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The Expert View: Provident, Rio Tinto and AstraZeneca

Our daily roundup of analyst commentary on shares, also including Cineworld and Mears.

by Michelle McGagh on Dec 06, 2017 at 05:00

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Key stats
Market capitalisation£1,179m
No. of shares out148m
No. of shares floating143m
No. of common shareholdersnot stated
No. of employees3261
Trading volume (10 day avg.)2m
Turnover£1,183m
Profit before tax£350m
Earnings per share179.95p
Cashflow per share197.54p
Cash per share151.38p

Shore Capital downgrades troubled Provident Financial

Shore Capital has downgraded Provident Financial (PFG) after the troubled lender has added to its woes with another regulatory investigation.

Analyst Gary Greenwood downgraded his recommendation from ‘buy’ to ‘hold’ on the shares, which fell 11.1% to 782p yesterday.

‘For some companies, it never rains but pours and this seems to be the case for Provident at present,’ he said.

‘Already stuck in a quagmire that is the badly-handled restructuring of its home credit operations, coupled with a Financial Conduct Authority (FCA) investigation into historical sales of its repayment option plan…Provident has announced that the FCA is now investigating Moneybarn, its car finance business.’

All three of the company’s main operating divisions are now under the spotlight and in Moneybarn’s case it relates to the company’s underwriting practices and how it assesses affordability.

‘At this stage it is not clear whether there has been any wrongdoing but for the FCA to be investigating then there must be at least some cause for concern,’ said Greenwood.

Key stats
Market capitalisation£61,877m
No. of shares out1,780m
No. of shares floating1,163m
No. of common shareholdersnot stated
No. of employees51018
Trading volume (10 day avg.)4m
Turnover25,064m USD
Profit before tax10,194m USD
Earnings per share1.89 USD
Cashflow per share3.93 USD
Cash per share3.52 USD

Jefferies: more capital returns expected from Rio Tinto

Jefferies is upbeat on Rio Tinto (RIO) after the miner’s annual investor seminar reiterated its focus on productivity and cashflow.

Analyst Christopher LaFemina reiterated his ‘buy’ recommendation and target price of £42.00 on the shares, which fell 2% to £34.69 yesterday.

‘Rio hosted it annual investor seminar in Sydney… the key message is that Rio is completely focused on productivity, efficiency, and cashflow generation,’ he said.

‘While none of this is really new, it is encouraging to see this level of discipline as the risk of bad acquisitions and value destructive growth projects is surprisingly very low. We have made some minor adjustments to our model and reiterate our “buy” rating.’

LaFemina added that Rio believed it had a ‘competitive advantage in mining because of its product quality in iron ore and bauxite’.

‘We agree, and we expect earnings margins and free cashflow generation for Rio to be high through the cycle. Rio’s balance sheet is strong as well, and the company therefore has the financial flexibility to increase its capital returns,’ he said.

Key stats
Market capitalisation£59,856m
No. of shares out1,266m
No. of shares floating1,262m
No. of common shareholdersnot stated
No. of employees59700
Trading volume (10 day avg.)2m
Turnover17,076m USD
Profit before tax5,281m USD
Earnings per share2.05 USD
Cashflow per share3.35 USD
Cash per share3.46 USD

Deutsche Bank: AstraZeneca has potential to be a market leader

Encouraging trials of AstraZeneca’s (AZN) lung cancer drugs Tagrisso/Imfinzi are a ‘turning point’ for the pharma giant and will push up margins and earnings per share next year, says Deutsche Bank.

Analyst Richard Parkes reiterated his ‘buy’ recommendation and target price of £57.00 on the shares, which fell 23p to £47.22 yesterday.

‘We believe recent strong data from the Flaura and Pacific trials of Tagrisso/Imfinzi mark a turning point for AstraZeneca and the profitability of its lung cancer franchise will drive a significant turnaround in margin and earnings per share momentum through 2018,’ he said.

‘This reassures our stance that it will emerge as a market leader in a potential $7 billion class, with significant upside potential to consensus forecasts. With shares trading at a more than 15% discount to our discounted cashflow, we reiterate our “buy” rating.’

Key stats
Market capitalisation£1,480m
No. of shares out274m
No. of shares floating192m
No. of common shareholdersnot stated
No. of employees9946
Trading volume (10 day avg.)2m
Turnover£798m
Profit before tax£169m
Earnings per share30.30p
Cashflow per share51.96p
Cash per share20.85p

Peel Hunt downgrades Cineworld on takeover win

Peel Hunt has downgraded Cineworld (CINE) after its cash offer for US cinema chain Regal was accepted, threatening to change the ‘long-term equity story’.

Analyst Douglas Jack downgraded his recommendation from ‘add’ to ‘hold’ and reduced the target price from 725p to 600p after the $23 per share cash bid for Regal Entertainment Group, the second largest cinema chain in the US, was accepted. The shares edged 3p lower to 543.1p yesterday.

‘We estimate this equates to paying 8.7x earnings to buy into a very mature market,’ he said.

‘As a result of $150 million of targeted synergies/structural benefits and Cineworld’s net debt/earnings rising from c.1x to c.4x - £1.7 billion of extra equity and almost £3 billion of extra debt – we estimate this should enhance earnings by c.30%.

‘However, the long-term equity story has changed, with higher debt and reduced growth prospects.’

He added that in the short-term ‘we would expect the scale of the equity raise to cause indigestion’.

Key stats
Market capitalisation£396m
No. of shares out103m
No. of shares floating102m
No. of common shareholdersnot stated
No. of employees15719
Trading volume (10 day avg.)m
Turnover£940m
Profit before tax£49m
Earnings per share20.92p
Cashflow per share42.55p
Cash per share52.40p

Liberum reduces Mears estimates on surprise cost

Liberum has reduced its estimates for social housing maintenance and repairs business Mears (MERG) after a higher than expected interest charge.

Analyst Joe Brent retained his ‘buy’ recommendation but reduced his target price from 525p to 480p. The shares slumped 8.5% to 387p yesterday.

‘We reduce our 2017 and 2018 earnings per share by 7% and 4% to 28.5p and 34.3p, due to housing, with a higher expected interest charge in full-year 2018,’ he said.

‘Management is more optimistic about 2018 than we are since the local authority reviews should have been completed and some of the benefits of the reviews and “placemaking partnerships” should be coming through.’

Brent warned of ‘further softening’ in revenues but said ‘some of the other benefits in housing are coming late’.

‘Restructuring should save money and improve efficiency and bidding,’ he said.

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  • Provident Financial PLC (PFG.L)
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  • Rio Tinto PLC (RIO.L)
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  • AstraZeneca PLC (AZN.L)
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  • Mears Group PLC (MERG.L)
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  • Cineworld Group PLC (CINE.L)
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