The Expert View: Centrica, Bovis Homes and Pace
Our daily roundup of analysts' share recommendations and commentary, also featuring Catlin and Vodafone.
Analysts warn over break-up of Centrica
Utilities providers Centrica (CAN.L) and SSE (SSE.L) have been singled out by the government over their high margins in gas supply and threatened with regulatory action, including the break-up in the companies.
Secretary of state Ed Davey said that he was concerned with the profits being made by the two companies when supplying gas to homes, which have been relatively high since 2009/10 compared to their peers.
Despite the announcement analysts at Liberum still maintained a ‘buy’ recommendation for both stocks but acknowledged that Davey’s comments ‘once again increased the degree of risk and uncertainty faced by shareholders’.
Analyst Peter Atherton said policymakers should ‘pause for thought’ before carrying out a break-up of any business, but particularly Centrica.
‘Centrica is the only company in the UK energy market with a clear commercial imperative to ensure the UK is amply supplied with affordable gas and has the financial capacity to make a substantial contribution to that happening,’ said Atherton. ‘Take away that commercial imperative and the UK potentially loses a very important driver delivering security of supply.’
Bovis Homes upgraded to ‘buy’ on three year predictions
Peel Hunt has upgraded housebuilder Bovis Homes (BVS.L) from ‘hold’ to ‘buy’ as it turns around after years of underperformance.
Analyst Clyde Lewis also increased the target price to 975p from 900p (current price 847p).
‘Bovis has materially underperformed the sector in the last three and five years,’ he said. ‘Bovis shares have risen c90% over both of these periods while the sector has risen c195% and c275% over three and five years, respectively.’
Bovis has fallen behind due to weak return on equity performance but now Lewis expects the company to ‘deliver significantly more turnover, and profit growth in the next three years than the sector’.
‘Having published a fairly detailed interim management statement on the 16 January, we think the focus will be firmly on the potential for growth and improvement in the next couple of years,’ said Lewis.
Barclays upgrades Pace as it predicts another good year
Set-top box maker Pace (PIC) has been upgraded to ‘overweight’ by Barclays after a ‘transformational journey’ that is expected to continue over the coming year.
Analyst Youssef Essaegh increased his target price for the shares to 450p from 320p (current price 380p).
‘Pace’s transformational journey continues and we expect further upside to estimates over the coming year, leading us to conclude valuation remains attractive,’ he said. ‘Pace is successfully navigating the turbulent set-top box market, focusing on high-value regions and leading with technology.’
Essaegh added that while there is competition and a limit to growth in the market Pace should ‘continue to drive increased profits’. This increase is due to in part to its acquisition of Aurora which gives it more exposure to ‘higher margin’ US sales.
Catlin ‘hold’ reiterated, but there are better alternatives
Analysts at Shore Capital have reiterated a ‘hold’ recommendation for Catlin Group (CGL.L) but warned about the insurance company’s reluctance to return capital to shareholders.
Analyst Eamonn Flanagan placed a target price of 540p on the company (current price 554p) but recommended switching to other insurers Amlin (AML.L) or Lancashire (LRE.L) if there is any ‘material strengthening of [Catlin] stock’ as the latter could provide better ‘upside potential’.
‘Catlin’s 2013 results were better than we and the market had expected but, despite a capital buffer which, at 21%, is above its targeted range of between 10% and 20%, the group remains unwilling to return capital to shareholders,’ said Flanagan.
‘This is likely to put it at odds…with the actions of some of its peers.’
Overarching concerns could see Vodafone forecasts reduced
Jefferies analysts retained a ‘hold’ recommendation on Vodafone (VOD.L) but could not rule out forecast downgrades after Q3 results from the telecoms company showed some European businesses were struggling.
Analyst Jerry Dellis placed a target price of 216p on the shares (current price 220p) and noted that while weaker results in Germany and Italy were offset by a stronger Spanish market ‘consensus forecasts have moved lower in recent weeks’ and ‘in light of today’s trends modest further downward adjustment can’t be ruled out’.
Dellis said investors should be focusing on the outlook for the business over the next one to two years and that the company was ‘very sensitive’ to forecasts.
He added that questions around Vodafone centred on its ability to weather European trends and foreign exchange headwinds, and whether Project Spring – which will see it inject £7 billion into its network operations – will allow ‘boost revenue share or…catch up’ with competitors.