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The Expert View: Shell, ABF and Topps Tiles

Our daily roundup of analyst commentary on shares, also including Paragon and Electrocomponents.

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If you would like to receive news alerts on any of the stocks mentioned in The Expert View, click on the star icons below to add them to your favourites.

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Key stats
Market capitalisation£133,952m
No. of shares out6,312m
No. of shares floating6,301m
No. of common shareholdersnot stated
No. of employees97000
Trading volume (10 day avg.)4m
Turnover237,577m USD
Profit before tax12,992m USD
Earnings per share2.12 USD
Cashflow per share3.79 USD
Cash per share1.41 USD

Shell’s ‘$10 billion opportunity’

Barclays believes shares in Royal Dutch Shell (RDS) are ‘meaningfully undervalued’ but that new chief financial officer Jessica Uhl will help make 2017 the year the oil giant delivers.

Analyst Lydia Rainforth retained her ‘overweight’ recommendation and target price of £27.50 on the stock, which rose 16.5p, or 0.8%, yesterday to £21.69.

‘A key challenge for new CFO Jessica Uhl will be to continue the pursuit of simplifying and standardising Shell,’ she said.

‘Given that the prevailing oil price is back to 2005 levels, we see no reason why the cost base should not return to this benchmark on a volume-adjusted basis. On our analysis, this is a $10 billion opportunity to reduce costs… This will come from continued simplification, high-grading of the portfolio and applying best practices from BG.’

The cost savings would ensure the dividend was sustainable at the prevailing oil price, added Rainforth, and ‘as such we continue to see shares, which yield 7%, as meaningfully undervalued’.

‘The journey to improve profitability and returns is one that will take time and there is likely to be more volatility ahead, but the direction of travel is clear and 2017 looks set to be a year of delivery,’ she said.

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Key stats
Market capitalisation£23,358m
No. of shares out792m
No. of shares floating346m
No. of common shareholdersnot stated
No. of employees129916
Trading volume (10 day avg.)1m
Turnover£13,399m
Profit before tax£818m
Earnings per share103.41p
Cashflow per share165.23p
Cash per share70.11p

ABF has turned around Primark, says Jefferies

Price cuts at Associated British Foods (ABF) owned Primark caused concerns at Jefferies last year but the retailer has turned it around this year.

Analyst James Grzinic retained his ‘buy’ recommendation and increased the target price from £31 to £35 after another visit to Primark stores in the UK and Europe. The shares gained 32.4p, or 1.1%, to £29.39 on Tuesday.

‘In May 2016, we flagged concerning evidence from Primark stores. The retailer was displaying sharp, unplanned mid-season price cuts. By last September, ABF warned of another drop in Primark margins to come in 2016/17, causing a further contraction in multiples,’ he said.

‘We return to Guildford one year on as buyers of ABF, with evidence from stores and competitors supportive of a more positive stance.’

He added that he expected competitors with longer lead times ‘to drive even greater inflation in the autumn/winter season, allowing Primark margins to rebuild from a trough of 9.7% this year to 10.5% in two years’ time’.

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Key stats
Market capitalisation£188m
No. of shares out192m
No. of shares floating160m
No. of common shareholdersnot stated
No. of employees1977
Trading volume (10 day avg.)m
Turnover£215m
Profit before tax£16m
Earnings per share7.82p
Cashflow per share10.75p
Cash per share5.21p

Topps Tiles: growth expected despite first-half softening

Shares in Topps Tiles (TPT) slumped after first-half results showed the toll of a tougher market but Liberum said its retail specialism meant it could weather the storm.

Analyst Adam Tomlinson retained his ‘buy’ recommendation and target price of 110p on the stock after first-half results showed a 1.9% fall in profits before tax to £10.1 million for the 26 weeks to 1 April. The shares slid 6.6%, or 6.75p, to 96.25p on Tuesday.

‘As expected current trading has slowed with underlying like-for-like sales down 5.8% against a tough prior year comparison and in subdued market conditions,’ said Tomlinson.

‘While prior year comparisons ease into the second half, we prudently reduce our full-year 2017 earnings per share by 9% with a flow through to outer years.’

On the plus side, Tomlinson added that the balance sheet health supported a first-half dividend increase of 10% and ‘we continue to believe Topps’ leading specialist market position leaves it better placed than competitors to weather softer trading conditions’.

‘We expect the ongoing store roll-out, focused strategy and opportunity in the commercial sector to drive long-term growth,’ he added.

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Key stats
Market capitalisation£1,293m
No. of shares out273m
No. of shares floating266m
No. of common shareholdersnot stated
No. of employees1299
Trading volume (10 day avg.)1m
Turnover£432m
Profit before tax£116m
Earnings per share39.73p
Cashflow per share40.93p
Cash per share443.74p

Peel Hunt lowers Paragon rating after interims

Peel Hunt has downgraded lender Paragon (PAG), which has been hit by a fall in its buy-to-let business due to stamp duty changes.

Analyst Stuart Duncan reduced his recommendation from ‘buy’ to ‘add’ but increased his share price target from 460p to 510p following interim results. Profit before tax increased 1% to £70.1 million.

Buy-to-let lending volumes fell by 32% due to stamp duty changes but it was offset by growth in other areas such as motor and asset finance.

‘Paragon has been a top performer over the last 12 months, more than doubling from its post-Brexit low,’ said Duncan.

‘Even after this, the shares are not overly expensive, trading on an annualised December 2017 price/earnings ratio of 11.4, which is broadly in line with the average of the other specialist lenders. Alternatively, the shares trade on a price/net asset value ratio of just 1.2.’

The shares added 4.7p on Tuesday to close 1% up at 476.7p.

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Key stats
Market capitalisation£2,408m
No. of shares out441m
No. of shares floating439m
No. of common shareholdersnot stated
No. of employees6024
Trading volume (10 day avg.)1m
Turnover£1,291m
Profit before tax£22m
Earnings per share4.97p
Cashflow per share11.70p
Cash per share7.83p

Numis predicts dividend growth at Electrocomponents

Full-year results from Electrocomponents (ECM) show there is scope for investment and dividend growth, according to Numis Securities.

Analyst Julian Carter retained his ‘hold’ recommendation but increased the target price from 525p to 550p following full-year results from the electronic/industrial component maker. Profit before tax and earnings per share were slightly ahead of Numis’ recently upgraded expectations but Carter said ‘the biggest surprise was the strength of the free cashflow’.

He said net debt was also reduced, providing ‘scope to invest both organically and inorganically to drive faster growth’.

‘It also enables the board to grow the dividend progressively, while also increasing cover, and we now forecast 5% per annum dividend growth. Though free cashflow may dip slightly in full-year 2018, we still forecast the company to be virtually debt free by March 2019,’ said Carter.

The shares advanced 15.5p, or 2.9%, at 554p on Tuesday.

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