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The Expert View: Tesco, GlaxoSmithKline and Carillion

Our daily roundup of analyst commentary on shares, also including Domino's Pizza and Tullow Oil.

by Michelle McGagh on Oct 05, 2017 at 05:00

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Key stats
Market capitalisation£14,846m
No. of shares out8,189m
No. of shares floating8,042m
No. of common shareholdersnot stated
No. of employees464520
Trading volume (10 day avg.)26m
Turnover£55,917m
Profit before tax£72m
Earnings per share0.88p
Cashflow per share16.70p
Cash per share83.57p

Tesco out of the medical ward, says Shore Capital

Tesco’s (TSCO) first dividend since its accounting crisis shows the supermarket giant has ‘left the medical ward’ but Shore Capital is still adopting a cautious approach.

Analyst Clive Black retained his ‘hold’ recommendation on the stock, which fell 3% to 184.4p yesterday.

He said the interim results for full-year 2018 from the supermarket beat expectations and ‘we are expecting to be upgrading our forecasts with respect to our full-year 2018 pre-tax profit and earnings per share’.

The recommendation of a 1p dividend payment was ‘a sign that the group has left the medical ward’, he said.

‘All in all, we believe that Tesco is doing very good, focused and diligent work that is evident in the consistent execution of improved store standards across the piece,’ he said.

‘All this good work is delivering a return to year-on-year growth, more attractive corresponding stock valuations and necessary deleveraging.

‘While so, the high core price/earnings ratio multiple, low free cashflow yield and still fulsome prevailing solvency ratios mean that we still sit on our hands for what our preview note characterised as a sideways story.’

Key stats
Market capitalisation£74,382m
No. of shares out4,919m
No. of shares floating4,860m
No. of common shareholdersnot stated
No. of employees99827
Trading volume (10 day avg.)8m
Turnover£27,889m
Profit before tax£912m
Earnings per share18.60p
Cashflow per share57.77p
Cash per share101.55p

Liberum defends ‘beaten up’ GlaxoSmithKline

Shares in GlaxoSmithKline (GSK) have been beaten up for no good reason, according to Liberum, which believes the outlook for the pharmaceutical giant is better than the market expects.

Analyst Roger Franklin retained his ‘buy’ recommendation but lowered the target price from £19.00 to £17.60. The shares fell 9p to £15.11 yesterday.

‘GlaxoSmithKline is off c.10% versus EU pharma, in dollars, since the end of May, despite stronger fundamentals including benign competitor data in HIV, a quality beat at the second quarter, upgraded pharma margin guidance and the confirmed dividend,’ he said.

He believes concerns about the pricing of respiratory drugs and the company’s research and development (R&D) programme ‘have unfairly weighed on the shares’.

‘Instead we believe the earnings outlook is better than consensus expects and there is 16% upside to fair value if Glaxo can deliver just breakeven R&D over the longer term, in line with its historical performance,’ said Franklin.

Key stats
Market capitalisation£204m
No. of shares out430m
No. of shares floating425m
No. of common shareholdersnot stated
No. of employees31628
Trading volume (10 day avg.)12m
Turnover£4,395m
Profit before tax£124m
Earnings per share26.13p
Cashflow per share35.40p
Cash per share109.18p

Numis predicts volatility at Carillion

Numis has downgraded Carillion (CLLN) profit estimates as it fears the support services company will be unable to repair its balance sheet.

Analyst Howard Seymour retained his ‘hold’ recommendation and target price of 45p on the stock as he reduced profit before tax estimates for this year and next year by 23% after the interim results. The shares fell 1% to 47.5p yesterday.

‘We downgrade profit estimates post recent interims, and continue to expect a volatile share price going forward,’ he said.

Although the disposal of its Canadian business will take some of the pressure off there are still a number of issues.

‘Uncertainty over the possibility of further trading issues and the inability to repair the balance sheet through equity issuance are genuine concerns and we continue to advocate switching out of Carillion into peers that have illogically been impact by Carillion’s issues,’ said Seymour.

Key stats
Market capitalisation£1,505m
No. of shares out491m
No. of shares floating486m
No. of common shareholdersnot stated
No. of employees911
Trading volume (10 day avg.)5m
Turnover£361m
Profit before tax£65m
Earnings per share12.93p
Cashflow per share14.41p
Cash per share4.63p

Domino’s up 15% but more to go, says Peel Hunt

Domino’s (DOM) share price has surged over the last two weeks as stock has been bought back but Peel Hunt said there is further to go if the takeaway pizza chain can grow like-for-like sales more quickly.

Analyst Douglas Jack retained his ‘buy’ recommendation and target price of 400p on the stock as the company undertook a 1.5 million share buyback over the last two weeks. The shares were flat at 306.9p yesterday.

‘What we said before still remains intact; if like-for-like sales start to accelerate and the buyback has to compete with short covering on the equivalent of 15% of the equity base, then the upward squeeze on the share price could be considerable.’

Jack has confidence that third quarter sales will increase as Domino’s will have benefited from poor weather and soft comparators but said ‘the self-help initiatives of new innovation, pricing and advertising only started towards the end of the quarter, benefiting the fourth quarter of 2017 and the first half of 2018 more than the third quarter of 2017’.

Key stats
Market capitalisation£1,665m
No. of shares out911m
No. of shares floating851m
No. of common shareholdersnot stated
No. of employees2071
Trading volume (10 day avg.)8m
Turnover1,483m USD
Profit before tax-1,043m USD
Earnings per share-1.15 USD
Cashflow per share-0.75 USD
Cash per share0.23 USD

Jefferies downgrades Tullow Oil

Jefferies has downgraded Tullow Oil (TLW) despite a resolution to its Ghanaian border dispute that means drilling on its Araku exploration site can now go ahead.

Analyst Mark Wilson downgraded his recommendation from ‘hold’ to ‘underperform’ with a target price of 155p on the shares, which fell 1.7% to 183p yesterday.

While he said Tullow had ‘plenty of momentum for the market to look to’ the Araku site was ‘a single exploration event which we include at, we believe, appropriate risked value in our 155p price target’.

‘We therefore move to “underperform” rather than chase the valuation ahead of this important catalyst for a stock trading at $24 per barrel of oil equivalent and still with material debt refinancing ahead of it,’ he said.

Wilson added that benefit of the doubt was in short supply at Tullow following the £600 million rights issue earlier this year.

‘Our rating record on Tullow this year has been dreadful and Araku success while “underperform” could further compound that record,’ he said. ‘The rights issue, however, belatedly proved our previous long-held caution.’

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  • Domino's Pizza Group PLC (DOM.L)
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  • Carillion PLC (CLLN.L)
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  • Tullow Oil PLC (TLW.L)
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  • GlaxoSmithKline PLC (GSK.L)
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  • Tesco PLC (TSCO.L)
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