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Numis: 12 New Year share tips

A dozen large cap stocks gained a 'buy' recommendation from Numis Securities analysts at the start of this year. 

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Key stats
Market capitalisation£3,031m
No. of shares out1,000m
No. of shares floating671m
No. of common shareholdersnot stated
No. of employees22929
Trading volume (10 day avg.)2m
Profit before tax£125m
Earnings per share12.45p
Cashflow per share14.62p
Cash per share9.59p

Disruptive discount chain looks cheap

Record Christmas sales at B&M European Value Retail (BME) have highlighted the attractions of the discount store chain, says Numis analyst Matthew Taylor.

At 302p today, the stock is closing in on Taylor’s 325p price target following the strong trading statement.

Chaired by former Tesco boss Terry Leahy, B&M has ‘a disruptive sourcing model, strict stock-keeping unit count discipline, ability to target general merchandise sector seasonal peaks and trade profitably across a wide range of retail outlets at high cost effectiveness’, meaning it has a ‘powerful and unique’ business model, said Taylor.

However, B&M’s valuation still lags other retailers that have brand and pricing integrity and international expansion potential. ‘On a discounted cash-flow basis, the current share price discounts earnings before interest and taxation growth falling comfortably below 10% by full-year 2019, which we view as highly unlikely,’ the analyst said.

Key stats
Market capitalisation£3,054m
No. of shares out123m
No. of shares floating121m
No. of common shareholdersnot stated
No. of employees2366
Trading volume (10 day avg.)m
Profit before tax£403m
Earnings per share327.96p
Cashflow per share330.44p
Cash per share48.06p

Bellway going for growth

Substantial volume growth is expected from housebuilder Bellway (BWY) this year, which Numis believes has the highest level of upside in its sector.

Analyst Chris Millington set a target price of £30.91 on the stock which traded at £26.03 earlier today. Although the shares have outperformed their sector average by 19% in the past two years, he said they traded at 1.3 times their net tangible asset value, below the sector average of 1.5. The stock offers a dividend yield of 4.8% which he estimates is three times covered by earnings.

‘Our analysis shows that Bellway’s land buying, production and regional expansion will support substantial volume growth from here against what we see as a supportive market backdrop,’ he said, adding that a prudent level of borrowing meant it could scale down its ambitions in the event of a downturn.

‘Furthermore, we think that forecasts are set at conservative level and upgrade momentum will continue to be towards the top-end of the sector. Despite this momentum and conservatism, Bellway’s shares still trade at a c.15% discount to the sector and look good value versus both its forecasted returns and its peers and we estimate it has one of the highest levels of upside to fair value in the sector.’

Key stats
Market capitalisation£1,530m
No. of shares out263m
No. of shares floating248m
No. of common shareholdersnot stated
No. of employees4358
Trading volume (10 day avg.)1m
Profit before tax£115m
Earnings per share43.50p
Cashflow per share62.31p
Cash per share78.33p

Britvic can brave the headwinds

Concerns about consumer spending, rising costs from the weak pound and the impending sugar levy have weighed on soft drinks manufacturer Britvic (BVIC), with its shares down 19% over one year.

While analyst Charles Pick says these worries are legitimate he believes they are priced in and, encouraged by the company’s track record of meeting or beating its profits targets, has set a price target of 697p against their current 581.5p.

‘Talks with retailers are planned for January-March 2017 to seek to pass on higher input costs and note that there is some offset to sterling weakness too as the group will enjoy translational gains on the 27% of euro based sales last full year from France and Ireland,’ said Pick.

The impact of next year’s sugar tax will not be severe for a company which includes low sugar Pepsi Max among its brands. ‘68% of the portfolio in Great Britain and Northern Ireland will be unaffected by the sugar levy due to new products that are low/zero sugar plus existing product reformulations,’ he said.

Key stats
Market capitalisation£2,265m
No. of shares out385m
No. of shares floating381m
No. of common shareholdersnot stated
No. of employees1182
Trading volume (10 day avg.)1m
Profit before tax£61m
Earnings per share15.58p
Cashflow per share27.07p
Cash per share36.66p

'Tipping point’ in radiology to boost BTG

Drug developer BTG (BTG) is well-placed to benefit from an ‘explosion’ in progress in hospital-based interventional radiology this year.

Analyst Paul Cuddon has a price target of 900p on the stock, currently trading at 612p. The optimistic target is due to what he describes as a ‘tipping point’ in interventional medicine.

‘We have noted an explosion of scientific and clinical progress in the field using innovative procedures that leverage significant investment in imaging, are less invasive than surgery, safer than drugs and more profitable for hospitals,’ he said.

‘BTG’s blood clot and oncology businesses are genuinely world class and with its technologies becoming better positioned in treatment guidelines, we see a business that can deliver strong growth over the medium term.’

Key stats
Market capitalisation£2,903m
No. of shares out373m
No. of shares floating262m
No. of common shareholdersnot stated
No. of employees10205
Trading volume (10 day avg.)1m
Profit before tax£141m
Earnings per share36.53p
Cashflow per share68.56p
Cash per share23.72p

Daily Mail doing well

Daily Mail General Trust (DMGT) reported strong 2016 results last month and analyst Gareth Davies believes the newspaper and media group could do well this year with new chief executive Paul Zwillenburg conducting a strategic review.

Davies retained his 970p on the stock, which currently trades at 776.5p, and commented: ‘DMGT reported 2016 results that were ahead of our estimates at every level. There should be no major surprises in terms of divisional outlook comments. It is worth nothing that current trading at DMG Media has been strong with the eight weeks since year end seeing circulation revenues up +5% and advertising revenues up an underlying +1%, while visibility remains limited this strong start bodes well.’

Davies also noted the three priorities set out by Zwillenburg, including operational improvements, increasing portfolio focus and enhancing the company’s financial flexibility. ‘At this early stage in the year we make no major change to our 2017 estimates, though see upside risk as we move through the year,’ he said.

Key stats
Market capitalisation£3,013m
No. of shares out111m
No. of shares floating96m
No. of common shareholdersnot stated
No. of employees100
Trading volume (10 day avg.)m
Profit before tax£766m
Earnings per share668.73p
Cashflow per share675.16p
Cash per share5.85p

Derwent London may escape hard Brexit

Brexit fears have made investors too negative about the capital’s property market and developer Derwent London (DLN) in particular, says analyst Robert Duncan.

Derwent shares have fallen 23% in the past year and Duncan has a ‘buy’ rating and £31.64 target on the shares which stand at £27.91 today.

‘Since the EU referendum, the world, and in particular London, has not ended, yet the share prices of the London developers are factoring in a hard end to the cycle with a rapid reversal in both yields and rents. We do not subscribe to this point of view,’ he said.

‘While difficult to gauge with any certainty, we believe that the expected deferral of developments from 2017 will broadly offset the likely slowdown in demand, and building obsolescence is increasingly problematic for office occupiers that have not moved from 10 years or more.’

He noted Derwent London’s ‘rock-solid balance sheet’ and a rising income profile and ‘we are confident in the prospects for the two longer-dated projects given the lack of competing schemes’.

However, the low dividend yield of 1.9%, but covered 1.6 times by earnings, was an obstacle, which he said meant ‘the shares may tread water until the body of supportive evidence becomes overwhelming’.

Key stats
Market capitalisation£1,359m
No. of shares out933m
No. of shares floating875m
No. of common shareholdersnot stated
No. of employees769
Trading volume (10 day avg.)2m
Profit before tax£211m
Earnings per share33.18p
Cashflow per share35.70p
Cash per share36.44p

JRP Group back on track

Annuity provider JRP Group (JRP) has overcome the problems it faced six months ago and is well placed for 2017, according to analyst Marcus Barnard.

Barnard has a target price of 200p on the stock, which was created after Just Retirement and Partnership combined following pension freedom reforms that shrank the market for their retirement income products.

Barnard’s price target is around a third higher than the current share price of 145p but he believes this is justified because even at that level the stock would trade at just 88% of embedded value.

‘Management has delivered a merger, generated higher-than-expected cost savings, increased overall sales and answered questions on capital adequacy, growth prospect and new business pricing. Solvency II capital now stands at 151%, new business margins are above 5% and there is a return to growth for individual and bulk annuities.’

Barnard said providing the growth in annuities is maintained ‘then we believe the current share price discount to embedded value is difficult to justify’.

Key stats
Market capitalisation£3,019m
No. of shares out340m
No. of shares floating260m
No. of common shareholdersnot stated
No. of employees18200
Trading volume (10 day avg.)2m
Turnover5,576m USD
Profit before tax-284m USD
Earnings per share-0.84 USD
Cashflow per share-0.35 USD
Cash per share3.74 USD

Petrofac looks perky

Petrofac (PFC) looks well positioned as the oilfield services company benefits from the rising oil price and recovers from last year’s contract cancellations.

Analyst James Hubbard has a target price of £12.44 on Petrofac, currently at 907p, which he said was too high a discount to its main rival Wood Group.

‘The shares are up nearly 10% over the last four weeks but there is still material upside to go,’ he said. ‘A forward price/earnings of 9x and forward embedded value/earnings before interest, tax, depreciation and amortisation (ebitda) of 5.4x leaves Petrofac trading at a c.45% discount to Wood Group versus a more “normal” discount of 15%.

‘As it becomes clear the problem contracts are over and as new contract awards recommence in H1 2017, we expect the valuation disconnect to narrow. For those seeking some yield, Petrofac’s dividend yield of 6.7% is comfortably funded by its c.14% 2017 equity free cash-flow yield.’

Key stats
Market capitalisation£5,984m
No. of shares out94m
No. of shares floating93m
No. of common shareholdersnot stated
No. of employees3714
Trading volume (10 day avg.)1m
Turnover816m USD
Profit before tax154m USD
Earnings per share1.63 USD
Cashflow per share3.15 USD
Cash per share1.87 USD

Randgold Resources should pay off

A new 10-year plan from Randgold Resources (RRS) means the next decade won’t look like the last for the gold miner, according to analyst Jonathan Guy.

Guy increased his target price from £85 to £90 with the shares currently trading at £65.65.

‘Randgold set out a 10-year plan that should see production maintained at between 1.35 million ounces and 1.55 million ounces with the development of Massawa (Senegal) and the superpit at Gounkoto (Mali), offsetting the depletion of Tongon (Ivory Coast) and Morila (Mali),’ he said.

‘The greenfield exploration focus appears to have been narrowed to target the areas surrounding Massawa, the north-east Democratic Republic of Congo and the Ivory Coast. We retain a “buy” recommendation but tweak our target price to £90 on unchanged multiples of 2x net asset value and 15x cash-flow.’

He added that management’s plan was to maintain the current level of production while ‘increasing the level of distribution through higher dividends supported by solid free cash-flow generation as capex tails off’.

Key stats
Market capitalisation£1,015m
No. of shares out51m
No. of shares floating49m
No. of common shareholdersnot stated
No. of employees1045
Trading volume (10 day avg.)m
Profit before tax£46m
Earnings per share96.57p
Cashflow per share130.13p
Cash per share1,212.78p

Rathbones recovering

Stock market uncertainty from Brexit may have been unhelpful for wealth managers but analyst Jonathan Goslin expects Rathbone Brothers (RAT) to recover.

Goslin has a target of £23.50 on the stock, ahead of the current price of £20.13. The shares hve fallen over 10% in the past year but have gained 7% in the past three months.

‘While uncertainty surrounding Brexit may impact near-term funds under management flows, we believe Rathbones’ conservative operating model combined with the industry’s long-term growth drivers should continue to generate average earnings growth of c.10% per annum over the medium to long-term,’ he said.

‘In our view, Rathbones remains the quality play in the sub-sector and justifies a premium rating relative to peers.’

Key stats
Market capitalisation£8,509m
No. of shares out283m
No. of shares floating91m
No. of common shareholdersnot stated
No. of employees3424
Trading volume (10 day avg.)m
Profit before tax£467m
Earnings per share166.51p
Cashflow per share179.48p
Cash per share1,265.78p

Schroders keeps it in the family

Family-owned fund manager Schroders is David McCann’s pick of the specialist financials.

The analyst said Schroders is ‘by far the most diversified UK-listed asset manager, has one of the strongest balance sheets and its unique ownership structure helps foster genuine long-term management decision making’.

McCann prefers the group’s non-voting shares (SDRt), which trade at a discount of more than 25% below the voting shares (SDR). He has a £30.05 price target on them, ahead of their current £22.74.

‘Other than not having a vote – minimal value anyway where c.45% of the votes are controlled by the Schroder family – there is no difference between the two classes. We therefore believe buying the non-voting shares is particularly attractive at the moment, independent of your view on the voting shares,’ said the analyst.

Key stats
Market capitalisation£1,457m
No. of shares out100m
No. of shares floating93m
No. of common shareholdersnot stated
No. of employees18339
Trading volume (10 day avg.)m
Profit before tax£103m
Earnings per share103.03p
Cashflow per share133.28p
Cash per share451.70p

WS Atkins deserves higher rating

Anticipation of greater infrastructure spending on both sides of the Atlantic have boosted shares in WS Atkins (ATKW) but analyst Will Wallis believes there could be more to come.

Wallis put a target price of £19 on the stock, which earlier today stood at £14.67. ‘Atkins is among the lower rated of the global engineering consultancies, despite a strong track record and generally well positioned business,’ he said.

‘Management’s focus is now on accelerating top line growth, albeit market expectations on this remain muted. We still think that the shares are at an interesting potential entry point, and consistent with moves in the global peer group.’

Wallis estimates the embedded value of Atkins’s shares stands at a reasonable 13.3 multiple to forecast net operating profit after tax. ‘We note that the high quality companies in the sector globally currently trade on a c.30% premium to Atkins,’ he said.

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