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The Expert View: Shell, BHP Billiton and Pearson
Our daily roundup of analyst commentary on shares, also including Boohoo and JD Wetherspoon.
by Michelle McGagh on Jan 21, 2016 at 05:00
Shell shareholder vote on BG takeover nears
Jefferies is sticking with its ‘buy’ recommendation on Shell (RDSa) despite a slump in profits as the oil price continues to tumble.
Analyst Jason Gammel kept his £20.40 target price on the shares, which tumbled 7.3% to £12.66 yesterday.
Shell said it expected profits for the last three months of 2015 to halve, but was handed a boost from BG beating its production target ahead of the vote on a takeover next week.
Gammel said should Shell’s deal go ahead it would produce one of ‘the most resilient cash cycles in the sector’.‘Royal Dutch Shell preliminary results for Q4 2015 indicate a miss versus our/consensus estimates due to weaker-than-expected downstream results. The company reiterated guidance for the 2016 dividend, cost savings and capital spending reductions,’ he said.
‘The Shell shareholder vote on the BG transaction is on 27 January, with a majority required for the proposed combination with BG to proceed. The BG vote is the following day.
‘We expect the combined entity to have one of the most resilient cash cycles in the sector with a break-even Brent price sub-$65 post-2017.’
BHP Billiton downgraded on commodity price slump
BHP Billiton (BLT) has been downgraded on renewed concerns about commodity prices.
Investec analyst Hunter Hillcoat downgraded his recommendation from ‘hold’ to ‘sell’ and reduced the target price from 943p to 581p based on the ‘disincentive nature of our revised commodity price forecasts, whereby we expect exceptionally low prices to prevail until excess supply is forced out of the market and balance returned’.
BHP Billiton fell 7% to 583.5p yesterday.
‘As a result of the negative impact on forecast cash flows, we have taken the view the BHP Billiton will need to reduce its progressive dividend policy and have assumed a future pay-out based on sustainable cash flows,’ he said.
‘Making valuation judgements in the mining sector is challenging until the latest round of asset impairments, dividend adjustments and assessment by credit agencies is complete.’
‘Robust’ Boohoo upgraded
There has been a ‘noticeable improvement’ at online fashion retailer Boohoo (BOOH) that has boosted investor confidence.
Barclays analyst Christodoulos Chaviaras upgraded his recommendation from ‘equal weight’ to ‘overweight’ and increased the target price from 34p to 45p. The shares fell 1.6% to 36.2p yesterday.
‘Positive sales momentum, more flexible/realistic margin targets, better clarity on capex plans and improved management communication combine to bring noticeable improvement in Boohoo’s investment thesis and mark steady progress in restoring investors’ confidence,’ he said.
‘We believe earnings visibility has improved and brand appeal continues to be robust in the UK and internationally.’
He added that the ‘valuation is undemanding on 27x current year price earnings’ and ‘we believe that Boohoo will unlikely have any negative surprise in the next 12 months regarding logistics’.
Pearson a ‘key sell’ as 2016 prospects decline
Educational publisher Pearson (PSON) is set for a difficult year including risks to the dividend.
Liberum analyst Ian Whittaker reiterated his ‘sell’ recommendation and reduced the target price from 640p to 540p. The shares fell 4.2% to 655.6p yesterday.
‘We reiterate Pearson as our key “sell” within the media sector and reduce our target price to 540p,’ he said. ‘We reduce estimates and the target price ahead of [the] trading update, despite Pearson benefiting from a strengthening dollar.
‘It is widely recognised that 2016 will be a difficult year for Pearson but we think the market still does not recognise the full extent of the secular issues. We think there is a significant chance of further restructuring charges and there is a risk to the dividend.’
JD Wetherspoon: poor margins disappoint
Pub chain JD Wetherspoon (JDW) has reported good second quarter revenue but the margins have disappointed analysts.
Shore Capital analyst Greg Johnson retained his ‘hold’ recommendation and does not have a target price on the stock. The shares slumped 9.6% to 610p yesterday.
‘We had expected first half margins to be lower than the full year as a consequence of staffing costs, however, the magnitude of the decline is worse than our expectations,’ he said.
‘The company states that it now expects profit before tax towards the low end of analyst consensus. Ahead of the analyst meeting we expect to lower our forecasts to c.£69 million implying 6.45% operating margins. We would expect the shares to open sharply lower with current metrics looking stretched relative to peers.
‘We continue to see better value elsewhere in the sector, where hopefully the like-for-like sales picture in the period…will help reassure that trading across the sector remains resilient.’
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Look up the shares
- Royal Dutch Shell PLC (RDSa.L)
- Pearson PLC (PSON.L)
- J D Wetherspoon PLC (JDW.L)
- Boohoo.Com PLC (BOOH.L)
- BHP Billiton PLC (BLT.L)