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The Expert View: Imperial Brands, Barratt and Sports Direct

  Our daily roundup of analyst commentary on shares, also including HSS Hire and McCarthy & Stone.

by Michelle McGagh on Sep 07, 2017 at 05:00

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Key stats
Market capitalisation£30,746m
No. of shares out959m
No. of shares floating952m
No. of common shareholdersnot stated
No. of employees33900
Trading volume (10 day avg.)2m
Turnover£27,634m
Profit before tax£631m
Earnings per share65.96p
Cashflow per share196.09p
Cash per share132.89p

Imperial Brands even cheaper than you think, says Jefferies

Tobacco giant Imperial Brands (IMB) is even cheaper than headline numbers suggest, according to Jefferies, which expects a re-rating.

Analyst Owen Bennett retained his ‘buy’ recommendation but lowered the target price from £42.00 to £41.00. The shares were down 0.3%, or 10p, at £31.89, at the time of writing.

‘While the headline multiple looks cheap, a sum-of-the-parts shows the underlying valuation is cheaper still,’ he said.

The shares currently trade at a 34% discount to the wider tobacco sector, which is ‘worse than the troughs of April 2013 when the company announced its model was no longer sustainable and it needed a change’, said Bennett.

‘Ardent bears will agree this is overly negative. Any positive news should drive re-rating at these levels,’ he said.

Key stats
Market capitalisation£6,057m
No. of shares out1,010m
No. of shares floating977m
No. of common shareholdersnot stated
No. of employees6209
Trading volume (10 day avg.)4m
Turnover£4,235m
Profit before tax£550m
Earnings per share54.32p
Cashflow per share54.77p
Cash per share75.61p

Shore Capital ‘cautious’ on overvalued Barratt

Shore Capital is remaining cautious on house builder Barratt Developments (BDEV) as the share valuation places a lot of hope on margin growth.

Analyst Robin Hardy retained his ‘sell’ recommendation and ‘fair value’ price of 520p on the stock, which was trading down 3.8%, or 24p, at 601p at the time of writing, despite profits rising 12% in the past year.

Hardy said current trading was ‘OK, but no fireworks’ and he ‘remains cautious of Barratt on valuation grounds’.

Hardy added there was a ‘lack of growth ambition’ and total debt was too high.

‘There is a material amount of profit from leasehold sales that is unlikely to recur, returns are too poor and the scope for margin expansion still feels limited into a slower market environment,’ he said.

Key stats
Market capitalisation£2,131m
No. of shares out542m
No. of shares floating209m
No. of common shareholdersnot stated
No. of employees17345
Trading volume (10 day avg.)1m
Turnover£3,245m
Profit before tax£230m
Earnings per share38.31p
Cashflow per share63.25p
Cash per share36.47p

Sports Direct moving to more profitable stores, says Hargreaves

Sports Direct (SPD) continues its transition to a more profitable store format but Hargreaves Lansdown is warned it may be dabbling in too many areas.

In a trading update ahead of its annual general meeting, the sportswear retailer said it continued to move to a ‘new generation flagship’ format. The stores with new formats have been trading ahead of expectations and earnings are expected to grow between 5% and 15% this year.

Analyst Nicholas Hyett said the performance at the new stores was ‘being sustained’ and should ‘improve significantly - albeit with significant upfront investment’.

However, he was less impressed by the group’s announcement that it has acquired 100% of luxury retailer Flannels.

‘Sports Direct has once again proven unable to resist the temptation to dabble in a few side projects,’ he said.

‘The group’s repeated inability to focus on one thing at a time has been a source of frustration for some investors. With stakes in businesses ranging from computer games to football pitches and catalogue sales, Sports Direct is increasingly resembling the department stores its ‘Selfridges of Sport’ strategy seeks to emulate.’

At the time of writing, the shares were trading up 2.7%, or 10p, at 394p.

Key stats
Market capitalisation£30m
No. of shares out69m
No. of shares floating13m
No. of common shareholdersnot stated
No. of employees21
Trading volume (10 day avg.)m
Turnover£9m
Profit before tax£1m
Earnings per share0.72p
Cashflow per share0.73p
Cash per share0.26p

HSS recovery not good enough, says Liberum

First-half results from HSS Hire Group (HSS) has reinforced concerns Liberum has about the recovery of its earnings.

Analyst Rahim Karim reiterated his ‘sell’ recommendation and lowered the target price from 46p to 30p after results that reported an underlying operating loss of £7.3 million, which he said stemmed from an ‘over-reliance on lower margin services revenues and a weak performance with its small and medium-sized enterprise client base’.

At the time of writing, the shares were trading up 0.6%, or 0.2p, at 41p.

‘Although the company is expected to return to profit in the second half, the profile of this recovery in earnings is less sharp than previously expected and as a result we cut our full year 2017 earnings forecasts by 81%,’ he said.

‘To make things worse, the company is currently in the midst of refinancing its debt, all of which matures in 2019. We believe that the current valuation fails to fully reflect all of these risks.’

Key stats
Market capitalisation£880m
No. of shares out537m
No. of shares floating495m
No. of common shareholdersnot stated
No. of employees1344
Trading volume (10 day avg.)1m
Turnover£636m
Profit before tax£73m
Earnings per share13.90p
Cashflow per share14.66p
Cash per share22.15p

McCarthy & Stone is bouncing back, says Peel Hunt

Retirement housebuilder McCarthy & Stone (MCS) has shaken off a difficult first half of the year and although conditions are still tough, Peel Hunt believes the shares are trading on too wide a discount.

Analyst Clyde Lewis retained his ‘buy’ recommendation and 220p target price on the shares, which was trading up 1.6%, or 2p, at 163p at the time of writing.

‘After a difficult first half the group has seen a decent bounce back in terms of volumes, and especially margins, in the second half,’ he said.

‘Market conditions for the group remain tougher than for other house builders due to the lack of any support from the Help to Buy scheme. While the group is sticking with its medium-term volume target of 3,000 units, it looks more likely this will be achieved in 2020 and not 2019 as we have forecast.’

This change in forecast has led Lewis to pull back top-end forecasts to ‘just below consensus numbers’ but he still feels the shares are too cheap.

‘The shares are trading on c.1.15x price/net asset value for current year 2018 versus a sector average of 1.85x, which looks too large a discount given the massive shortage in retirement housing in the UK,’ he said.

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  • Imperial Brands PLC (IMB.L)
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  • Barratt Developments PLC (BDEV.L)
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  • Sports Direct International PLC (SPD.L)
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  • HSS Hire Group PLC (HSS.L)
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  • McCarthy & Stone PLC (MCS.L)
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