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The Expert View: FirstGroup, Domino’s and WH Smith

A round-up of the best analyst commentary on shares, also including Berkeley and AZ Electronic Materials.

Our daily round-up of analyst recommendations and commentary, featuring FirstGroup, Domino’s, WH Smith, Berkeley and AZ Electronic Materials.

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Key stats
Market capitalisation£1,397m
No. of shares out1,205m
No. of shares floating1,187m
No. of common shareholdersnot stated
No. of employees120475
Trading volume (10 day avg.)3m
Turnover£6,901m
Profit before tax£35m
Earnings per share5.89p
Cashflow per share78.21p
Cash per share115.40p

*Correct as at 6 Dec 2013

New chairman to put FirstGroup back on track

The appointment of Aviva boss John McFarlane as FirstGroup’s new chairman was seen as positive news for the train operator, but not enough for Shore Capital to label the shares a ‘buy’.

McFarlane turned around Aviva’s fortune and is hoped to work the same magic at FirstGroup after joining on 1 January and ‘grapple with the previous regimes legacy of underinvestment’ as Shore Capital analyst Martin Brown put it.

‘During his time at Aviva he has torn into the cost base and sold a number of business units,’ said Brown, who kept his ‘hold’ rating on the shares and a target price of 111p.

‘We believe FirstGroup’s problems are surmountable but we remain to be convinced that earnings can rise high enough to offset the crippling cost of its gross debt anytime soon.’

Brown added that the share would remain on a hold recommendation until ‘the risk profile became more favourable’.

Shares in FirstGroup ended Friday trade up 4.9% at 116p

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Key stats
Market capitalisation£836m
No. of shares out165m
No. of shares floating152m
No. of common shareholdersnot stated
No. of employees730
Trading volume (10 day avg.)0m
Turnover£241m
Profit before tax£31m
Earnings per share18.85p
Cashflow per share21.36p
Cash per share15.66p

*Correct as at 6 Dec 2013

Domino’s under review as chief executive exits

Peel Hunt has put its ‘buy’ recommendation on pizza company Domino’s Pizza under review following the surprise exit of chief executive Lance Batchelor.

Analyst Nick Batram said the departure created further problems in a company that was dealing with uncertainty in Germany and its roll-out in the UK.

Despite the remaining management team ‘lacking experience’ Batram said Domino’s was ‘still a great business’.

‘Although we consider it right to put our rating under review, we still believe Domino’s Pizza is a good business, particularly in the UK estate,’ he said. ‘Established Domino’s Pizza operations are remarkably resilient and, when there are hiccups, they don’t tend to be material or long-lasting.’

Domino's shares fell 9.2% on Friday, to close at 480p.

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Key stats
Market capitalisation£3,226m
No. of shares out131m
No. of shares floating122m
No. of common shareholdersnot stated
No. of employees1326
Trading volume (10 day avg.)0m
Turnover£1,373m
Profit before tax£210m
Earnings per share140.36p
Cashflow per share141.57p
Cash per share50.89p

*Correct as at 6 Dec 2013

Berkeley raises the roof with first-half results

Housebuilder Berkeley pleased investors with its half-year profit figures but analysts maintained a ‘hold’ position and a target price of £26.34.

With H1 profits before tax up 19% to £170 million and earnings per share up 22% to 100p, analyst Charlie Campbell said the figures were ‘blow out numbers’.

He predicted ‘smoother returns (ie more frequent payments of dividends)’ in the future and full year profits at ‘the top of the range this year’ with profits before tax estimated at £375 million.

However, it wasn’t all good news as the Autumn Statement brought in capital gains tax for non-resident property owners in the UK.

‘This is an issue for the company as a third of the units are sold overseas,’ said Campbell.

Berkeley shares enjoyed an 11% rally on Friday to close at £25.37

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Key stats
Market capitalisation£1,509m
No. of shares out381m
No. of shares floating377m
No. of common shareholdersnot stated
No. of employees1092
Trading volume (10 day avg.)0m
Turnover485m USD
Profit before tax51m USD
Earnings per share0.13 USD
Cashflow per share0.31 USD
Cash per share0.18 USD

*Correct as at 6 Dec 2013

AZ could draw higher bids

Merck's £1.6 billion takeover offer for AZ Electronic Materials, the producer of liquid crystals used in TVs and tablets, has pleased investors but analysts Numis believe a competitor may put in a higher bid.

‘Other potential bidders for AZ would be Samsung affiliated Cheil Industries, Dow Chemical, Shin-Etsu Chemical and Platform Acquisition Holdings (chemicals industry roll-up vehicle),’ said Nick James of Numis.

‘Given the company has now suddenly come into play, there could be scope for a higher offer and we attach a 25% probability to a 10% improvement in price.’

Numis ranks AZ a ‘hold’.

Shares in AZ, which had rallied 50% on Thursday, fell 0.2% on Friday to 394p

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Key stats
Market capitalisation£1,180m
No. of shares out122m
No. of shares floating115m
No. of common shareholdersnot stated
No. of employees16086
Trading volume (10 day avg.)0m
Turnover£1,186m
Profit before tax£87m
Earnings per share68.50p
Cashflow per share96.06p
Cash per share24.41p

*Correct as at 6 Dec 2013

International boost makes WH Smith a buy

Aggressive plans for international growth have led Investec analysts to brand high-street stationer WH Smith a ‘buy’ with a target price of £12.00.

Its full year report showed a successful change in leadership, with new boss Steve Clarke indicating there will be little change to the strategy that has been in place for nearly a decade.

Analyst Kate Calvert said she expected to see ‘a more aggressive move internationally’ and that the company was ‘capable of delivering double digit growth for the foreseeable future’ thanks to its in-airport stores.

‘The last few years have been spent testing various formats and business models. Its new internationally trade units trade 15-35% higher than under the previous operator. We believe WH Smith has the skills set and knowledge to become a leading travel retail playing in a fragmented market,’ she said.

WH Smith shares rose 2.2% on Friday to 976p.

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