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The Expert View: Pearson, Burberry and William Hill
Our daily roundup of analyst commentary on shares, also including Home Retail and Premier Oil.
by Michelle McGagh on Jan 15, 2016 at 05:00
Pearson: uncertainty remains but success is possible
Educational publisher Pearson (PSON) isn’t expected to make too many predictions about 2016 in its trading updates as few things are certain about the company.
Jefferies analyst David Reynolds retained his ‘underperform’ recommendation and 685p target price on the shares, which rose 1.6% to 712p yesterday.
‘Pearson delivers a trading update on 21 January, one suspects the statement will be brief and not extend to a view of 2016 and beyond, but few things are certain with Pearson these days,’ he said.
‘If so, the debate shifts quickly to the full-year 2015 print in late February, as Pearson should deliver to the late October full-year 2015 guide with ease. February’s debate will be fiery, one imagines, full-year 2016 guide, restructuring, dividend policy, impairments and leadership all potentially on the agenda.’
While there is much to discuss, Reynolds believes there is still a future for education publishers.
‘Success will be dependent on delivering digital technologies that move the value proposition away from content,’ he said.
Burberry: inadequate cash returns
Luxury retailer Burberry (BRBY) has a strong balance sheet but cash returns are causing concern.
Liberum analyst Tom Gadsby retained his ‘sell’ recommendation and target price of £10.50 on the stock following Q3 results. Burberry rose 9p to £11.21 yesterday.
‘Burberry has announced Q3 like-for-like sales a touch down versus consensus of -2%,’ he said. ‘Hong Kong and Macau continue to be poor while Asia as a whole was down mid-single digit. The company is continuing to cut costs to allow it to maintain full-year profit before tax guidance.
‘Our investment case is based on a long-term lack of growth. We forecasts three-year earnings per share compound annual growth rate of -0.4% versus 9.4% for the luxury peer group, and yet Burberry trades on a price/earnings ratio of 16x versus a sector rating of 17x. We acknowledge Burberry’s strong balance sheet but in our view cash returns of 3.3% do not provide adequate support.’
Home Retail Group sends mixed messages
It is difficult for analysts to tell the good news from the bad at Home Retail Group (HOME) at the moment.
Haitong Research analyst Tony Shiret retained his ‘sell’ recommendation and target price of 95p on the shares, which rose 2.2% to 152.7p yesterday.
‘Even the good news – Homebase possible disposal – is not that good and the bad news, while definitely bad – consensus profit before tax Q2 2016 down 10%-plus – does contain some seed of positivity in the contribution of implant stores,’ he said.
‘On the potential Homebase disposal to Wesfarmers, the arithmetic is simply that of the £340 million cash… £215 million will find its way into valuation as the rest goes in pension contributions and restructuring costs. That is equivalent to c.25p per Home Retail Group share. There was probably something small already embedded in break-up valuations so net maybe 15-20p before considering other factors.
‘These are the likely reduction in underlying profit estimates coming from the interim management statement, which is effectively a 10% reduction to Q2 2016 consensus and likely to flow into following years.’
Premier Oil agrees to buy E.ON North Sea portfolio
Premier Oil (PMO) has an agreement to acquire E.ON’s UK North Sea portfolio which is an important step for the oil explorer.
Barclays analyst James Hosie retained his ‘equal weight’ recommendation and target price of 60p on the shares, which were suspended at 19p on Tuesday pending the acquisition.
‘Acquiring cash generative production assets and selling pre-development assets are two ways for an explorer and producer to address a sub-optimal balance sheet,’ he said. ‘Premier’s agreement to acquire E.ON’s UK North Sea portfolio follows its Q4 2015 sales of its Norwegian business.
‘Assuming shareholder and lender approvals are forthcoming, we expect the $120 million (£83 million) debt-funded acquisition to be an important step in management’s plans to reduce financial leverage. Premier’s ability to pursue the deal during a spell of substantial oil price and stock market volatility underlines the robustness of its borrowing facilities and the strength of management’s conviction to ensure the business is equipped to endure the prevailing oil price environment.’
‘Under construction’ William Hill downgraded
Bookmaker William Hill (WMH) has been downgraded as the ‘process of construction’ is more difficult than analysts expected.
Numis analyst Ivor Jones downgraded his recommendation from ‘buy’ to ‘add’ with a target price of 425p on the shares, which rose 3.4% to 382p yesterday.
‘William Hill is, in our view, building an attractive international and substantial digital business,’ he said.
‘However, the process of construction is proving harder than we had expected. [The latest] trading statement makes clear that, just as the Australian business appears to be turning a corner, the rest of the online business is struggling to grow. In part this is because technology upgrades are being delivered more slowly than expected and in part because of the drag from non-core markets.’
He added: ‘We believe there will signs of success during 2016 and as a result, we are retaining a positive stance on the shares, changing our rating to “add” from “buy”.
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Look up the shares
- Pearson PLC (PSON.L)
- Premier Oil PLC (PMO.L)
- Burberry Group PLC (BRBY.L)
- Home Retail Group PLC (HOME.L)
- William Hill PLC (WMH.L)