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The Expert View: M&S, Burberry and Bovis

Our daily roundup of analyst commentary on shares, also including ZPG and Babcock.

by Michelle McGagh on May 24, 2018 at 05:00

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Key stats
Market capitalisation£4,986m
No. of shares out1,625m
No. of shares floating1,601m
No. of common shareholdersnot stated
No. of employees85209
Trading volume (10 day avg.)8m
Turnover£10,622m
Profit before tax£1,269m
Earnings per share7.18p
Cashflow per share42.54p
Cash per share29.73p

Leap of faith needed with M&S, says Hargreaves

Investors will need to take a ‘leap of faith’ with Marks & Spencer (MKS) as the high street stalwart teeters on the edge of FTSE 100 relegation, says Hargreaves Lansdown.

The shares rose 3.7% to 302.7p yesterday as the embattled retailer held its dividend.

Annual profits fell 62% to £66.8 million, weighed down by a £321 million charge for store closures. Excluding this charge, profits hit £580.9 million, ahead of analysts’ forecasts of £573 million.

Analyst Laith Khalaf said M&S was struggling to compete with companies with a strong online presence and reducing high street footfall.

Although food used to be the ‘bright spark’ for M&S, that has ‘dimmed’ as it scales back the opening of more food outlets and has failed to jump on board the trend for home delivery.

‘M&S is currently restructuring its business to make it more relevant, less costly, and more profitable,’ said Khalaf. ‘For investors, a dividend yield of over 6% is an attractive stopgap, but at the moment Steve Rowe’s promise to make M&S special again requires a leap of faith.’

He added that the potential relegation from the FTSE 100 as online supermarket Ocado looks set to join ‘paints a picture of the old economy and the new, passing each other in very different directions’.

Key stats
Market capitalisation£147m
No. of shares out30m
No. of shares floating22m
No. of common shareholdersnot stated
No. of employees0
Trading volume (10 day avg.)m
Turnover£1m
Profit before tax£1m
Earnings per share-1.39p
Cashflow per share-9,999,999.00p
Cash per share1.98p

Upside risk at ZPG, says Numis

ZPG (ZPG), parent company of Zoopla, has reported a solid first half performance after a bid from private equity firm Silver Lake earlier this month.

Numis analyst Gareth Davies retained his ‘hold’ recommendation and target price of 490p on the stock after ‘a good set’ of half-year results where ‘like-for-like revenues were up a good 10%’. The shares were flat at 488.4p yesterday on the news.

‘Outlook comments note the good start to the year and confirm confidence with full-year estimates, noting increased investment in brands into the second half,’ he said.

‘We are broadly in line with consensus, at face value – taking account of the increased marketing comments – our headline profits do not change materially with risk firmly on upside in the second half dependent on how much brand investment is undertaken.’

Key stats
Market capitalisation£8,486m
No. of shares out418m
No. of shares floating412m
No. of common shareholdersnot stated
No. of employees9828
Trading volume (10 day avg.)4m
Turnover£2,733m
Profit before tax£611m
Earnings per share68.35p
Cashflow per share98.95p
Cash per share218.83p

Burberry has a lot to do, says Jefferies

Jefferies has a ‘greater confidence’ in the outlook for designer brand Burberry (BRBY) but admits there are challenges ahead.

Analyst Flavio Cereda retained his ‘hold’ recommendation but increased the target price from £17.00 to £20.20. The shares edged 7p lower to £20.03 yesterday.

‘We increase our price target… this is less so on the result of new post-full year guidance but rather reflects a greater confidence in the strategy as newsflow unravels,’ he said.

‘Reversing the recent deterioration in metrics and brand profile remains a challenge though and the 15% bounce since the GBL stake sale a fortnight ago appears stretched given recovery signs are not yet evident.’

Cereda added that Burberry was an ‘underperformer’ with ‘issues relating to product and distribution coming under management scrutiny, digital effectiveness remains poor, pricing is unbecoming of luxury status in many categories and brand profile is not where it should be’.

‘Valuation needs to reflect this too,’ he said.

Key stats
Market capitalisation£3,968m
No. of shares out506m
No. of shares floating498m
No. of common shareholdersnot stated
No. of employees35750
Trading volume (10 day avg.)2m
Turnover£4,547m
Profit before tax£443m
Earnings per share61.71p
Cashflow per share103.03p
Cash per share37.86p

No near-term catalysts at Babcock, says Peel Hunt

The valuation of Babcock (BAB) reflects the challenging market and Peel Hunt is struggling to envisage a near-term catalyst that will benefit the engineering group.

Analyst Christopher Bamberry retained his ‘hold’ recommendation and target price of 785p on the stock after in-line full-year results that showed profit before tax up 4%. The shares rose 2.4% to 783p yesterday.

‘The share trade on 8.7 times full-year 2019 earnings per share…[and] a 19% discount to the FTSE All-Share, which reflects the challenging environment in which Babcock operates and the uncertain market conditions,’ he said.

‘As a consequence, organic revenue growth is likely to be muted. Therefore, despite the low valuation multiples it is difficult to envisage a catalyst that will sustainably improve the rating of the shares in the shorter term.’

Key stats
Market capitalisation£1,721m
No. of shares out135m
No. of shares floating132m
No. of common shareholdersnot stated
No. of employees1297
Trading volume (10 day avg.)1m
Turnover£1,028m
Profit before tax£130m
Earnings per share67.84p
Cashflow per share68.97p
Cash per share126.29p

Shore Capital: too much hope priced into Bovis

There is too much hope priced into Bovis Homes (BVS) as the house builder will struggle to maintain its large dividend, according to Shore Capital.

Analyst Robin Hardy retained his ‘sell’ recommendation and ‘fair value’ price of 967p on the stock after a trading statement that reported sales ‘well below industry averages’. The shares fell 1% to £12.79 yesterday.

Although the shares are trading at a premium to mid-cap peers, Hardy is unsure about how sustainable the dividend is.

‘We still struggle with the strategic objectives, with the drive to unlock dead or underperforming assets within the group and, in effect, start to dissolve the balance sheet in order to pay a large dividend,’ he said.

The sales mean the dividend can be kept high for now but Hardy said shareholders would be ‘better served’ by using those assets to grow the business.

‘The shares are simply discounting a level of trading improvement that will be very hard to deliver and the share price is pregnant with a special dividend that risks becoming a drag on the equity value,’ said Hardy. ‘The shares [are] looking expensive and [contain] way too much hope value.’

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Look up the shares

  • Babcock International Group PLC (BAB.L)
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  • Bovis Homes Group PLC (BVS.L)
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  • Burberry Group PLC (BRBY.L)
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  • Marks and Spencer Group PLC (MKS.L)
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  • ZPG PLC (ZPG.L)
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