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The Expert View: Pennon, Next and GKN

Our daily roundup of analyst commentary on shares, also including JD Sports and Keywords Studios.

by Michelle McGagh on Mar 27, 2018 at 05:00

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Key stats
Market capitalisation£2,445m
No. of shares out420m
No. of shares floating417m
No. of common shareholdersnot stated
No. of employees4788
Trading volume (10 day avg.)2m
Turnover£1,353m
Profit before tax£479m
Earnings per share39.60p
Cashflow per share87.23p
Cash per share90.43p

Watch out for Pennon divi, says Hargreaves

Water company Pennon (PNN) is facing headwinds from regulation and likely interest rate rises which may impact future dividends, says Hargreaves Lansdown.

An update from the utility company showed it was trading inline with expectations ahead of full-year results but analyst George Salmon said it faced a ‘trio of headwinds’ from politics, tougher regulation, and potential interest rate rises.

It will also have to invest in its waste management business to meet stricter Chinese quality standards, meaning margins will dip. There are also ongoing issues with its energy recovery facility in Glasgow.

‘However, a continued strong performance from the water business means 2017/18 numbers will likely hit expectations, and it’d be a big surprise if Pennon didn’t pay an inflation-beating dividend with full-year results in May,’ said Salmon.

‘Nonetheless, with regulations looking tougher from 2020, investors should be wary of the potential for the group to tweak its payout plans in future.’

The shares were flat at 583.4p yesterday.

Key stats
Market capitalisation£6,994m
No. of shares out143m
No. of shares floating136m
No. of common shareholdersnot stated
No. of employees30525
Trading volume (10 day avg.)1m
Turnover£4,056m
Profit before tax£882m
Earnings per share415.59p
Cashflow per share501.97p
Cash per share40.86p

Jefferies: Next bucks the retail trend

The outlook for retailers hasn’t been good but Next (NXT) has bucked the trend with a confident outlook statement and Jefferies says the high street stalwart is working on ‘many interesting’ developments.

Analyst Niraj Amin retained his ‘hold’ recommendation and target price of £52.00 on the shares, which fell 2.2% to £48.75 yesterday.

‘Next positively surprised with a confident 2018/19 outlook contrasting the recent cautionary statements from UK retail peers,’ he said.

‘Next is working on many interesting multi-channel developments, which could provide upside over the midterm. With minimal changes to our forecasts and unchanged UK macro outlook, we maintain our 'hold'.’

He added that the £11 million extra investment in its online platform meant Next was ‘back on track’ with its online shopping plan and was ‘working on a range of initiatives to strengthen its omni-channel offering’.

Key stats
Market capitalisation£7,446m
No. of shares out1,719m
No. of shares floating1,668m
No. of common shareholdersnot stated
No. of employees51381
Trading volume (10 day avg.)16m
Turnover£9,671m
Profit before tax£948m
Earnings per share29.11p
Cashflow per share57.23p
Cash per share24.80p

Numis backs Melrose bid for GKN after Dana deal

GKN (GKN) has struck a deal with US company Dana to sell its automotive business but Numis says although it’s the ‘wrong price, wrong time’ and investors should back the Melrose proposal to take over the engineering company.

Analyst David Larkam retained his ‘add’ recommendation and target price of 480p on the stock after Dana made a bit for GKN Driveline.

‘The issue we have is that the business is being sold too cheaply and too early,’ he said.

‘Significantly lower multiple than recent industry transactions with insufficient value attached to eDrive, the technology jewel in the crown. We also believe greater value could be attained when margins have been improved.’

He said in order for investors to ‘avoid selling at the wrong price…and looking for recovery prior to value realisation on a more structured timescale, we suggest shareholders back the Melrose proposal’.

Shares in GKN were up 2.5p at 431.5p yesterday.

Key stats
Market capitalisation£3,429m
No. of shares out973m
No. of shares floating405m
No. of common shareholdersnot stated
No. of employees23584
Trading volume (10 day avg.)1m
Turnover£2,379m
Profit before tax£309m
Earnings per share18.38p
Cashflow per share25.37p
Cash per share25.44p

JD Sports gains strength in US with acquisition

JD Sports (JD) has acquired US athletic wear brand Finish Line, which provides the UK retailer with ‘another growth arm’, according to Shore Capital.

Analyst Clive Black reiterated his ‘buy’ recommendation on the stock, after it acquired 100% of Finish Line for $558 million (£392 million). The shares fell 3.5% to 343.5p yesterday.

Black said this was a ‘significant acquisition’ that gave JD Sports ‘access to the largest sportswear market in the world’.

‘This proposed acquisitions will give JD Sports another growth arm,' he said.

‘JD Sports continues with its international strategy and this transaction will scale that up significantly with enhanced revenues and earnings from a new US division. This looks a sizeable transaction but highlights the global ambitions of the management team.’

Key stats
Market capitalisation£964m
No. of shares out62m
No. of shares floating54m
No. of common shareholdersnot stated
No. of employees1818
Trading volume (10 day avg.)m
Turnover84m EUR
Profit before tax14m EUR
Earnings per share0.09 EUR
Cashflow per share0.15 EUR
Cash per share0.27 EUR

Peel Hunt backs Keywords

Peel Hunt has initiated coverage of Keywords Studios (KWS), which offers outsourced services to the video games industry, and is growing twice as fast as its peers.

Analyst Ashu Sony initiated coverage with an ‘add’ recommendation and target price of £18.50 on the shares, which fell 2.5% to £15.70 yesterday.

Sony believes the company is ‘attractively positioned to corner the market’ thanks to its established position, ‘blue-chip’ client base, significant cross-selling opportunity, and ‘unmatched record of value-accretive mergers and acquisitions’.

Based on his valuation methods the company is growing earnings ‘over twice as fast as the relevant peer group’ at 38% versus 15%. He said Keywords would ‘win out’ in its industry.

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  • GKN PLC (GKN.L)
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  • JD Sports Fashion PLC (JD.L)
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  • Keywords Studios PLC (KWS.L)
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  • Next PLC (NXT.L)
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  • Pennon Group PLC (PNN.L)
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