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The Expert View: Diageo, Kingfisher and Dunelm

Our daily roundup of analyst commentary on shares, also including BTG and Domino’s.

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Key stats
Market capitalisation£61,093m
No. of shares out2,516m
No. of shares floating2,501m
No. of common shareholdersnot stated
No. of employees30051
Trading volume (10 day avg.)5m
Turnover£12,050m
Profit before tax£2,717m
Earnings per share107.69p
Cashflow per share126.36p
Cash per share50.52p

Hopes of a recovery fading for Diageo, says Liberum

A presentation by beverage company Diageo (DGE) on its prospects in Europe, Russia and Turkey did not fill Liberum with hope for a recovery.

Analyst Nico von Stackelberg retained his ‘sell’ recommendation and target price of £20.00 on the stock, which was trading down 2.4%, or 60.5p, at £24.39 at the time of writing.

‘Diageo presented on the Europe, Russia, and Turkey region…which has struggled to achieve growth. Price/mix has been rather anaemic over the past three years and management is cautiously guiding low single-digit top line growth in this context,’ he said.

‘We see no imminent signs of meaningful recovery in the region.’

Von Stackelberg added that the stock was trading on a 2017 price/earnings ratio of 21.7x ‘which is more expensive than its closest peers’.

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Key stats
Market capitalisation£6,833m
No. of shares out2,177m
No. of shares floating2,162m
No. of common shareholdersnot stated
No. of employees77000
Trading volume (10 day avg.)10m
Turnover£11,225m
Profit before tax£610m
Earnings per share26.96p
Cashflow per share38.14p
Cash per share35.49p

Kingfisher turnaround on track, says Hargreaves

Markets were buoyed by a double dose of good news at B&Q owner Kingfisher (KGF) which delivered better-than-expected profits and a positive update on its turnaround.

Profits before tax hit £440 million for the half-year and Kingfisher said it was on track to hit its turnaround targets. The shares jumped 4.5% to 312.9p yesterday on the news.

Hargreaves Lansdown analyst George Salmon said investors’ focus leading into the results was the group’s turnaround plans and ‘progress here provided some much-needed good news’.

‘Cost savings are being generated at a decent lick, and it’s reassuring that the group is still confident of hitting its five-year targets,’ he said.

‘Screwfix remains a bright spot, but like-for-like sales at the group’s flagship stores on both sides of the Channel fell over the period. While Kingfisher remains cautious on its prospects for the second half, the group expects to see recent operational disruption fade away.’

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Key stats
Market capitalisation£1,286m
No. of shares out202m
No. of shares floating96m
No. of common shareholdersnot stated
No. of employees5675
Trading volume (10 day avg.)1m
Turnover£956m
Profit before tax£73m
Earnings per share36.09p
Cashflow per share51.04p
Cash per share8.63p

Jefferies: Dunelm targets are too ambitious

Plans from homeware retailer Dunelm (DNLM) to double sales in the medium term are ‘overly ambitious’ given the economic environment, according to Jefferies.

Analyst Caroline Gulliver retained her ‘underperform’ recommendation and target price of 515p on the shares, which fell 3p to 639p yesterday.

‘Last week Dunelm raised its medium term sales ambition to £2 billion, double full-year 2017 sales,’ she said.

‘We estimate that to do this within eight years would require a like-for-like of 7.5%, which we view as overly ambitious given the weak macro-environment and competitive pressure from Amazon and other retailers with a higher net promoter score [that measures customer loyalty] than Dunelm.’

Gulliver added that her full-year 2018 and 2019 forecasts were 8-9% below consensus and ‘thus we retain an “underperform’’.

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Key stats
Market capitalisation£2,567m
No. of shares out386m
No. of shares floating382m
No. of common shareholdersnot stated
No. of employees1355
Trading volume (10 day avg.)1m
Turnover£571m
Profit before tax£34m
Earnings per share8.62p
Cashflow per share22.15p
Cash per share40.38p

BTG shares still good value despite court case blow, says Numis

A Delaware court has ruled against drug developer BTG (BTG) over a distribution agreement but Numis said there would be little financial impact and the shares remained good value.

Analyst Paul Cuddon retained his ‘buy’ recommendation and target price of 900p on the shares, which were flat at 667p yesterday.

A Delaware court ruled against BTG in relation to a breach of a distribution agreement signed with WellStat Therapeutics in 2011 concerning the commercialisation of chemotherapy drug Vistoguard, which generated £3.5 million of sales in 2017.

The disagreement lies in the effort BTG made in deploying a large enough salesforce to sell the drug.

‘We would expect BTG to appeal the ruling or otherwise seek to reduce the bill or return the rights,’ said Cuddon.

‘The $55.8 million settlement equates to 20% of BTG’s net cash resources and makes little difference to forecasts or valuation. The shares trade on less than 19x ex-cash price/earnings and remain good value in our view.’

At the time of writing the shares were trading down 0.9%, or 6p, at 661p.

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Key stats
Market capitalisation£1,432m
No. of shares out492m
No. of shares floating487m
No. of common shareholdersnot stated
No. of employees911
Trading volume (10 day avg.)3m
Turnover£361m
Profit before tax£65m
Earnings per share12.93p
Cashflow per share14.41p
Cash per share4.63p

Domino’s commences share buyback

Domino’s (DOM) has started its share buyback programme, which Peel Hunt has taken as a sign of the takeaway pizza chain’s confidence in trading conditions.

Analyst Douglas Jack retained his ‘buy’ recommendation and target price of 400p on the stock after the group announced it would commence a share repurchase programme of up to £15 million-worth of shares ending on 19 October.

‘In our view, the company would not do this if trading was deteriorating or if it planned to sink its capital into UK corporate stores,’ he said.

‘Domino’s share buyback programmes tend to be weighted to the first and fourth quarters. The net return to shareholders under “share issue” in the cashflow has averaged just £6 million per annum over the last 10 years, because buying back shares has not always been easy to achieve.’

However, he said that if like-for-like sales started to accelerate and ‘the buyback has to compete with short covering on the equivalent of 15% of the equity base, the upward squeeze on the share price could be considerable’.

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