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The Expert View: Sainsbury’s, Flybe & Rathbones

Our daily roundup of analyst commentary on shares, including Convatec and Ashmore.

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Key stats
Market capitalisation£5,400m
No. of shares out2,190m
No. of shares floating2,078m
No. of common shareholdersnot stated
No. of employees51900
Trading volume (10 day avg.)8m
Turnover£26,224m
Profit before tax£1,348m
Earnings per share16.54p
Cashflow per share44.08p
Cash per share54.06p

Sainsbury’s right to slash 2,000 jobs, says Shore Capital

Sainsbury’s (SBRY) is cutting 2,000 jobs in its next phase of cost reduction, which Shore Capital said is the correct course of action for the ‘bloated’ supermarket.

Analyst Clive Black retained his ‘buy’ recommendation on the shares which shed a penny to 246.8p.

The supermarket is targeting £500 million of cost savings having bought Argos for £1.4 billion last year.

Black said from an ‘investment thesis perspective’ he is comfortable with Sainsbury’s performance in groceries, which is benefiting from increasing inflation and Argos synergies are ‘a key positive force’.

‘As ever, for the respective folks concerned by the announcement, Sainsbury’s decision will be very worrying and disappointing,’ he said.

‘However, the reality is that like many large companies, Sainsbury’s was bloated, too corporate, too slow and too far detached from the realities of the market place. As such, we can understand in the big scheme of things why this is a correct course of action and so welcome to the stock market.’

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Key stats
Market capitalisation£79m
No. of shares out217m
No. of shares floating209m
No. of common shareholdersnot stated
No. of employees2388
Trading volume (10 day avg.)1m
Turnover£707m
Profit before tax£45m
Earnings per share-12.32p
Cashflow per share5.72p
Cash per share53.13p

Flybe shares grounded by cost shock, says Liberum

Liberum has stripped its ‘buy’ rating on Flybe (FLYB) after shares in the regional airline crashed 20% yesterday after a profits warning.

Higher maintenance costs and intense competition mean the company only expects to make a first half profit of £5-10 million, down from £15.9 million a year ago.

Analyst Gerald Khoo cut his recommendation from ‘buy’ to ‘hold’ and reduced his target price from 50p to 45p as the shares plunged 8.75p to 35.5p.

‘Higher maintenance costs are a clear disappointment in the short term. We assume a £15 million hit this year, which ought to be conservative and one-off,’ he said.

‘There ought to be payback from improved reliability, which in turn should reduce passenger compensation and other disruption costs. The commercial performance appears encouraging, with improvements in both yields and load factors. However, until there is greater clarity on maintenance costs...we believe the shares will struggle to perform,’ he added.

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Key stats
Market capitalisation£1,331m
No. of shares out51m
No. of shares floating50m
No. of common shareholdersnot stated
No. of employees1123
Trading volume (10 day avg.)m
Turnover£272m
Profit before tax£84m
Earnings per share78.24p
Cashflow per share120.72p
Cash per share2,122.74p

Rathbone Brothers looks good on its own, says Peel Hunt

Rathbone Brothers (RAT) has got the distraction of the failed Smith & Williamson merger out of the way and can now focus on growth, says Peel Hunt.

Analyst Stuart Duncan retained his ‘hold’ recommendation and target price of £26.30 on the wealth manager which advanced 49p, or 1.9%, to £25.94 after a ‘solid’ third quarter trading update from the core investment management business and stronger growth from its unit trust and Greenbank ethical investment divisions.

‘After the distraction of the now terminated merger discussions with Smith & Williamson, focus now returns to the progress being delivered from the range of strategic initiatives,’ he said.

‘Solid growth continues to be generated with more to come, both from the growing intermediary relationships and the private office, which remains in its infancy.’

With its embedded value trading at 15.5 times Duncan’s 2018 forecast for net operating profit after tax and the shares yielding 2.5%, the analyst reckoned the stock ‘is starting to look attractive for the longer-term potential’.

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Key stats
Market capitalisation£4,172m
No. of shares out1,951m
No. of shares floating1,524m
No. of common shareholdersnot stated
No. of employees8524
Trading volume (10 day avg.)14m
Turnover1,280m USD
Profit before tax263m USD
Earnings per share-0.11 USD
Cashflow per share-0.01 USD
Cash per share0.10 USD

Convatec is hamstrung, says Numis

Numis Securities has upgraded medical technology company Convatec (CTEC) following this week’s profits warning but reduced its share price target, which it said was too generous given the logistics problems faced by the company.

Analyst Paul Cuddon lifted his recommendation from ‘sell’ to ‘reduce’ and lowered the target price to 180p on the stock, which gained 3.3p to close 1.5% up at 216.4p.

Cuddon said the company operates in attractive markets with top three positions in certain segments but ‘each of its key products faces intense competitive and pricing pressures, and the business remains hamstrung’.

Historic underinvestment versus its competitors means that they are now targeting its key franchises.

‘With significant manufacturing and operational issues still to be resolved, we think the 14 times rating remains too generous and further downgrade our target price to 180p based on a 12 times embedded value/EBITDA rating, which now infers a “reduce” rating,’ he said.

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Key stats
Market capitalisation£2,669m
No. of shares out707m
No. of shares floating388m
No. of common shareholdersnot stated
No. of employees252
Trading volume (10 day avg.)2m
Turnover£257m
Profit before tax£157m
Earnings per share23.71p
Cashflow per share24.76p
Cash per share100.51p

Jefferies moves Ashmore forecasts up

Jefferies expects emerging markets fund manager Ashmore (ASHM) will grow assets under management in the next two years as investors return to its asset class.

Analyst Phil Dobbin retained his ‘hold’ recommendation and increased the target price from 331p to 370p on the stock, which closed broadly unchanged at 376.8p.

‘At the full-year results in September, we needed to trim our forecasts to reflect the run-rate of net management fees, which had been impacted by mix and the size of mandates won,’ he said.

‘We now find that we need to move forecasts back up due to higher-than-forecast, first-quarter net inflows, albeit $1.2 billion of $4.3 billion reported net flows came from low-margin products.’

Dobbin forecasts 2018 earnings will increase by 7% and rise another 10% in the following year as assets under management grow. Emerging markets suffered a three-year downturn but have bounced back strongly in the past year.

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