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The Expert View: Sainsbury's, Barratt and Provident Financial
Our daily roundup of analyst commentary on shares, also including Direct Line and Ted Baker.
by Michelle McGagh on Jan 14, 2016 at 05:00
Questions to be answered at Sainsbury’s
Sainsbury’s (SBRY) is providing analysts with more questions than answers following its bid for Home Retail Group and third quarter results.
Shore Capital analyst Clive Black retained his ‘hold’ recommendation on the shares but does not have a target price. The shares fell 1.4% to 247.7p despite better-than-expected results, with sales falling 0.4% in the 15 weeks to 9 January, versus the 0.7% fall analysts had been expecting.
Black said he was not inclined to change full-year 2016 forecasts for Sainsbury’s following the results, and said the supermarket’s presentation pack outlining the rationale for its interest in Argos owner Home Retail threw up more questions.
‘We have more questions than answers, which leads us to sit on the fence for a little while longer,’ he said. ‘Core Sainsbury’s is sound, a stock that is reasonably fairly valued on an earnings… and dividend yield basis.
‘Sainsbury’s with Home Retail is a potentially different matter altogether, one that could both positively and negatively excite depending upon the outcome of key questions that for now remain unanswered. The market has taken a rather mellow initial view on the potential Home Retail tie-up, making for a potentially larger than anticipated equity fund raise, assuming as we do that Sainsbury’s would not wish to be needing to run too hard from an ongoing financing perspective.’
Caution remains over Barratt’s prospects
Caution remains over house builder Barratt Developments (BDEV) despite half-year results coming in in-line with expectations.
Liberum analyst Charlie Campbell retained his ‘sell’ recommendation and target price of 539p on the shares, which rose 0.6% to 613p yesterday.
‘Barratt’s half year update is in line with expectations, and we do not expect consensus estimates to change,’ he said. ‘Our caution on the stock remains as we believe that valuation is stretched and we expect returns to peak in 2016 as selling price inflation moderates and build cost inflation remains high.’
Barratt is not the only housebuilder Campbell is cautious about, with ‘sell’ recommendation on Persimmon and Taylor Wimpey.
‘Falling gross margins and returns would put pressure on high valuations, in our view,’ he said.
Direct Line gives guidance on storm losses
Insurer Direct Line (DLGD) has provided clearer guidance on weather losses and the 2015 dividend is now expected to be lower.
Deutsche Bank analyst Oliver Steel retained his ‘buy’ recommendation but reduced the target price from 430p to 420p. The shares were broadly flat at 372.6p yesterday.
‘Direct Line has announced expected weather losses from the various UK storms between £110 million and £140 million. This compares to normal weather losses in a year of £80 million but, as there had been no exceptional weather losses at all until end November, we had reduced our expectations for these to just £25 million,’ he said.
Despite the increase in losses the recommendation from Steel is still a ‘buy’.
‘Through the 2015 estimated dividend will clearly be less than hoped, investors should still receive a 3.7% yield on the final alone and the shares have now fallen almost 50p from their peak compared with extra weather losses of just 5.5p,’ he said.
‘The shares now trade at 12.6x 2016 estimates, with a 6.5% 2016 estimated yield.’
Provident Financial not as low risk as thought
A return of competition in the lending space means payday lender Provident Financial (PFG) has been saddled with more risk, according to Numis.
Numis analyst James Hamilton retained his ‘sell’ recommendation and target price of £26.41 on the shares, which fell 2.1% to £32.31 yesterday.
‘The credit crisis saw the specialist market segment expand as banks withdrew credit from all but the very lowest risk customers,’ he said. ‘Consequently, Provident was able to attract prime customers at sub-prime lending margins, delivering exceptional risk-adjusted margins.
‘Competition has returned, the non-standard space is shrinking rapidly and impairment will increase as prime customers are replaced with more normal non-standard customers.
He added: ‘Provident has a first class credit crisis managing to grow profit every year which makes it appear extremely low risk, as opposed to the relatively low risk we believe it to be.’
Ted Baker: analysts looking for top line acceleration
Ted Baker (TED) had a good Christmas but analysts are still keen to see the high street designer accelerate the top line.
Jefferies analyst Charmaine Yap retained her ‘hold’ recommendation and target price of £34.00 on the shares, which were broadly flat at £26.90 yesterday.
‘Ted Baker reported a solid Christmas update, considering the unseasonably warm winter and negative calendar impact,’ she said.
‘Retail sales grew by 10.1%, slightly ahead of Jefferies’ estimate, but modest by Ted Baker’s standards and management expects full-year results to be in-line with expectations.
‘Notwithstanding the sequential sales slowdown Ted Baker displays a healthy mid-teens growth profile and 19% total shareholder return on Jefferies’ estimate. We would like to see signs for a reacceleration in top line to be more positive.’
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Look up the shares
- Ted Baker PLC (TED.L)
- Provident Financial PLC (PFG.L)
- J Sainsbury PLC (SBRY.L)
- Barratt Developments PLC (BDEV.L)
- Direct Line Insurance Group PLC (DLGD.L)