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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

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Key stats
Market capitalisation£30,665m
No. of shares out1,798m
No. of shares floating1,189m
No. of common shareholdersnot stated
No. of employees59775
Trading volume (10 day avg.)7m
Turnover32,938m USD
Profit before tax4,510m USD
Earnings per share2.43 USD
Cashflow per share4.22 USD
Cash per share4.70 USD

*Correct as at 11 Feb 2016

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.

Key stats
Market capitalisation£820m
No. of shares out137m
No. of shares floating135m
No. of common shareholdersnot stated
No. of employees6183
Trading volume (10 day avg.)m
Turnover£1,515m
Profit before tax£-39m
Earnings per share-29.13p
Cashflow per share3.30p
Cash per share59.54p

*Correct as at 11 Feb 2016

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.’

Key stats
Market capitalisation£1,883m
No. of shares out203m
No. of shares floating89m
No. of common shareholdersnot stated
No. of employees8556
Trading volume (10 day avg.)m
Turnover£836m
Profit before tax£96m
Earnings per share47.28p
Cashflow per share57.83p
Cash per share8.00p

*Correct as at 11 Feb 2016

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.’

Key stats
Market capitalisation£2,592m
No. of shares out1,132m
No. of shares floating1,075m
No. of common shareholdersnot stated
No. of employees922
Trading volume (10 day avg.)3m
Turnover£671m
Profit before tax£127m
Earnings per share11.13p
Cashflow per share16.60p
Cash per share29.97p

*Correct as at 11 Feb 2016

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.’

Key stats
Market capitalisation£1,440m
No. of shares out574m
No. of shares floating416m
No. of common shareholdersnot stated
No. of employees39000
Trading volume (10 day avg.)1m
Turnover£3,204m
Profit before tax£139m
Earnings per share24.15p
Cashflow per share47.06p
Cash per share68.83p

*Correct as at 11 Feb 2016

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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  • Stagecoach Group PLC (SGC.L)
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  • Henderson Group PLC (HGGH.L)
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  • Rio Tinto PLC (RIO.L)
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  • Dunelm Group PLC (DNLM.L)
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  • Dairy Crest Group PLC (DCG.L)
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