The Expert View: Tesco, big pension providers & Babcock
Our daily roundup of the best analyst commentary on shares, also including Sage and Schroders Real Estate.
Analysts at Shore Capital upgraded Tesco (TSCO) to ‘hold’ from ‘sell’ after the troubled supermarket group announced the departure of chief executive Philip Clarke with another profits warning.
Clive Black and Darren Shirley said Clarke’s replacement, Dave Lewis, had been a great success at Unilever where he headed its personal care division. They looked forward to his ‘prognosis for the business, particularly the UK, with considerable interest’ even as they prepared to cut their forecasts for Tesco again.
They added: ‘We believe that his appointment will be greeted with a great sense of encouragement by a store staff that has been pummelled in recent years. A material change in UK trading strategy cannot be dismissed, which is likely to have considerable implications for the rest of the sector.’
‘In addition to strategic change, we also expect to see adjustments to Tesco’s executive team in time and maybe considerable reconfiguration of the group and executive boards, noting as we do considerable market criticism of senior management in recent times.’
Tesco shares closed 3.65p or 1.3% higher at 288.65p.
Barclays Capital convinced big insurers will do well from pension reforms
Analysts at Barclays Capital remain positive on Legal & General (LGEN), Prudential (PRU) and Aviva (AV) believing they have the scale to exploit significant opportunities in the bulk annuity market which they say will offset the decline in individual annuities caused by the Budget pension reforms.
The government yesterday announced that members of valuable defined benefit (DB) pension schemes will be allowed to transfer to less secure defined contribution (DC) schemes in order to take advantage of the increased retirement flexibility brought in by the Budget provided they take advice first.
Allowing scheme members to transfer will make it cheaper for employers to close off their pension liabilities by buying bulk annuities from one of the big life insurers. This could ‘trigger’ big sales of bulk annuities, say the analysts.
‘The defined benefit liabilities in the UK alone are £1 trillion … versus the £12 billion a year individual annuity market. For the few players with the scale to take advantage (Legal & General, Prudential plc, Aviva), the bulk annuity market can, over time, offset the loss of individual annuity sales,’ they said.
Babcock ‘oversold’ says Investec
A first quarter trading statement from Babcock International Group (BAB) reassured John Lawson of Investec Securities.
Lawson maintained his ‘buy’ recommendation and £13.77 target price on shares in the defence and engineering contractor after yesterday’s interim management statement showed a ‘robust’ order book of £13.5 billion, helped by the acquisition of helicopter group Avincis in March.
The analyst stuck to his forecasts for 2015 pre-tax profit of £403.6 million and earnings per share of 68p, noting that they were below the £416.2 million and 69.1p consensus cited by Babcock, after the company reported a good start to 2014/15 in all its businesses.
The shares closed yesterday 8p or 0.7% at £11.08. They have fallen 18% this year. Lawson commented: ‘Babcock has been out of favour in recent months, but we believe this has been overdone.’
Sage acquisition disappoints Panmure
The €16.25 million (£12.9 million) cash purchase of the German payroll business of Exact Holding by accountancy software giant Sage (SGE) left Panmure analyst George O’Connor unimpressed.
At just 1.55 times historic sales, the deal was cheap and established Sage as one of two leading players in this part of the market. However, O’Connor said his enthusiasm was muted because Sage was buying ‘on old-school, on premise solution’ when, he argued, it ‘should have been bolder and looked to acquire one of this market’s disruptors like Accede’, a cloud-based software provider.
O’Connor recognised that with outgoing chief executive Guy Berruyer making a ‘long goodbye’ from the business, a big deal was not likely. A third quarter trading statement is due today which he said should show ‘all is well’.
Sage shares have fallen 6% this year. Trading at 16.6x earnings O’Connor said it was too soon to call for a buying opportunity. He retained his ‘hold’ and 407p target price. The shares closed virtually unchanged at 379p.