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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.

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Key stats
Market capitalisation£23,451m
No. of shares out8,123m
No. of shares floating8,109m
No. of common shareholdersnot stated
No. of employees510444
Trading volume (10 day avg.)16m
Turnover£63,557m
Profit before tax£1,916m
Earnings per share23.72p
Cashflow per share42.77p
Cash per share43.50p

*Correct as at 21 Jul 2014

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.

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Key stats
Market capitalisation£13,916m
No. of shares out5,936m
No. of shares floating5,784m
No. of common shareholdersnot stated
No. of employees9237
Trading volume (10 day avg.)10m
Turnover£39,251m
Profit before tax£893m
Earnings per share15.00p
Cashflow per share16.01p
Cash per share294.18p

*Correct as at 21 Jul 2014

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.

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Key stats
Market capitalisation£5,577m
No. of shares out502m
No. of shares floating495m
No. of common shareholdersnot stated
No. of employees28385
Trading volume (10 day avg.)1m
Turnover£3,321m
Profit before tax£181m
Earnings per share43.79p
Cashflow per share71.49p
Cash per share23.35p

*Correct as at 21 Jul 2014

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.’

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Key stats
Market capitalisation£4,414m
No. of shares out1,167m
No. of shares floating1,160m
No. of common shareholdersnot stated
No. of employees13095
Trading volume (10 day avg.)3m
Turnover£1,340m
Profit before tax£239m
Earnings per share18.60p
Cashflow per share22.29p
Cash per share4.63p

*Correct as at 21 Jul 2014

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.

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Schroder Real Estate nears dividend cover

Schroder Real Estate investment trust (SREI) is within reach of achieving full dividend cover, after a busy year for the property fund, says house broker Numis Securities.

SREI yesterday revealed net asset value (NAV) per share had risen 4.3% to 50.7p in its first quarter following 7.8% NAV growth in the full year to 31 March.

Numis commented: ‘With a secure balance sheet, positive market backdrop and ongoing asset management initiatives we believe that SREI is well placed to continue to deliver further NAV and income growth. The manager continues to successfully execute its strategy of reaching full dividend cover (95% currently), produce a long-term sustainable yield, and exploit the arbitrage between low long-term borrowing costs and property yields whilst targeting a lower long-term LTV (ranging between 25-35%). The current share price of 52.5p represents a premium of 3.6% to the 30 June NAV, and the shares yield 4.7% (95% covered).’

The shares closed unchanged at 51.75p.

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