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The Expert View: Rio, Marks and Spencer and Debenhams

Our daily roundup of analyst commentary on shares, also including National Express and CYBG.

by Michelle McGagh on Apr 20, 2018 at 05:00

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Rio Tinto 'deeply undervalued'

Shares in mining giant Rio Tinto (RIO) are ‘deeply undervalued’ despite a slight miss on production in the first quarter, says Jefferies.

Analyst Christopher LaFemina retained his ‘buy’ recommendation and target price of £47 on the shares, which were flat at £39.76 yesterday.

‘While Rio’s production report was not very eventful, the shares are deeply undervalued, and the trade-off between risk and reward in Rio shares continues to be positive despite iron ore price risk this summer,’ he said.

‘Proceeds from the announced coal asset sales, as well as continued strong free cashflow, and a clean balance sheet, will enable Rio to enhance its ongoing capital return program when it reports results in August.’

Key stats
Market capitalisation£4,559m
No. of shares out1,625m
No. of shares floating1,602m
No. of common shareholdersnot stated
No. of employees85209
Trading volume (10 day avg.)9m
Profit before tax£1,269m
Earnings per share7.18p
Cashflow per share42.54p
Cash per share29.73p

Shore Capital welcomes board changes at M&S

Shore Capital is heartened by the change in management at Marks & Spencer (MKS) as it believes cultural change is needed at the high street stalwart.

Analyst Clive Black retained his ‘hold’ recommendation on the stock after a series of board changes and appointments under chief executive Steve Rowe.

‘M&S cannot talk its way to growth, it has to do it,’ said Black. ‘Central to a more effective financial performance is cultural change to us, it is a pre-condition, and it is for this reason we harbour encouragement at the nature and extent of senior management adjustment.’

However, Black said the proof of the new team will be what it ‘serves on the tables and to the wardrobes of the UK’.

‘Ahead of those servings, we feel the current valuation metrics and the dividend support, the pay-out rate that we sense will be maintained, although unlikely to grow for some time,’ he said.

The shares fell half a penny to 280.8p yesterday.

Key stats
Market capitalisation£277m
No. of shares out1,228m
No. of shares floating789m
No. of common shareholdersnot stated
No. of employees8431
Trading volume (10 day avg.)5m
Profit before tax£230m
Earnings per share3.97p
Cashflow per share12.88p
Cash per share3.26p

Debenhams margins 'shot to pieces'

Debenhams (DEB) has announced a dividend cut after margins tumbled and Hargreaves Lansdown said the changes made at the department store could be too little too late.

Debenhams reported revenue falls of 1.6% in the first half to £1.7 billion, with like-for-like sales down 2.8%. It halved the dividend to half a penny.

After slumping at the open, the shares climbed 2.5% yesterday to 23.9p.

Analyst Nicholas Hyett said there were some ‘bright spots’, including online sales and a clothing division that was ‘holding up’ as sales are not far off market expectations.

‘Unfortunately, all of that is essentially irrelevant because margins are totally shot to pieces,’ he said. ‘The combination of low sterling increasing the cost of stock, and heavy discounting, means gross margins have tumbled... and has ultimately cost investors over half the interim dividend.’

He said the concern now was store improvements were ‘too little too late’ and its reputation as a ‘serial discounter’ would ‘take time to shift’.

Key stats
Market capitalisation£2,089m
No. of shares out512m
No. of shares floating440m
No. of common shareholdersnot stated
No. of employees46264
Trading volume (10 day avg.)1m
Profit before tax£381m
Earnings per share22.89p
Cashflow per share58.14p
Cash per share61.42p

Liberum downgrades National Express

Liberum has downgraded National Express (NEX) after strong share price performance from the bus and train operator.

Analyst Gerald Khoo downgraded his recommendation from ‘buy’ to ‘hold’ and reduced the target price from 420p to 410p. The shares fell 4p to 409p yesterday.

He said the company remained ‘best-in-class’ in public transport with ‘all divisions trading well, limited exposure to UK political risk, and no exposure to UK rail following its exit last year’.

‘We cut our estimates by 2% across the board to reflect a less favourable US dollar exchange rate impacting the translation of US earnings,’ he said. ‘Strong share price performance has left the valuation appearing up with events.’

Key stats
Market capitalisation£2,603m
No. of shares out885m
No. of shares floating881m
No. of common shareholdersnot stated
No. of employees6040
Trading volume (10 day avg.)2m
Profit before tax£527m
Earnings per share17.31p
Cashflow per share30.43p
Cash per share1,090.42p

Berenberg: CYBG ‘undervalued’ despite PPI woes

CYBG (CYBG), which owns Clydesdale and Yorkshire banks, is undervalued despite market concerns about the increased cost of its payment protection insurance (PPIprovision, says Berenberg.

Analyst Alex Medhurst retained his ‘buy’ recommendation and reduced the target price from 375p to 350p. The shares rose 5p to 204.2p yesterday.

The company announced it had increased its PPI provision by £350 million, £130 million more than Berenberg's estimates, which will have ‘a material impact on the value attributed to CYBG’s excess capital from 2019’.

‘Importantly, however, we believe that the market has been attributing no value to this excess capital, and the current valuation fails to capture the 325p value per share of the core bank alone,’ said Medhurst.

‘With PPI provisioning having no bearing on this core bank value, and 25p excess capital remaining even under prudent assumptions, we believe CYBG is undervalued.’

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  • Debenhams PLC (DEB.L)
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  • Marks and Spencer Group PLC (MKS.L)
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  • National Express Group PLC (NEX.L)
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  • Rio Tinto PLC (RIO.L)
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