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The Expert View: Rio Tinto, Henderson and Stagecoach
Our daily roundup of analyst commentary on shares, also including Dunelm and Dairy Crest.
by Michelle McGagh on Feb 12, 2016 at 05:00
Rio Tinto preparing for tough times
Liberum has welcomed Rio Tinto’s (RIO) abandonment of its progressive dividend policy, saying it shows the miner is serious about tackling a ‘lower for longer’ environment in commodities.
Rio yesterday kept its full-year dividend flat but warned it would cut future payments by about a half, arguing it was ‘no longer appropriate to maintain the progressive dividend policy.
Analyst Richard Knights, who rates the miner a ‘sell’ with a £15.85 target price, said the move would assuage the risk of balance sheet stress.
‘Rio’s decision to pre-emptively cut its dividend this morning is a sharp change in tone from management who hiked the interim dividend by 12% in August,’ he said.
‘Nevertheless, we think the move is a positive step that more accurately aligns capital allocation priorities with shareholders.’
Rio Tinto shares fell 3.3% to £17.06 yesterday.
Dairy Crest: a high quality business in the making
Dairy Crest (DGC) has had a difficult first half but the third quarter has marked a boost in confidence.
Peel Hunt analyst Charles Hall retained his ‘buy’ recommendation and target price of 660p on the shares, which fell 1.5% to 595.6p yesterday.
‘After a tough H1, the spreads business has seen a much strong Q3, which should improve both confidence in the business and sustainability of profits,’ he said.
‘FryLight is the star performer, but Country Life has shown strong growth and Clover is back in growth. In addition, Cathedral City continues to show positive momentum.
‘Dairy prices are still tumbling, which affects profits in the short term, but will improve input costs as the cheese matures. Dairy Crest has recently announced a reduction in its milk input costs at Davidstow. With the dairy business finally consigned to the past, both management and investors can look forward to a higher quality business, with a focus on growth and much improved cash generation.’
Dunelm: good first half but more mid-term details needed
Homeware retailer Dunelm (DNLM) has had a good first half but new projects to drive revenue are unquantified.
Deutsche Bank analyst Charles Muir-Sands retained his ‘hold’ recommendation and target price of 885p on the shares, which fell 1.6% to 920p yesterday.
‘H1 profit before tax of £75.5 million was 2% ahead of our expectations while commentary on Q3 to-date trading was also upbeat,’ he said.
‘The new management team presented eight new projects to continue to drive towards the company’s 50% revenue growth “mid-term” target – all intuitively sensible though most will not be near-term earnings drivers and the benefits of none have been quantified.
‘The good free cashflow generation and 31.5p/ share capital return is a pleasant surprise and our full year forecasts increase 2%. [Thursday’s] share price move does seem a little over-reaction though, even in the context of weak year-to-date performance. Trading on 17.5x price/earnings, close to our revised 885p we maintain our “hold” rating.’
Henderson a ‘core holding’ in asset management
Asset manager Henderson Group (HGGH) has proved itself a core holding following final results ahead of forecast.
Shore Capital analyst Paul McGinnis retained his ‘buy’ recommendation but does not have a target price on the shares, which fell 7.1% to 229.1p yesterday.
‘The results were a slight beat compared to our forecasts. Net income from continuing operations was up 16% year-on-years at £618.9 million, with continuing profit before tax up 17% at £220 million...The full dividend was raised 14% to 10.3p.
‘Henderson is a very good fit to our favoured “hyperactive” thematic, with a strong ability to actually monetise periods of good investment performance through performance fees. We upgraded back to a “buy” recommendation on 19 August…and continue to regard Henderson as a core holding within the asset manager sub-sector.’
Stagecoach share fall, but still not a ‘buy’
Bus and rail operator Stagecoach (SGC) may have seen its share price decline but not by enough to tempt Jefferies analyst Joe Spooner to ‘buy’.
Spooner retained his ‘hold’ recommendation and reduced the target price from 373p to 280p. The shares fell 3.9% to 251.1p yesterday.
‘We expect Stagecoach to continue to grind through operational challenges, but the prospect of shortlisting for significant UK rail contracts through 2016 should serve to strengthen the equity story ahead, in our view,’ he said.
‘But we see insufficient opportunity in the share price despite declines, to change our “hold” rating.’
He added: ‘Revisions to our earnings per share estimates may appear severe but that’s partly due to us catching up with more recent developments and partly due to us now moving below market expectations. A more meaningful reference is that our forecasts are now pitched c.10% below consensus.’
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Look up the shares
- Stagecoach Group PLC (SGC.L)
- Henderson Group PLC (HGGH.L)
- Rio Tinto PLC (RIO.L)
- Dunelm Group PLC (DNLM.L)
- Dairy Crest Group PLC (DCG.L)