The Expert View: Morrisons, BG Group and Lloyds
Our daily round-up of analyst recommendations and commentary, featuring The Restaurant Group and N Brown Group.
Seymour Pierce downgrades Morrisons to 'reduce'
Kate Calvert, analyst at Seymour Pierce, has downgraded Morrisons (MRW.L) from 'hold' to 'reduce' ahead of next week's third-quarter update, expecting a continued deterioration in sales.
Calvert said news that Morrisons is accepting other retailers' vouchers and offering coupons worth £5 for £40 of spending suggests trading remains under pressure. She expects the quarterly results to show a 2% like-for-like decline in sales excluding petrol, down from a 0.9% decline in the previous quarter.
The recent decline in the share price offsets the weaker sales outlook to a degree, Calvert said, as does the attractive 4.4% yield, but she doesn't like the longer-term picture.
'We expect the shares to drift further given management may well have to invest margin to protect market share as we believe Christmas will be extremely aggressive, as Tesco can not afford to continue underperforming either and consumer spending is expected to remain subdued,' she said.
'Given we believe forecast risk is still on the downside and it is hard to see the shares performing in the short term, we are cutting our recommendation to reduce from hold (Hold since 21 September 2010) and our target price from 300p to 250p.'
Shares in the group closed at 267.3p on Thursday, down 0.6p or 0.22%.
Canaccord cuts BG Group's target price, stays at 'buy'
Gordon Gray, analyst at Canaccord, has cut his target price for gas producer BG Group (BG.L) following Wednesday's production warning, but he retains his 'buy' recommendation, saying the slump in the shares looks disproportionate.
The shares crashed almost 20% after the group announced that it expects no production growth next year - investors had been expecting growth of around 10%.
'BG remains a high growth company, but repeated disappointments on volumes, culminating in yesterday’s news flow, have caused severe scepticism over its growth prospects,' Gray said.
'We view the share price reaction to the volume newsflow in itself to be an overreaction, but it reflects this change of focus. We can see a recovery in the stock into the £12-13 range in the coming months, but more significant upside may be harder to come by yet.'
Gray's target price falls 20% from £16.25 to £13. This lower target is based on a lower sum-of-the-parts valuation stemming from the reduced production forecasts on top of a bigger discount given the likely negative sentiment around the shares.
Shares in the group closed at £11.00 on Thursday, down 47.5p or 4.14%.
Investec says 'sell' Lloyds as losses mount
Ian Gordon, analyst at Investec, has reiterated his 'sell' recommendation on Lloyds (LLOY.L) after it announced another £1 billion of costs for insurance mis-selling and a quarterly loss of £144 million.
António Horta-Osório, chief executive of the bank, cited bills for the mis-selling of payment protection insurance (PPI) as the main reason for the loss, which takes the total for the first nine months of 2012 to £583 million.
Gordon said long-term shareholders must be used to hearing bad news by now. 'Lloyds’ shareholders may be quite used to taking the pain by now. Today’s Q3 IMS is overshadowed by another £1.15bn of mis-selling charges – PPI £1.0 billion and Clerical Medical (Germany) £150 million. Nothing for swaps yet. Lloyds’ cumulative charge over two decades of redress? £8.2 billion and counting.
'Is relief in sight? As expected, net interest margin has bottomed, and this will slow the pace of revenue decline in future periods. However with planned ongoing reductions in both “core” and “non-core” loans, we continue to expect lower income in 2013/14e.'
However, battle-hardened Lloyds investors clearly don't share Gordon's pessimism, with the shares one of the biggest risers on the FTSE 100 yesterday. They closed at 43.94p on Thursday, up 3.36p or 8.29%.
Shore Capital says 'hold' The Restaurant Group
Greg Johnson, analyst at Shore Capital, has reiterated his 'hold' recommendation on The Restaurant Group (RTN.L), saying that although it has plenty of growth potential the shares look fully valued.
Interim results released yesterday showed like-for-like sales growth in the fist 42 weeks of the year of 3.5%, marginally up on the 3.25% figure recorded at the six-month stage.
The group, whose brands include Frankie & Benny's and Chiquito, has opened 16 new restaurant over the year. Three of these are its new American-themed Coast to Coast chain, and the group said trading at this new venture is going well.
'The stock trades on a prospective price-to-earnings ratio (PER) of 16x (a cash PER of 11.8x), an enterprise value/earnings of 8x and a dividend yield of 3.1%,' Johnson said.
'Restaurant Group remains an excellently managed operation with robust current trading and strong balance sheet. Although the rollout of the new brand Coast-to-Coast provides further growth potential, we believe that it is too early to call and with the valuation looking rich against its more asset rich pub peers, the stock looks up with events.'
Shares in the group closed at 382.4p on Thursday, up 7.6p or 2.03%.
Peel Hunt lifts target price for N Brown Group
John Stevenson, analyst at Peel Hunt, has increased his target price for specialist fashion retailer N Brown Group (BWNG.L), saying consensus forecasts aren't recognising its growth potential.
N Brown is a Manchester-based home-shopping business that targets customers who aren't well served on the high street, such as the elderly and those requiring bigger than average clothes.
Consensus expectations for the company are modest, with sales growth of 3.5% pencilled in for the year ahead and three-year compound sales growth of 4%, pretty much in line with Next and M&S.
However, Stevenson said rising staff levels coupled with a rising financial services yield means these figures look a bit mean. 'Early moves into the US look encouraging, UK store trials are driving brand penetration and sales within the store post code, online trends are delivering operational leverage, and the shift to accept non-credit account sales offers like-for-like upside,' he said.
Stevenson reiterated his 'buy' recommendation and his target price rises from 340p to 375p. Peel Hunt is a market maker for N Brown.
Shares in the group closed at 339.8p on Thursday, up 3.6p or 1.07%.