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The Expert View: SSE, Marks and Spencer and Persimmon

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

by Michelle McGagh on Nov 09, 2017 at 05:00

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Key stats
Market capitalisation£14,318m
No. of shares out1,022m
No. of shares floating1,016m
No. of common shareholdersnot stated
No. of employees21157
Trading volume (10 day avg.)3m
Profit before tax£2,907m
Earnings per share158.19p
Cashflow per share282.25p
Cash per share140.51p

Jefferies warns over dividend impact of SSE spin-off plans

Jefferies has warned SSE’s (SSE) dividend could be rebased under the energy provider’s plans to spin off its UK retail business and merge it with Npower.

SSE plans to list the spin-off company, with SSE shareholders owning just under two thirds and shareholders in Innogy, Npower’s German parent, owning just over a third.

Analyst Ahmed Farman retained his ‘hold’ recommendation and target price of £14.00 on the shares, which fell 12p to £13.98 yesterday.

SSE has committed to increasing its 2017/18 dividend by at least the retail price index measure (RPI) of inflation, with a similar rise targeted for the following year. SSE paid 91.3p in dividends for the year to the end of March, equating to a trailing yield of 6.5%.

Beyond 2018/19, SSE said that its dividend policy for the company that remained following the spin-off would 'reflect the quality and nature of its assets and operations, the earnings derived from them and the longer-term financial outlook'.

While it said it expected to keep dividend increases in line with RPI inflation, Farman warned these hikes may be made from a lower, rebased payout.

'Once the demerger is complete, we estimate that the spin-off would result in a 20p (17%) earnings per share dilution in 2019 (this excludes SVT price cap effect, and assumes there is no cash inflow for SSE),' he said.

'This could prompt a dividend rebasing from SSE.'

Key stats
Market capitalisation£5,292m
No. of shares out1,625m
No. of shares floating1,598m
No. of common shareholdersnot stated
No. of employees85209
Trading volume (10 day avg.)10m
Profit before tax£1,269m
Earnings per share7.18p
Cashflow per share42.54p
Cash per share29.73p

Hargreaves: M&S has a long way to go in turnaround

Food sales used to be the bright spot in Marks & Spencer’s (MKS) results but even they are faltering, with Hargreaves Lansdown warning the retailer has a lot further to go in its turnaround plan.

First-half results may have seen food revenues increase 4.4% but this was the result of new store openings and on a like-for-like basis, sales fell 0.1%. This was on top of reduced food margins.

With clothing and home sales down as well, profit before tax fell 5.3% to £219.1 million. The shares rose 1.6% to 333.1p yesterday.

Analyst Laith Khalaf said it was ‘not a pretty set of results for M&S, which has seen its turnaround plan undermined by changing consumer shopping habits and a weaker pound’.

‘The food business has been keeping M&S afloat in recent years, but now progress seems to be flagging here, the clothing division needs to start pulling its own weight,’ he said, adding that the festive period looked set to be ‘challenging’.

‘For M&S it is still early days in the turnaround plan, and it’s unfortunate that the retailer’s structural issues have been compounded by tough times in the industry as a whole. There won’t be any champagne accompanying the marmalade sandwiches at M&S HQ, it’s a quick brew then back to work.’

Key stats
Market capitalisation£566m
No. of shares out178m
No. of shares floating174m
No. of common shareholdersnot stated
No. of employees3697
Trading volume (10 day avg.)1m
Profit before tax£81m
Earnings per share11.93p
Cashflow per share31.14p
Cash per share22.98p

Tyman hits a speedbump, says Numis

Numis is reducing its forecasts for Tyman (TYMN), which supplies building products to the door and window industry, on the back of changes in its North American business.

Analyst Christen Hjorth retained his ‘add’ recommendation but lowered the target price from 405p to 375p. The shares were flat at 328.5p yesterday.

Full-year profit before tax is expected to be ‘slightly below’ the current range of analyst expectations, said Hjorth, and he has adjusted his 2017 forecasts by 5% to £68 million.

‘However, with these issues primarily expected to be one-off in nature, management views this as a “speedbump”, which relates to the group’s North American footprint rationalisation. As a result, we model a slightly lower reduction to profit before tax in 2018, down 3% to £74.2 million.’

He added that following the downgrade the group traded on a 2018 price/earnings ratio of 12x and dividend yield of c.3.5%.

Key stats
Market capitalisation£8,543m
No. of shares out309m
No. of shares floating296m
No. of common shareholdersnot stated
No. of employees4526
Trading volume (10 day avg.)2m
Profit before tax£782m
Earnings per share196.95p
Cashflow per share199.47p
Cash per share295.95p

Persimmon valuation is too stretched, says Shore Capital

Shares in housebuilder Persimmon (PSN) are ‘too stretched’ as the builder faces stiffening headwinds from the housing market, according to Shore Capital.

Analyst Robin Hardy retained his ‘sell’ recommendation and a ‘fair value’ of £21.50 on the stock, after its third quarter trading update that was ‘light on detail’. The shares fell 3.6% to £27.72 yesterday.

While he said the business was strong ‘the rating is just too stretched with the shares trading on a price/earnings of almost 11.5 times next year and now yielding 4.7% 9good for the market but low relative to other house builders)’.

‘While government policy appears favourable at present there will need to be a flip from demand to supply stimulus sooner rather than later and additional output from other channels and other supplies is a major threat to what we firmly believe are supernormal returns being made by the national housebuilders,’ said Hardy.

‘We remain cautious on the sector with a ‘sell’ stance here and on Barratt and Bovis. We would take profits from Taylor Wimpey and from Berkeley. There is better relative value but not absolute in the mid-caps.’

Key stats
Market capitalisation£1,319m
No. of shares out106m
No. of shares floating67m
No. of common shareholdersnot stated
No. of employees22780
Trading volume (10 day avg.)m
Profit before tax£202m
Earnings per share50.37p
Cashflow per share116.38p
Cash per share46.46p

Peel Hunt: take profits from JD Wetherspoon

Pub chain JD Wetherspoon (JDW) has suffered increased costs meaning it cannot achieve like-for-like growth, and Peel Hunt has recommended taking profits.

Analyst Douglas Jack retained his ‘reduce’ recommendation and target price of £11.00 on the stock after first quarter 2018 sales rose 6.1%. The shares edged 5p higher to £12.49 yesterday.

Jack said the increase in sales ‘only resulted in margins being flat despite freehold eversions and tail-end disposals, reflecting increasing cost pressures and lower drinks prices’.

‘Costs have been significantly higher than last year, and further increases are expected in areas including labour, business rates, utilities and sugar taxes, all of which suggest JD Wetherspoon’s pricing for like-for-like growth cannot be sustained,’ he said.

‘Given this and the company’s premium enterprise value/earnings valuation of 10.2x to its freehold peers’ 8.9x average, we would take some profits.’

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  • Marks and Spencer Group PLC (MKS.L)
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  • Persimmon PLC (PSN.L)
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  • Tyman PLC (TYMN.L)
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