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The Expert View: Sainsbury’s, WPP and Interserve

Our daily roundup of analyst commentary on shares, also including DFS and Lancashire.

by Michelle McGagh on May 01, 2018 at 05:00

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Key stats
Market capitalisation£6,810m
No. of shares out2,195m
No. of shares floating2,180m
No. of common shareholdersnot stated
No. of employees51900
Trading volume (10 day avg.)8m
Profit before tax£1,283m
Earnings per share16.54p
Cashflow per share44.08p
Cash per share54.06p

Sainsbury’s to face competition scrutiny over Asda merger

Sainsbury’s (SBRY) sensational plan to swoop on rival Asda will come under scrutiny from the competitions watchdog and store closures may be required, says Hargreaves Lansdown. The supermarkets confirmed plans to merge, in a deal which would see Sainsbury’s pay £3 billion in cash, with Asda owner Walmart receiving a 42% stake in the combined business. Sainsbury’s shares rose 16.8% to 315p yesterday on the news.

Analyst Laith Khalaf said there would be benefits for the supermarkets, which would have huge buying power resulting in lower prices for customers and higher margins for the business.

However, he said the stance of the Competition and Markets Authority would be critical, although the rubber-stamping of Tesco’s takeover of Booker ‘may give some cause for confidence’.

‘We expect the competition to take a localised approach to their assessment as they did with the Tesco takeover of Booker, so store disposals could still be a feature of the merger. Although Sainsbury’s thinks they will be able to avoid any closures,’ he said.

‘If the deal goes through, the prospect of Sainsbury’s, Asda, and Argos working together, with Walmart chipping in too, is a pretty powerful combination.’

Key stats
Market capitalisation£15,564m
No. of shares out1,266m
No. of shares floating1,222m
No. of common shareholdersnot stated
No. of employees134413
Trading volume (10 day avg.)7m
Profit before tax£2,552m
Earnings per share124.04p
Cashflow per share167.76p
Cash per share188.31p

WPP: caution remains but outlook strong, says Shore Capital

Advertising giant WPP (WPP) faces uncertainty in the short term but Shore Capital believes it will face down competition and deliver to clients in the long term.

Analyst Roddy Davidson retained his ‘hold’ recommendation on the stock after first quarter results, the first after the unexpected departure of chief executive Martin Sorrell.

Organic net sales fell 0.1% in the first quarter, better than the drop of up to 1.5% some analysts had been forecasting, helping the shares rise 8.6% to £12.48 yesterday.

‘We are reassured by the “as expected” start to the year…and await with interest the results of the strategic review now in process,’ he said.

‘More broadly, we remain positive on the strength of WPP’s underlying agencies, its ability to deliver a comprehensive service on a global basis and its long-standing ethos of investment and innovation to create and reinforce competitive advantage.

‘Ultimately, we believe these characteristics will help it to successfully face down new entrants.’

Key stats
Market capitalisation£139m
No. of shares out146m
No. of shares floating134m
No. of common shareholdersnot stated
No. of employees46246
Trading volume (10 day avg.)2m
Profit before tax£125m
Earnings per share-71.22p
Cashflow per share-22.53p
Cash per share77.76p

Interserve facing myriad problems, says Liberum

There is upside at Interserve (IRV) but Liberum is concerned about the myriad risks facing the support services company.

Analyst Joe Brent retained his ‘buy’ recommendation and target price of 180p on the stock after ‘terrible [full-year] results as expected’ that saw him cut earnings per share forecasts by 12%. Interserve’s debt refinancing deal saw warrants issued over 20% of the business, reducing the upside for investors.

‘We believe that the balance sheet needs addressing and we expect that will be achieved by a mixture of disposals and rights issues, but we think it may take time to arrange a rights issue,’ he said.

‘We still see significant upside, albeit arguably 20% less than after the grant of the warrants on the banks.’

The shares tumbled 12.3% to 93.8p yesterday.

Key stats
Market capitalisation£480m
No. of shares out212m
No. of shares floating206m
No. of common shareholdersnot stated
No. of employees4354
Trading volume (10 day avg.)m
Profit before tax£82m
Earnings per share18.61p
Cashflow per share28.92p
Cash per share28.84p

Jefferies upgrades ‘resilient’ DFS

Jefferies has upgraded furniture store DFS (DFSD) after first-half results showed the company’s resilience in a challenging market.

Analyst Niraj Amin upgraded his recommendation from ‘hold’ to ‘buy’ and increased the target price from 210p to 255p. The shares edged 2p lower to 227.5p yesterday.

Amin said the results ‘proved that with better visibility of market growth, flexibility in operating expenses and market cost deflation, it is able to limit operating deleverage’.

‘Our confidence in DFS’s outlook rises as the first-half 2018 results proved resilience of its profitability in the face of a challenging UK upholstery market,’ said Amin.

‘Additionally, we believe the Sofology acquisition provides an interesting mid-term opportunity. Improved cashflow visibility sees us increase our price target to 255p and upgrade.’

Key stats
Market capitalisation£1,200m
No. of shares out201m
No. of shares floating190m
No. of common shareholdersnot stated
No. of employees103
Trading volume (10 day avg.)1m
Turnover346m USD
Profit before tax45m USD
Earnings per share-0.26 USD
Cashflow per share-0.25 USD
Cash per share0.93 USD

Peel Hunt: outlook to improve at Lancashire

Insurance group Lancashire (LRE) has had a benign start to the year but Peel Hunt believes the picture should continue to improve as premiums increase.

Analyst Andreas van Embden retained his ‘add’ recommendation and target price of 690p on the shares, which rose 1p to 596p yesterday.

He said that market conditions were ‘improving but not sufficiently to warrant a material expansion of Lancashire’s underwriting capacity’.

‘Instead, selective growth combined with high single-digit rate increases should see an improvement in Lancashire’s underlying margins,’ he said.

‘We have assumed a modest decline in the company’s risk profile as Lancashire keeps its excess capital powder dry ahead of the June/July renewals. The first quarter 2018 numbers on 3 May should see support from a benign start to the year.’

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  • DFS Furniture PLC (DFSD.L)
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  • Interserve PLC (IRV.L)
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  • Lancashire Holdings Ltd (LRE.L)
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  • J Sainsbury PLC (SBRY.L)
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