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The Expert View: Rolls-Royce, Esure and Sage

Our daily roundup of analyst commentary on shares, also including JD Wetherspoon and Centaur.

by Michelle McGagh on May 04, 2018 at 05:00

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Key stats
Market capitalisation£15,418m
No. of shares out1,860m
No. of shares floating1,849m
No. of common shareholdersnot stated
No. of employees50000
Trading volume (10 day avg.)7m
Turnover£16,307m
Profit before tax£2,198m
Earnings per share230.00p
Cashflow per share277.55p
Cash per share159.35p

Jefferies: don’t ignore long-term issues at Rolls-Royce

Rolls-Royce (RR) may have addressed its short-term issues but Jefferies said this doesn’t mean investors should ignore longer-term operational issues.

Analyst Sandy Morris retained his ‘buy’ recommendation at target price of £11 on the stock after an annual general meeting statement that said ‘the year has started well and that trading is in line with Rolls-Royce’s expectations’.

‘The group has been slimmed down from five to three divisions,’ said Morris. ‘Significant progress has been made in developing more maintenance, repair, and overhaul capacity to address the Trent 100 issues [which has seen problems with aircraft engines].

He added: ‘That is all satisfactory, but we wonder whether by keeping attention focused on the short-term we are glossing over the strategic and operational issues that are ultimately more important.’

The shares edged 6p lower to 830.4p yesterday.

Key stats
Market capitalisation£958m
No. of shares out419m
No. of shares floating283m
No. of common shareholdersnot stated
No. of employees1623
Trading volume (10 day avg.)1m
Turnover£781m
Profit before tax£117m
Earnings per share19.00p
Cashflow per share21.20p
Cash per share11.14p

Esure numbers reflect insurance trends, says Hargreaves

Esure (ESUR) has seen policy numbers rising and the insurer shouldn’t be too concerned about price competition from comparison sites, says Hargreaves Lansdown.

Results from the insurer showed in-force policies rose 9.2% in the first quarter, driven by motor insurance, and premiums rose 18% thanks to an improving price environment. Analyst Nicholas Hyett said the numbers reflected more general insurance trends.

He said insurers would be hoping for a milder rest of the year after the Beast from the East blew ‘a great big hole in weather contingencies’ and any further flooding, storms, or a cold winter ‘all have the potential to seriously dent profits’.

While motor insurance is healthy, it is being offset by competition in home insurance market.

‘If big players are standing firm on pricing, then competition at the lower end of the market must be fierce indeed - price comparison sites strike again,’ said Hyett.

For Esure, underwriting is not a major contributor to group profits and as service revenues grow ‘a punch-up at the bottom end of the market is unlikely to bother Esure too much’.

The shares rose 1.2% to 226.4p yesterday.

Key stats
Market capitalisation£79m
No. of shares out144m
No. of shares floating133m
No. of common shareholdersnot stated
No. of employees515
Trading volume (10 day avg.)m
Turnover£65m
Profit before tax£7m
Earnings per share-0.76p
Cashflow per share3.81p
Cash per share2.84p

Shore Capital: Centaur valuation ‘undemanding’

B2B publisher Centaur Media (CAU) has made progress and Shore Capital said the shares were now trading at an ‘undemanding valuation’.

Analyst Roddy Davidson retained his ‘buy’ recommendation and target price of 53p on the stock after first quarter trading was in line with expectations and an outlook statement from management showed it was ‘confident of the group’s ability to take advantage of market opportunities and its strengthened balance sheet supportive of organic growth and the pursuit of complementary acquisitions’.

He added that progress has been made following a period of ‘rationalisation and investment’ that has improved the ’earnings quality, the clarity of its strategic and operational focus and has enhanced its long-term organic growth potential’.

‘The group’s stock is trading on a full year 2018 price/earnings of 15.1 times. We view this as an undemanding valuation given its attractive earnings per share growth potential, strong income support, and strategic value in a consolidating B2B sector,’ said Davidson.

The shares fell 2.4% to 51.5p yesterday.

Key stats
Market capitalisation£6,936m
No. of shares out1,083m
No. of shares floating1,080m
No. of common shareholdersnot stated
No. of employees13795
Trading volume (10 day avg.)3m
Turnover£1,715m
Profit before tax£498m
Earnings per share23.71p
Cashflow per share29.06p
Cash per share21.35p

Sage can overcome its difficulties, says Numis

Software company Sage (SGE) has been dogged by problems but there is upside to be had and it is not predicated on ‘everything going right’, says Numis.

Analyst David Toms retained his ‘hold’ recommendation and target price of 690p on the shares, which were flat at 635.4p yesterday.

Toms said first-half results gave him ‘little incremental comfort’ over the second half of the year and his forecasts remain below guidance. But he argued the problems, including a lack of training restricting the salesforce and weak growth, were fixable.

‘As we move through the second half... comparisons become tougher and recurring revenue little easier; management itself highlighted the challenge in moving the dial materially in a recurring revenue business and thus we think performance may not show any near-term improvement,’ he said.

‘We leave our forecasts at a level that allows for upside should performance improve, but it is not predicated on an ''everything going right'' second half.’

Toms added that ‘long-term margin optionality is not expensive’ but said the risk ‘still feels to the downside’.

Key stats
Market capitalisation£1,200m
No. of shares out106m
No. of shares floating67m
No. of common shareholdersnot stated
No. of employees22780
Trading volume (10 day avg.)m
Turnover£1,661m
Profit before tax£202m
Earnings per share50.37p
Cashflow per share116.38p
Cash per share46.46p

Investment pays off for JD Wetherspoon, says Peel Hunt

Investment at JD Wetherspoon (JDW) is paying off and changes at the pub group should support margins, says Peel Hunt.

Analyst Douglas Jack retained his ‘hold’ recommendation and target price of £12 on the shares, which were trading at £11.43 yesterday.

A third quarter trading statement is expected to show a slowing in like-for-like sales reflecting tougher comparisons and bad weather but year-to-date should still be ahead.

‘JD Wetherspoon’s asset quality is improving, as a result of investment, tail-end disposals, and freehold reversions - freeholds now account for almost 60% of the estate,’ he said.

‘This, combined with recent growth in machine and accommodation sales as well as higher drink prices should support margins. Nevertheless, with the shares valued at 9.4x enterprise value/earnings our recommendation remains ''hold'’.’

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  • Centaur Media PLC (CAU.L)
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  • esure Group PLC (ESUR.L)
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  • J D Wetherspoon PLC (JDW.L)
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  • Rolls-Royce Holdings PLC (RR.L)
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  • Sage Group PLC (SGE.L)
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