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The Expert View: Legal & General, AstraZeneca and Sky

Our daily roundup of analyst commentary on shares, also including Associated British Foods and Restore.

by Michelle McGagh on Sep 12, 2017 at 05:00

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Key stats
Market capitalisation£15,304m
No. of shares out5,957m
No. of shares floating5,836m
No. of common shareholdersnot stated
No. of employees8253
Trading volume (10 day avg.)12m
Turnover£77,969m
Profit before tax£1,258m
Earnings per share21.13p
Cashflow per share22.17p
Cash per share431.88p

Jefferies inches up Legal & General target price but stays cautious

Jefferies has increased its target price for insurer Legal & General (LGEN) on the back of positive earnings growth targets but recognises there are caveats to that growth.

Analyst Mark Cathcart retained his ‘hold’ recommendation and increased the target price from 249p to 253p as ‘the outlook for L&G’s core business looks strong’, with management predicting 10% earnings growth and 7% dividend growth.

‘We recognise a range of caveats for growth and margins, and question the validity of the multi-decade assumption sets that drive L&G’s cash earnings essential for dividend growth,’ he said.

He added that the insurer ‘must rely annually on sizeable bulk and back book deals to retain momentum, where regulatory risk is always at play, and with returns dependent on third-party pricing structures in reinsurance’.

The shares rose 1.7% to 258.2p yesterday.

Key stats
Market capitalisation£62,016m
No. of shares out1,266m
No. of shares floating1,261m
No. of common shareholdersnot stated
No. of employees59700
Trading volume (10 day avg.)2m
Turnover17,430m USD
Profit before tax2,651m USD
Earnings per share2.09 USD
Cashflow per share3.42 USD
Cash per share3.53 USD

Shore Capital: positive data at AstraZeneca already priced in

AstraZeneca (AZN) announced the results from two lung cancer studies at the weekend but Shore Capital said there was little scope for upgrades as the strong data was expected.

Analyst Tara Raveendran retained her ‘hold’ recommendation and target price of £47.74 on the shares, which rose 1.8% to £48.76 yesterday.

‘AstraZeneca reported detailed data for two important lung cancer studies at the European oncology meeting in Madrid over the weekend,’ she said.

‘The strong data was as expected and did not disappoint in our view, but was widely anticipated following positive headline data for [lung cancer treatments] Tagrisso and Imfinzi… hence we see limited scope for upgrades to consensus earnings on the back of these data.’

Key stats
Market capitalisation£16,344m
No. of shares out1,719m
No. of shares floating992m
No. of common shareholdersnot stated
No. of employees26982
Trading volume (10 day avg.)2m
Turnover£12,916m
Profit before tax£695m
Earnings per share39.97p
Cashflow per share94.60p
Cash per share145.43p

Liberum confident of Fox bid for Sky

Liberum has factored Sky’s (SKYB) new cost saving measures into its estimates but is still expecting the Fox bid to drive up shares.

Analyst Ian Whittaker reiterated his ‘hold’ recommendation and target price of £10.60 on the stock, which inched 4p higher to 952.5p yesterday.

He said he has updated his estimates ‘to take into account Sky’s full-year results and the cost-saving initiatives designed to offset extra inflation in costs’.

‘It is the latter which drives the earnings upgrades despite modest decreases to our top-line estimates,’ said Whittaker.

‘However, the main driver of Sky continues to be the Fox bid for the shares.’

Although the bid is expected to be referred to the Competition and Markets Authority, due to the size of the deal, Whittaker argued it would ‘eventually go through’.

‘Timing wise, we believe it is likely that the deal is finalised in [the first half of] 2018,’ he said.

Key stats
Market capitalisation£24,585m
No. of shares out792m
No. of shares floating346m
No. of common shareholdersnot stated
No. of employees129916
Trading volume (10 day avg.)1m
Turnover£13,399m
Profit before tax£818m
Earnings per share103.41p
Cashflow per share165.23p
Cash per share70.11p

Cracking the US will be the real test for ABF, says Hargreaves Lansdown

Margins at Primark-owner Associated British Foods (ABF) are expected to improve in the second half but the real test will be its ability to crack the US, says Hargreaves Lansdown.

The shares fell 2.4% to £31.87 yesterday, despite ABF announcing second half margins in the retail division were expected to be up on the first half, having previously guided they would fall.

Analyst George Salmon said the UK had been ‘singled out as performing particularly strongly, which would normally have positive read-across for the rest of the clothing sector’.

‘However, this probably isn’t the case this time. We feel Primark’s good domestic performance is more a sign the UK consumer is tightening the purse strings and moving down the value chain as inflation outstrips wage growth,’ he said.

The roll-out story at ABF, which is adding a million square feet of sales space each year, means the shares ‘trade on a more premium rating than many of its peers’.

‘The US is particularly important,’ said Salmon. ‘Progress here looks good, but investors should remember that many other UK retailers have tried and failed to crack the notoriously competitive market across the pond.’

Key stats
Market capitalisation£593m
No. of shares out113m
No. of shares floating106m
No. of common shareholdersnot stated
No. of employees1798
Trading volume (10 day avg.)m
Turnover£129m
Profit before tax£11m
Earnings per share9.80p
Cashflow per share17.84p
Cash per share11.96p

M&A means more upside to Restore, says Peel Hunt

Office support services company Restore (RST) is trading at a premium but Peel Hunt said there could be further upside from continued mergers and acquisitions.

Analyst Christopher Bamberry retained his ‘buy’ recommendation and target price of 528p on the stock after interim results came in ahead of expectations. Profit before tax rose 59% thanks to last year’s acquisition of PHS Data Solutions and ‘good organic growth’.

‘We increase our 2017 estimated and 2018 estimated earnings per share by 6%, primarily as a consequence of the strong organic growth, in particular at Datashred,’ he said.

Bamberry added that the shares traded on 20.2x 2018 estimated earnings per share, representing a 42% premium to the FTSE All-Share and a 12% premium to the Alternative Investment Market.

‘The main source of potential upside to our base-case forecasts comes from continuing M&A,’ he said. ‘Therefore, we take this into account in setting our target price.’

The shares rose 3.8% to 525p yesterday.

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  • Legal & General Group PLC (LGEN.L)
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  • AstraZeneca PLC (AZN.L)
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  • Sky PLC (SKYB.L)
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  • Associated British Foods PLC (ABF.L)
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  • Restore PLC (RSTP.L)
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