The Expert View: Rolls Royce, Oxford Instruments and Ted Baker
Our daily roundup of the best analyst commentary on shares, including Fuller, Smith & Turner and the Escher Group.
Investec buys into Rolls Royce’s industrial thrust
Rolls Royce (RR) has had a difficult time this year, with its shares down 15%, but Investec is confident the engine maker’s new strategy can deliver long-term results.
Investec analyst Rami Myerson reiterated a ‘buy’ rating and increased the target price to £12.25. Yesterday the shares traded 5p higher at £10.76.
‘We believe there is material upside to Rolls Royce’ share price on a 12-month basis as management restore confidence in the outlook and deliver results in line with guidance,’ he said. ‘In the short-term, we expect volatility in the share price as investors factor in Rolls’ strategy to become a diversified industrial rather than a pure play aero engine company and worry about whether second half weighted full-year 2014 guidance is met.’
Myerson said there was ‘opportunity’ in the short-term volatility of the stocks. ‘We expect short-term trading to remain volatile as the share register transitions between investors that prefer to invest in pure play aerospace company and those happy with management’s diversified strategy and recognise the longer-term upside potential. We do not believe diversification should necessarily result in a trading multiple discount.’
Oxford Instruments gets off to solid start, says Jefferies
Jefferies believes Oxford Instruments (OXIG) still looks quite fully valued even after the 21% drop in the shares in the technology tools maker this year over concerns about the impact of the strong pound.
Oxford Instruments, which bought Andor Technology in December, generates only 9% of its turnover from the UK and has been hurt by sterling’s five-year high.
Jefferies analyst Andy Douglas retained a ‘hold’ rating and a target price of £16.25 as full-year results showed a small rise in full-year adjusted pre-tax profits to £47.1 million. It raised the final dividend about 11% to 9.04p per share.
Douglas described the figures for the year ending 31 March as ‘perfectly acceptable’ after they came in slightly ahead of expectations with earnings per share boosted by a lower than expected tax charge.
‘Full-year 2014 was a tough year in many respects, and full-year 2015 will have its challenges too, but the start of the year has seen progress (as expected),’ said Douglas. ‘We want/need to see more from Oxford Instruments and whilst the long-term outlook remains attractive, there are a lot of moving parts in the near/medium-term and the group’s valuation remains quite full.’
He added the group ‘still has work to do… to get back off the naughty step, but this is a solid start and we continue to like the group’s long-term exposures’.
The shares closed 30p or 2.2% higher at £13.74.
Numis likes Fuller’s acquisition of The Stable
Numis analyst Douglas Jack is impressed with brewer Fuller, Smith & Turner (FSTA) after it bought a stake in a chain of craft cider and pizza restaurants.
Jack retained a ‘buy’ recommendation and increased the target price on the stock from £10.50 to £11.00 after Fuller took a 51% share in The Stable. The shares shed 21.5p or 2.2% to 946p.
The Stable has six sites across the South West and specialises in gourmet pizza and offers a range of 40 craft ciders. As part of the deal, Fuller also acquired a freehold in The Bull Hotel in Dorset.
‘The acquisition is an excellent fit, with The Stable having a focus on high quality seasonal ingredients, craft ciders and great service. It should complement Fuller’s growing premium food and drink portfolio,’ said Jack. ‘Fuller has an option to increase its investment in the future. The acquisition should have minimal impact on earnings this year as The Stable is at an early stage roll out… Expecting The Stable to open four leasehold restaurants per annum, we are upgrading profit before tax by £0.6 million for 2016 and £0.8 million for 2017.’
Gibraltar deal bodes well for Escher, says Panmure
Software solutions provider Escher Group (ESCH) has struck a deal with The Royal Gibraltar Post Office which Panmure Gordon analysts hope could lead to an even bigger contract win.
Analyst George O’Connor reiterated a ‘buy’ recommendation and a target price of 507p on the shares, which yesterday rose 4% to 320p. He noted the Gibraltar Post Office has similar processes to the UK Post Office, which is reviewing its systems.
‘The [Gibraltar] contract value was not disclosed [but] it is notable that the Royal Gibraltar Post Office has processes similar to UK Post Office Counters which is currently reviewing proposals for its new front office systems,’ he said.
‘Our view is that Escher is a digital champion, helping postal authorities to navigate to the new digital world as it spans both the traditional point-of-sale environment and new interactive service such as mobile wallets.’
O’Connor said Escher’s ‘valuation remains very attractive’ with the shares trading at 13.8 times forecast earnings for this year, compared to the average multiple in its sector of 18.2.
Liberum reassured by Ted Baker trading statement
Ted Baker (TED) remains Liberum’s ‘preferred quality growth play’ in the fashion retail sector after it issued a strong first quarter trading statement.
Analyst Sanjay Vidyarthi retained a ‘buy’ recommendation and target price of £24.00. ‘Ted has delivered strong growth against tough comparatives, with continued momentum in established and new markets,’ he said. ‘We nudge up our estimates again and now look for 19% full-year 2015 earnings per share growth.’
He added that second half assumptions ‘remain cautiously set’ and there were still ‘risks on the upside’ but noted the shares have recovered.
‘Shares have recovered from recent lows, but we still see 19% upside to our maintained £24.00 target prices. [It is] our preferred quality growth play.’
The shares fell 84p or 4% to close at £19.35 yesterday.