under administration arriving,’ he said. ‘Last year Hargreaves added 20,000 clients with net inflows of £1.1 billion in the first quarter. We expect customer numbers to have increased significantly in the first quarter this year and we expect the increased flow to beneficially impact the second quarter as well.’

Hamilton predicted Hargreaves would add 57,240 clients in the first half of the year with inflows of £3 billion, an increase of 29% on the £2.3 billion added in the first half of last year.

Key stats
Market capitalisation£3,843m
No. of shares out1,000m
No. of shares floating984m
No. of common shareholdersnot stated
No. of employees158955
Trading volume (10 day avg.)4m
Profit before tax£272m
Earnings per share27.29p
Cashflow per share58.70p
Cash per share29.90p

Jefferies warns of downside risks at Royal Mail

Jefferies believes there remains ‘downside risk’ to negotiations over pay and pensions at Royal Mail (RMG) as workers yesterday voted in favour of holding a strike.

The Communication Workers Union said the ballot among 110,00 staff backed strikes by 89% on a turnout of 73%.

Analyst David Kerstens retained his ‘underperform’ recommendation and target price of 320p on the shares, which edged a penny higher to 384.2p yesterday.

He said Royal Mail shares were trading at a 15% discount to the European postal sector but thinks ‘there remains downside risk in the labour negotiations about pay and pensions’.

Key stats
Market capitalisation£4,165m
No. of shares out506m
No. of shares floating497m
No. of common shareholdersnot stated
No. of employees35750
Trading volume (10 day avg.)2m
Profit before tax£312m
Earnings per share61.71p
Cashflow per share103.03p
Cash per share37.86p

Babcock ‘fundamentally different’ to peers, says Seneca

Seneca Investment Managers has added engineering support services company Babcock (BAB) to its multi-asset portfolios as it believes it is ‘fundamentally different’ to others in its sector.

Seneca fund manager Mark Wright said the share has been added to the UK equity allocations across its multi-asset portfolios as part of its approach of investing in undervalued companies.

‘Babcock has been tarnished with the same brush as other support services companies, such as Capita, Interserve and Mitie, which have all issued profit warnings over the last few years,’ he said.

‘As a result, its valuation close to halved on simple metrics such as price to earnings ratio, and its dividend yield reached a 10-year high, comfortably covered three times by earnings.’

He said the company was ‘fundamentally different’ to its peers. ‘The company operates in complex, highly regulated and often secretive industries, so the barriers to entry are high,’ said Wright.

‘Contracts are long-term in nature and allow gains and pains to be shared with customers. Unlike many peers, Babcock doesn’t depend on cost-plus contracts that often rely on add-on work at high margins to earn a decent overall return.’

Key stats
Market capitalisation£1,281m
No. of shares out101m
No. of shares floating92m
No. of common shareholdersnot stated
No. of employees20581
Trading volume (10 day avg.)m
Profit before tax£58m
Earnings per share56.65p
Cashflow per share101.15p
Cash per share45.44p

Hargreaves Lansdown: Greggs has the right ingredients

A growing franchise model means baker Greggs (GRG) can continue with its strong cash generation, according to Hargreaves Lansdown.

Third quarter sales were up 8.6% as Greggs continues its shop roll-out. The shares edged 9p higher to £12.59 yesterday.

Analyst George Salmon said the increased sales plus plans for 100 net new shops this year means ‘Greggs has got all the ingredients of an attractive roll-out story’.

‘It’s good to see the group investing to ensure its menu doesn’t become stale,’ he said.

‘New shop openings and spending on manufacturing and distribution operations has seen capital investment creep up, while higher ingredients costs continue to prove a headwind. However, Greggs’ growing franchise model should help cash generation remain strong, and the system changes have boosted sales in this quarter.’

Key stats
Market capitalisation£295m
No. of shares out124m
No. of shares floating115m
No. of common shareholdersnot stated
No. of employees17500
Trading volume (10 day avg.)m
Profit before tax£42m
Earnings per share33.05p
Cashflow per share44.06p
Cash per share26.67p

Liberum eyes Wincanton’s attractive valuation at Wincanton

Logistics specialist Wincanton (WIN) may have to shoulder restructuring costs of up to £7 million but Liberum still believes the shares offer good value.

Analyst Gerald Khoo retained his ‘buy’ recommendation and target price of 375p on the stock after a ‘broadly reassuring’ first-half update. The shares rose 1.4% to 238.3p yesterday.

‘Trading is in line with expectations, although previously-flagged trading headwinds for the industrial and transport division have continued,’ he said.

‘Management is cutting costs in response to this, but also to pre-empt anticipated future cost pressures from inflation and various statutory measures. Exceptional restructuring costs of up to £7 million are anticipated, with some offset from a £2 million one-off pension credit.’

Despite the cost pressures, Khoo has not changed his forecasts: ‘We remain positive, with the valuation remaining attractive.’

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Look up the shares

  • Hargreaves Lansdown PLC (HRGV.L)
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  • Royal Mail PLC (RMG.L)
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  • Babcock International Group PLC (BAB.L)
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  • Greggs PLC (GRG.L)
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  • Wincanton PLC (WIN.L)
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