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The Expert View: Pearson, AstraZeneca and Aberdeen

Our round-up of analyst commentary on stocks, also including Reckitt Benckiser and Compass.

by Daniel Grote, Danielle Levy on Feb 03, 2017 at 05:01

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Key stats
Market capitalisation£5,301m
No. of shares out822m
No. of shares floating820m
No. of common shareholdersnot stated
No. of employees37265
Trading volume (10 day avg.)11m
Turnover£4,468m
Profit before tax£-352m
Earnings per share-43.28p
Cashflow per share-0.12p
Cash per share212.56p

More pain for Pearson investors

Liberum predicts more pain ahead for long-suffering Pearson (PSON) shareholders.

Shares in the education publisher crashed last month after it issued the latest in a string of profit warnings, saying revenues would be lower over the next two years and warning it could sell its Penguin Random House book venture.

The shares have rallied 11% from those lows as amid investor hopes the worst for the company is over. Yesterday they were up 5p at 643p.

But Ian Whittaker, analyst at Liberum who has long rated the shares his ‘top sell’, said that optimism appeared misplaced, saying another profit warning was likely before the year was out, and retaining his 360p target price. ‘Short term, we expect the full-year results on 24 February to highlight further issues at Pearson and we would be particularly concerned about two issues, cash-flow conversion and goodwill write-downs,’ he said.

‘We would also ask why a company that had 0.4 times net debt to earnings at the end of 2015 now feels the need to sell its 47% stake in Penguin Random House (and, according to some web reports, may have already sold its Brazilian Sistema business). Our view is that it could be a sign that there are worrying signs regarding its cash-flow / balance sheet,’ he said.

Key stats
Market capitalisation£53,348m
No. of shares out1,265m
No. of shares floating1,260m
No. of common shareholdersnot stated
No. of employees61500
Trading volume (10 day avg.)4m
Turnover19,529m USD
Profit before tax2,233m USD
Earnings per share1.77 USD
Cashflow per share3.44 USD
Cash per share4.28 USD

AstraZeneca disappoints once again, says Edentree

Another set of disappointing results from pharma giant AstraZeneca (AZN) will once again cause investors to question its decision to rebuff a bid from Pfizer back in 2014.

This is the view of Ketan Patel, manager of the EdenTree UK Equity Growth fund, who points out that Astra’s current share price is 25% lower than the price that was proposed in Pfizer’s bid.

‘Management’s guidance on 2017 as a defining year will not provide much comfort to shareholders who have seen the share price underperform the FTSE 100 by over 20% over the last 12 months,’ Patel said.

Making matters worse, rival GlaxoSmithKline has performed better than the FTSE 100 over the same period.

Although Astra’s decision to maintain a progressive dividend policy will provide some support for the share price in the near term, Patel says investors need to see meaningful progress within its pipeline of products in 2017. If they don’t, he warns they will lose patience.

Yesterday the shares added 5p or 0.3% to £15.40. They have risen 8% in the past 12 months.

Key stats
Market capitalisation£3,293m
No. of shares out1,318m
No. of shares floating919m
No. of common shareholdersnot stated
No. of employees2812
Trading volume (10 day avg.)4m
Turnover£1,114m
Profit before tax£165m
Earnings per share12.62p
Cashflow per share24.92p
Cash per share182.70p

Aberdeen offers Peel Hunt a ‘glimmer of hope’

The fourth quarter represented another challenging period for Aberdeen Asset Management (ADN), marked by significant outflows. However, Peel Hunt analyst Stuart Duncan suggests it wasn’t all bad news for the fund manager.

In his opinion, an increase in the total amount of money going in to the business (but not including withdrawals) during the three-month period may provide shareholders with some room for optimism.

‘Further mandate losses were flagged, yet an increase in gross inflows and healthy client interest may offer a glimmer of light. We reduce our target price to 280p but maintain our hold recommendation,’ Duncan noted.

Over the three months to January, Aberdeen saw assets under management fall by 3% to £302.7 billion. Positive currency and market movements helped to counter net outflows of £10.5 billion. This included a mandate that had been run for wealth manager St James’s Place, alongside another that was managed on behalf of a sovereign wealth fund.

Although the firm expects a further £3.4 billion will be withdrawn, it is seeing signs of improving investor sentiment. This is demonstrated by gross inflows of £10.2 billion, which is £1.8 billion higher than the previous quarter.

Aberdeen shares fell 3%, or 8.4p lower, at 249.7p.

Key stats
Market capitalisation£49,275m
No. of shares out700m
No. of shares floating630m
No. of common shareholdersnot stated
No. of employees34700
Trading volume (10 day avg.)1m
Turnover£8,874m
Profit before tax£1,743m
Earnings per share240.90p
Cashflow per share263.29p
Cash per share95.33p

Hargreaves hails Reckitt’s baby steps

Shares in Reckitt Benckiser (RB) have rallied after the consumer group said it was in talks to buy baby formula maker Mead Johnson Nutrition and Hargreaves Lansdown fund manager Steve Clayton can see why.

Clayton, who boasts the stock as his top holding in the HL Select UK Shares fund, said the potential boost to earnings from the $16.7 billion (£13.2 billion) deal could be ‘very significant’. Shares in Reckitt Benckiser rose 3.1% to £70.41 yesterday.

‘Baby milk is a category with a lot of growth potential, and MJN is heavily focused on the US and Asian markets, where we expect longer term growth to be strong,’ he said.

‘The market’s initial reaction to the deal is positive, and we can see why. Reckitt Benckiser’s track record of reinvigorating brands is a strong one, and they already have strong sales links into pharmacies and supermarkets globally.

‘This looks like a return to form for the Reckitt Benckiser deal-making machine. At a quarter the size of Reckitt Benckiser, Mead Johnson is a big, but manageable step, and further tilts the group away from Europe and toward the world’s North American and Asian growth engines.’

Key stats
Market capitalisation£23,484m
No. of shares out1,644m
No. of shares floating1,636m
No. of common shareholdersnot stated
No. of employees527180
Trading volume (10 day avg.)4m
Turnover£19,605m
Profit before tax£992m
Earnings per share60.27p
Cashflow per share86.76p
Cash per share21.06p

Berenberg sees Compass pointing the right way

Berenberg has reiterated its ‘buy’ rating on Compass (CPG) after the food services group kept its full-year outlook unchanged.

Analyst Najet El Kassir has a £16.50 price target on the shares, which rose 2.3% to £14.29 yesterday. ‘Compass delivered solid first quarter organic sales in line with expectations of 2.8%, reflecting a deceleration that it flagged at its full-year 2016 results,’ he said.

‘Compass has de-rated since Donald Trump’s election, but we continue to like the structural growth, coupled with supportive fundamentals (gross domestic product and employment trends).

‘We believe that the company’s leading position and its diversity (by geography and industry), coupled with its scale, should underpin sustainable underlying growth of 4.3% and earnings expansion of around 20 basis points in 2017.

‘In our view, there is scope for Compass to return up to £500 million to shareholders in the next 18 months, while remaining within its leverage target.’

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Look up the shares

  • Pearson PLC (PSON.L)
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  • Compass Group PLC (CPG.L)
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  • Aberdeen Asset Management PLC (ADN.L)
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  • Reckitt Benckiser Group PLC (RB.L)
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  • AstraZeneca PLC (AZN.L)
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