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The Expert View: SSE, St James’s Place and Babcock

Our daily roundup of analyst commentary on shares, also including SIG and Compass.

by Michelle McGagh on Nov 22, 2017 at 05:00

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Key stats
Market capitalisation£13,675m
No. of shares out1,019m
No. of shares floating1,016m
No. of common shareholdersnot stated
No. of employees21157
Trading volume (10 day avg.)5m
Profit before tax£2,907m
Earnings per share158.19p
Cashflow per share282.25p
Cash per share140.51p

‘Buy’ SSE despite looming dividend cut

Jefferies has upgraded energy supplier SSE (SSE) following its deal announced earlier this month to spin off its retail energy business and merge it with Npower.

Analyst Ahmed Farman upgraded his recommendation from ‘hold’ to ‘buy’ and increased the target price from £14.00 to £17.00 after the two big six energy suppliers announced they would merge to create a UK-listed energy company with 11.5 million accounts. The shares rose 11p to £13.42 yesterday.

‘We believe that the spin-off and merger of SSE’s domestic retail business with Npower would create material synergies, improve visibility on SSE’s under-rated network and renewable assets, and result in more focused business models,’ he said.

‘These factors should drive a re-rating in-line with recent sector precedents.’

He added that the merger will create a more ‘sustainable dividend’.

‘We estimate the combined full year 2019 dividend per share…to be 86p, lower than current consensus for SSE [at 100p]. However, the current 2018 dividend yield of 7% versus peers at 5% suggests that a cut is already priced in. We see a credible, rebased dividend as positive for the stock,’ said Farman.

Key stats
Market capitalisation£6,039m
No. of shares out529m
No. of shares floating494m
No. of common shareholdersnot stated
No. of employees1735
Trading volume (10 day avg.)1m
Profit before tax£497m
Earnings per share21.34p
Cashflow per share23.33p
Cash per share65.58p

Numis: look for SJP Budget buying opportunity

Numis believes there could be a ‘short-term buying opportunity’ at St James’s Place (SJP) should today’s Budget bring any adverse pension changes. Analyst David McCann retained his ‘add’ recommendation and target price of £13.70 on the stock, which fell 6p to £11.52 yesterday.

He said any adverse changes to pension rules in the Budget, which have been rumoured, could put the shares ‘under pressure’ and he ‘would likely see this as a buying opportunity’.

‘We think the argument that curtailed pension tax advantages equals bad news for SJP is overly simplistic,’ he said. ‘In our view, people will still need/want to save money for retirement…pensions rules have been tinkered with numerous times in recent years and it did not disrupt SJP’s overall net flows…[and] over 70% of SJP’s pension inflows come from transfers of existing pensions elsewhere.’

He added that net flows only had short- to medium-term impact on cash profit and there could be ‘positive offsetting tax changes elsewhere in the Budget’, while a more complex tax code would boost the need for financial advice.

Key stats
Market capitalisation£3,630m
No. of shares out506m
No. of shares floating498m
No. of common shareholdersnot stated
No. of employees35750
Trading volume (10 day avg.)3m
Profit before tax£443m
Earnings per share61.71p
Cashflow per share103.03p
Cash per share37.86p

Babcock set to perform long term, says Shore Capital

Lower debt and more normal working capital means engineering support services company Babcock (BAB) is on track to perform well, says Shore Capital.

Analyst Robin Speakman reiterated his ‘buy’ recommendation on the stock despite first-half results sending the shares 6.8% lower at 703.5p yesterday.

‘Babcock continues to perform well, in our opinion, on an underlying level,’ he said.

‘This reflects its strong market position in essential, non-discretionary spend, services. We feel confident that the business trajectory is set to see net debt levels fall substantially over the next couple of years as working capital and capital expenditure tends to normalise. Contract performance appears high to us.’

Key stats
Market capitalisation£973m
No. of shares out592m
No. of shares floating549m
No. of common shareholdersnot stated
No. of employees10315
Trading volume (10 day avg.)3m
Profit before tax£131m
Earnings per share-20.14p
Cashflow per share-13.33p
Cash per share21.76p

SIG turnaround could create more upside, says Liberum

The new chief executive of insulation group SIG (SHI), Meinie Oldersma, has a background in turnarounds and there may be upside to the shares sooner rather than later, says Liberum.

Analyst Charlie Campbell retained his ‘sell’ recommendation and target price of 157p on the stock after a ‘consistent’ second-half trading update. The shares jumped 6% to 169.1p on the news.

‘We broadly agree that SIG’s new chief executive has a good chance of restoring profitability, as this is now his thirteenth turnaround and he has a good track record in comparable businesses,’ he said.

‘We were surprised by how fast and how soon the shares re-rated, and rated the shares ‘sell’ at 179p, noting that 5% margins were priced in at that point. They now trade at 0.4x 2018 enterprise value/sales implying that the stock market is anticipating a margin approaching 4% quite soon, from 3.2% in 2017, suggesting a better risk/reward than 179p.

He added that there ‘may be upside if the 5% margin target is delivered sooner rather than later’ and that he was keeping ‘an open mind’.

Key stats
Market capitalisation£24,324m
No. of shares out1,582m
No. of shares floating1,575m
No. of common shareholdersnot stated
No. of employees527180
Trading volume (10 day avg.)4m
Profit before tax£1,823m
Earnings per share62.68p
Cashflow per share90.23p
Cash per share21.90p

Compass can handle cost challenges, says Hargreaves

Profits at the world’s largest catering group Compass (CPG) have benefited from weak sterling and the company is well placed to weather its cost challenges, says Hargreaves Lansdown.

Shares fell 3.3% on full-year results despite full-year revenues rising 4% to £22.9 billion and operating profits up 5.6% to £1.7 billion. At the time of writing the shares were trading down 3.1%, or 50p, at £15.42.

Analyst Nicholas Hyett said it was clear why chief executive Richard Cousins has decided to hand over the reins.

‘The upheaval caused in offshore and remote by 2015’s commodity crash is starting to recede and the rest of the group is getting on with the job of winning new business,’ he said.

‘In a company employing over 500,000 people at tens of thousands of sites, keeping a firm grip on costs and efficiency is both challenging and vitally important. With margins expanding again this year, Compass continues to show that’s a challenge it’s more than able to handle.’

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  • St. James's Place PLC (SJP.L)
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  • Babcock International Group PLC (BAB.L)
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  • Compass Group PLC (CPG.L)
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