The Expert View: Aviva, Just Retirement and Telecity
Our daily roundup of analysts' share recommendations and commentary, also featuring Dixons Retail and Petrofac.
The market has ‘under-estimated’ the scale of the restructuring still facing Aviva (AV.L), with earnings forecasts too high, said analysts at Barclays as they reiterated their ‘underweight’ rating.
After a 26% share price rise over 12 months, the insurance company is now trading at a premium to its closest competitors, Barclays’ Alan Devlin and Chris Roberts noted.
‘We believe for the stock to continue to perform it now has to deliver positive earnings revisions’ they warned.
‘However, we believe the market has under-estimated the scale of the restructuring required, and consensus (Thomson) earnings estimates are too high’.
The UK’s extensive flooding adds further pressure to Aviva’s ability to meet high City expectations.
‘We believe the valuation and earnings estimates have got ahead of themselves, and we reiterate our Underweight rating.’
Annuities crackdown ‘bodes well’ for Just Retirement
A regulatory crackdown on the provision of annuities ‘bodes well’ for Just Retirement (JRG.L), a specialist provider that could draw in more clued-up consumers in the future.
That was the conclusion from analysts at Nomura after a report by the Financial Conduct Authority (FCA) showed the ‘annuities market is not working well for consumers’ and has said it will launch an investigation into competition in the market.
Nomura’s Fahad Changazi also name-checked Partnership as a potential beneficiary from Friday’s report, but while he rates Just Retirement as a ‘buy’ (target price: 262p), the analyst downgraded Partnership to ‘neutral’ in January.
Changazi noted that the watchdog’s report singles out the under-penetration of ‘enhanced annuities’, products which pay a higher income for people who are likely to live shorter lives, such as smokers. Just Retirement specialises in these products.
Changazi didn’t make any changes to this ratings based on the FCA’s report.
Petrofac ‘entry point’ for investors
Investors should look for entry points in Petrofac (PFC.L), said analysts at Berenberg as they upgraded the stock to ‘buy’, claiming concerns that had recently weighed on the shares would start to ease.
Analysts Asad Farid and Jaideep Pandya expect a recovery in margins in the oilfield services company’s onshore engineering and construction (E&C) business.
In addition, they played down concerns that Petrofac is attempting full-on competition with dominant peers Subsea 7 and Technip: ‘We think it plans to carve a niche market share in southeast Asia (especially Malaysia), which is developing into a key deep water region.
'Petrofac in our view will have a competitive advantage as its larger peers are under-resourced and Petrofac has far stronger linkages with leading national oil companies such as Petronas in Malaysia.’
Petrofac trades at an ‘excessive’ discount to closest competitor Saipem and ‘we see any price weakness as a good entry point for investors,’ concluded the Berenberg team, who assign the shares a price target of £17.40 (versus £13.04 at the time of writing).
Dixons Retail ‘significantly undervalued’
Investors should ‘buy’ shares in Dixons Retail (DXNS.L), say Cantor Fitzgerald: Sales are holding up, the pipeline is relatively strong and the stock is undervalued.
The stock’s underperformance so far in 2014 is probably due to cautious comments made by management at the time of the Christmas trading statement, said analyst Freddie George.
‘However, we believe the positive momentum can continue due to the positive pipeline and a number of one off factors,’ he added.
‘The stock also looks significantly undervalued relative to the proposed valuation of Appliances Online.’
George has a target price of 60p on the shares, versus Dixons’ 47P share price at midday on Friday.
Telecity: neither growth nor value
Shares in data centre provider Telecity (TCY.L) may have fallen 28% over the past year, but they’re still not cheap, concluded William Shirley, analyst at Liberum.
Shirley said the shares were ‘neither fish nor fowl’, meaning they didn’t offer either growth or value. He repeated his ‘sell’ recommendation on the stock.
His comments come after Telecity’s management told investors to expect revenues of £355 million to £362 million for 2014, lower than the City had expected.
Margins are still vulnerable in what is a ‘a highly operationally geared business model with risks asymmetrically weighted to the downside,’ according to the analyst who has a target price of 600p on the shares (down from Friday’s midday price of 643p).