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The Expert View: Sainsbury’s, Greene King and Compass

Our daily roundup of analyst commentary on shares, also including Vectura and Micro Focus.

by Michelle McGagh on Jun 30, 2017 at 05:01

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Key stats
Market capitalisation£5,635m
No. of shares out2,190m
No. of shares floating2,080m
No. of common shareholdersnot stated
No. of employees51900
Trading volume (10 day avg.)12m
Profit before tax£359m
Earnings per share16.54p
Cashflow per share44.08p
Cash per share54.06p

Jefferies: Nisa buy could benefit Sainsbury’s

Jefferies believes a tie-up between Sainsbury's (SBRY) and Nisa could add value if the supermarket giant is able to snap up Nisa at a good price.

Analyst James Grzinic retained his ‘hold’ recommendation and target price of 260p on the stock, as he predicted ‘resilient’ first quarter sales.

Grzinic was particularly keen to discuss the potential merits of acquisitions, as reports suggest Sainsbury's is working on a bid for convenience store group Nisa and wholesaler Palmer & Harvey.

‘There is certainly more substance to the former given the predominance of tobacco in the latter,’ he said. ‘And we can see the strategic rationale of Sainsbury’s boosting food buying volumes by well over 5% at a time when the business is struggling to do so organically.’

The rumoured prices tag for Nisa of £130 million would offer good value, added Grzinic.

‘However, this also underlines the need for such actions at a time when the core food business has been lagging peers for much of the past year,’ he said. ‘Some may be also concerned by the growing to-do list for the leadership team.’

Overall, Grzinic believes there are risks to market expectations, given the wider UK macro backdrop.

At the time of writing, the shares were trading down 1%, or 2.6p, to 255.6p.

Key stats
Market capitalisation£2,129m
No. of shares out310m
No. of shares floating300m
No. of common shareholdersnot stated
No. of employees41486
Trading volume (10 day avg.)1m
Profit before tax£191m
Earnings per share64.10p
Cashflow per share99.26p
Cash per share75.68p

Don't say cheers to Greene King just yet, warns Hargreaves

In spite of record revenues at Greene King (GNK), the pub company is not immune to a fall in consumer spending, Hargreaves Lansdown has warned.

The company reported a 6.9% jump in full-year revenues to a record high of £2.2 billion, prompting a 3.6% rise in in its full-year dividend to 33.2p.

Analyst Nicholas Hyett also highlights Greene King's track record of growing dividends for more than 20 years. The stock has a yield of 4.9%.

‘On the face of it, income investors should be queuing at the bar for a piece of the action. However, while the acquisition of Spirit pubs has done wonders for the business, it also increased the group’s exposure to the casual dining market, and that’s an industry which looks under pressure,' he noted.

'Competition is fierce and the combination of rising wages and weak sterling has set costs creeping up.’

Hyett noted strong cash generation and a project to switch Spirit pubs to better performing Greene King formats meant the company could weather storms. Nevertheless, he added that a slowdown in the UK economy would still be unpleasant.

The shares were trading up 0.1%, or 0.5p, at 688.5p at the time of writing.

Key stats
Market capitalisation£25,579m
No. of shares out1,581m
No. of shares floating1,573m
No. of common shareholdersnot stated
No. of employees527180
Trading volume (10 day avg.)3m
Profit before tax£992m
Earnings per share62.68p
Cashflow per share90.23p
Cash per share21.90p

Berenberg: Compass continues to deliver

A meeting with Compass's (CPG) chief financial officer, Johnny Thomson, has convinced Berenberg that the catering group can expand margins and maintain underlying growth.

Analyst Najet El Kassir reiterated his ‘buy’ recommendation and increased the target price from £16.50 to £18.00 after the meeting confirmed his ‘confident outlook’.

‘The North America business remains strong, Europe is performing well with strong contract wins and the rest of the world is expected to pick up in 2018,’ he said.

‘We continue to believe that Compass’s diversity, both by geography and by industry, means that it has levers it can pull to maintain underlying growth and continued modest margin expansion.’

Forecasts have been amended to reflect currency moves and the recent £1 billion special dividend.

At the time of writing, the shares at the world's largest contract catering group were trading down 1.5%, or 25p, at £16.24.

Key stats
Market capitalisation£3,436m
No. of shares out149m
No. of shares floating148m
No. of common shareholdersnot stated
No. of employees1191
Trading volume (10 day avg.)m
Turnover289m USD
Profit before tax80m USD
Earnings per share0.47 USD
Cashflow per share0.61 USD
Cash per share0.14 USD

Deutsche: Micro Focus offers value

Micro Focus (MCRO) looks attractively priced - even though question marks remain about the IT company's buy of HP Enterprise’s software business.

Analyst Steve Goulden retained his ‘buy’ recommendation but reduced the target price from £29.00 to £28.00. At the time of writing Micro Focus was trading down 3.9%, or 92p, at £22.85.

Goulden believes the near-term investment case rests on whether the company can deliver HP Software margins in line with guidance.

'And will license sales recover after a terrible second quarter?’ he added.

The analyst noted that synergies appear to be materialising ahead of original guidance, but licenses and execution risk provide 'cause for concern’.

Nevertheless, he expects Micro Focus can ‘steady the ship’ and believes the company looks attractively valued at current levels.

Key stats
Market capitalisation£757m
No. of shares out679m
No. of shares floating597m
No. of common shareholdersnot stated
No. of employees453
Trading volume (10 day avg.)2m
Profit before tax£-100,000m
Earnings per share-9,999,999.00p
Cashflow per share-9,999,999.00p
Cash per share13.64p

Numis welcomes Vectura-Sandoz tie-up

Pharma Vectura (VEC) looks attractively priced following news of its tie-up with Sandoz to develop a generic inhaler.

Analyst Stefan Hamill reiterated his ‘buy’ recommendation and target price of 214p following the exclusive deal with Sandoz, a division of Novartis. In his opinion, this provides further validation of Vectura’s strong generic formulation and device capabilities. Vectura's shares were down 2.6%, or 3p, at 112p at the time of writing.

‘Perhaps most significantly, it is Vectura’s first generic metered-dose inhaler deal providing clear evidence of synergies from the SkyePharma merger last year,’ he said.

‘We see current levels as very attractive and completely underpinned by already approved inhalers, with... the Sandoz deal marking a near-term trough for sentiment after recent setbacks.’

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Look up the shares

  • J Sainsbury PLC (SBRY.L)
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  • Vectura Group PLC (VEC.L)
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  • Greene King PLC (GNK.L)
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  • Compass Group PLC (CPG.L)
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  • Micro Focus International PLC (MCRO.L)
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