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The Expert View: Chemring, RBS and M&S

Our daily round-up of analyst recommendations and commentary, featuring GlaxoSmithKline and British Sky Broadcasting.

Our daily round-up of analyst recommendations and commentary, featuring Chemring, RBS, M&S, GlaxoSmithKline and British Sky Broadcasting.

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Key stats
Market capitalisation£529m
No. of shares out193m
No. of shares floating190m
No. of common shareholdersnot stated
No. of employees4679
Trading volume (10 day avg.)0m
Turnover£724m
Profit before tax£70m
Earnings per share36.06p
Cashflow per share58.77p
Cash per share47.13p

*Correct as at 2 Nov 2012

FinnCap puts Chemring under review as takeover deadline nears

David Buxton, analyst at FinnCap, has put his 'buy' recommendation for military countermeasure maker Chemring (CHG.L) under review following another profit warning.

In its second profit warning within three months the specialist manufacturer warned on Thursday that delays in critical contracts would depress full-year earnings. The shares ended the day of the announcement down 17%.

Complicating matters is the proposed takeover by US rival Carlyle, which Buxton said was the reason for the lack of financial details in the announcement as it's currently bound by takeover code strictures.

'The group is in a difficult position, with short term trading problems coming on top of a series of disappointing trading updates, political/budgetary uncertainty and reductions in forecasts,' Buxton said.

'A profit warning is hardly the most robust point from which to mount a bid defence for a company many regard as having at least temporarily lost its way. Prospects for the shares now rest with Carlyle – if they formally launch a bid and also at what price. We move our forecasts and rating under review.'

Carlyle has until Friday to decide whether or not to buy Chemring.

Shares in the group closed at 276p on Friday, up 15p or 5.9%.

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Key stats
Market capitalisation£31,866m
No. of shares out11,336m
No. of shares floating7,128m
No. of common shareholdersnot stated
No. of employees142800
Trading volume (10 day avg.)9m
Turnover£21,410m
Profit before tax£-2,044m
Earnings per share-18.89p
Cashflow per share-1.30p
Cash per share719.13p

*Correct as at 2 Nov 2012

Shore Capital reiterates 'hold' on Royal Bank of Scotland

Gary Greenwood, analyst at Shore Capital, has reiterated his 'hold' recommendation on Royal Bank of Scotland (RBS.L) shares, saying the possibility of fines for Libor manipulation and other regulatory concerns offset an attractive valuation.

The bank made a pre-tax loss of £1.38 billion in the third quarter as it took a £1.5 billion hit on the value of its bonds and made a £400 million provision for mis-selling payment protection insurance. It also warned it expects fines for its part in setting the Libor inter-bank lending rate.

Greenwood noted that although the results don't look too good on the face of it they are in fact ahead of expectations, and he expects 'some upward pressure on our adjusted earnings forecasts' as a result.

However, although the shares trade at an attractively low price-to-earnings multiple of 9.1x, he is staying at 'hold'.

'Despite the encouraging underlying operating performance and undemanding valuation multiples, in our view, we remain HOLDers on the shares as we believe that visibility remains low and the company still has a large number of governance / regulatory issues to negotiate,' he said.

'For investors looking to put money into domestic banks, we continue to prefer Lloyds, where we have a BUY stance.'

Shares in the group closed at 281p on Friday, lower by 5.9p or 2%.

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Key stats
Market capitalisation£6,285m
No. of shares out1,608m
No. of shares floating1,583m
No. of common shareholdersnot stated
No. of employees81208
Trading volume (10 day avg.)5m
Turnover£9,934m
Profit before tax£513m
Earnings per share32.23p
Cashflow per share60.28p
Cash per share28.44p

*Correct as at 2 Nov 2012

Seymour Pierce predicts sales decline at M&S

Freddie George, analyst at Seymour Pierce, expects tomorrow's interim results from Marks and Spencer (MKS.L) to show a 10% fall in profits, and he reiterated his 'hold' recommendation.

The analyst's projected decline in pre-tax profits would see the figure come in at £285 million, which would see the company 'do the normal trick of beating the whisper number', which stands at £280 million.

On Thursday George attended a presentation on the company’s multi-channel strategy, meaning the integration of online and in-store operations, which he said was interesting but a bit light on financial details.

'It is clear that the company has recruited a strong team under the leadership of Laura Wade-Gery to handle the process and they are making good headway towards completing the multi-channel project by 2015,' he said. 'The risks in executing the plan, however, should not be underestimated with the number of distribution depots being reduced down from over 100 in 2009 to four warehouses.'

George said one notable absence from the presentation was any detail on how M&S plans to sort out the branding in stores or lacklustre sales of womenswear.

Shares in the group closed at 391p on Friday, down 4.4p or 1.1%.

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Key stats
Market capitalisation£66,629m
No. of shares out4,929m
No. of shares floating4,920m
No. of common shareholdersnot stated
No. of employees97389
Trading volume (10 day avg.)8m
Turnover£27,387m
Profit before tax£5,261m
Earnings per share103.18p
Cashflow per share134.95p
Cash per share116.81p

*Correct as at 2 Nov 2012

UBS cuts GlaxoSmithKline's target price

Gbola Amusa, analyst at UBS, has cut his target price for pharmaceutical giant GlaxoSmithKline (GSK.L), warning that falling sales of older drugs are likely to drag on the group's profitability.

Third-quarter results released last week showed group sales down 5% to £6.527 billion, 1.8% lower than the consensus analyst estimate. Operating profits, though, rose 18% to £1.679 billion, and the dividend was increased 6% to 18p.

Amusa warned that profits look likely to come under pressure in the short term. 'As EU austerity picks up for GSK (-9% impact: -7% pricing, -2% volumes), with GSK newly calling for "a prolonged period of significant economic pressure," we moderate long-term pharma Europe forecasts, with a focus on the pharma tail (older, non-key products). Adjustments to Europe and the overall tail lead to 3%-4% 2013-18 sales and earnings per share downgrades.'

However, the analyst said things look better in the long term, with sales set to gain from a strong pipeline of new products. He retains a 'neutral' recommendation on the shares, but his target price falls from £15.25 to £14.50.

Shares in the group closed at 1,361p on Friday, down 26p or 1.8%.

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Key stats
Market capitalisation£12,560m
No. of shares out1,654m
No. of shares floating989m
No. of common shareholdersnot stated
No. of employees17431
Trading volume (10 day avg.)4m
Turnover£6,791m
Profit before tax£906m
Earnings per share52.16p
Cashflow per share71.96p
Cash per share70.11p

*Correct as at 2 Nov 2012

Berenberg Bank says 'sell' BSkyB on broadband weakness

Sarah Simon, analyst at Berenberg Bank, has reiterated her 'sell' recommendation on British Sky Broadcasting (BSY.L), saying the group's lack of proprietary infrastructure leaves it weakly positioned in the race to provide super-fast broadband.

BSkyB delivered what Simon called a 'solid' quarterly trading update last week, with revenues up 3.5% year-on-year. However, this was flat on the previous quarter and slightly below what the analyst had pencilled in.

'TV net adds came in at 20,000 versus our 13,000 forecast,' Simon noted. 'While in percentage terms this is a lot better, in absolute terms the number is very low. BT delivered 21,000 during the same period and Virgin Media 11,000.'

However, broadband numbers were the focus of Simon's analysis. Additions of this service fell substantially in the quarter to 106,000 versus Simon's 115,000 estimate and 150,000 last year.

'As previously highlighted, we believe that in a world that is moving towards superfast broadband, BSkyB is poorly positioned as it lacks its own fibre infrastructure,' she said. 'In our view, BSkyB will soon have to choose between volume and margin: its rolling 12-month share of net adds looks to have peaked, and we expect it to deteriorate from here.'

Shares in the group closed flat at 758p on Friday.

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