The Expert View: Tesco, Hargreaves Lansdown and Grainger
Our daily roundup of the best analyst commentary on shares, also including Dialight and Safestore.
Tesco profits fall but Jefferies still hopeful of turnaround
Tesco (TSCO.L) may have suffered a 6% fall in group profit but Jefferies analysts believe the long road ahead for the supermarket giant is shortening.
Tesco reported a fall in group trading annual profit to £3.3 billion for last year, the second year in a row it has announced declining profits, although the drop is not as bad as many feared.
Analyst James Grzinic retained his ‘buy’ recommendation and target price of 320p for the shares, which closed yesterday up 8.7p, or 3%, at 295p.
Grzinic focused on the positives of the results, highlighting a turn in international profits, which were up 6% in the second half of the year after a 31% drop in the first half.
‘The long road appears to have been shortened a little, and whilst the UK outlook remains challenged, we are more positive than most that UK grocers have a huge reserve of investment at their disposal when considering the remarkable levels of promotional activity on which the industry operates,’ he said.
‘The group could provide long suffering shareholders with a more considerable buffer by extracting cash out of the international operations in order to step up the process of organic leverage.’
Hargreaves is still ‘best in sector’, says Numis
Online stockbroker Hargreaves Lansdown (HRGV.L) has seen record net inflows of £1.83 billion in the last quarter and is set to benefit further from pension changes announced in the Budget.
Numis analyst James Hamilton retained a ‘hold’ recommendation and a target price of £12.86 on the shares, which closed yesterday down 12p, or 1%, at £11.99. Numis is a house broker for Hargreaves Lansdown.
Hamilton said the inflows and recruitment of 33,000 new customers last quarter showed the company had not been impacted by rules which tightened the rules around commission on platforms.
‘Despite the recent weakness Hargreaves Lansdown continues to command a justifiable premium valuation reflecting its best-in-sector cashflow characteristics and its superior growth outlook,’ he said.
He added that future interest rate rises and relaxation of drawdown rules would also start to benefit the company.
‘Hargreaves Lansdown already has £2 billion of assets in income drawdown and the changes to pensions legislation should start to benefit the group next year.’
Grainger acquisition to provide significant value
Residential landlord Grainger (GRI.L) has made another acquisition in the exclusive area of Knightsbridge which the company is sure will generate significant value.
Peel Hunt James Carswell has retained a ‘buy’ rating and a target price of 260p on the shares, which closed yesterday up 5.9p, or 2.7%, at 222.4p.
Carswell said the acquisition added to Grainger’s ‘rare central London portfolio’.
‘[The] £160 million acquisition…is well suited to Grainger – it knows the regulated tenancy market well, owns existing assets in the area and is experienced at carrying out significant refurbishment works,’ he said.
‘The portfolio will be financed through low-cost debt, which will minimise the impact to earnings, and we would expect capital uplifts in due course. Regulated tenancy portfolios in this part of London are rare and Grainger has done well to secure the assets.’
Dialight downgraded on share bounce
LED lighting specialists Dialight (DIA.L) has been downgraded despite being on track to meet its expectations. Investec analyst Michael Blogg downgraded his recommendation from ‘buy’ to ‘hold’ but moved the target price up to 910p from 885p. Shares closed yesterday up 16.5p, or 1.8%, at 940p.
‘Dialight has set sensible expectations for the year – stability in signal [division] and all the growth from lighting [division] – and so far it seems to be on course to meet them,’ he said. ‘However, visibility is still poor (as it has been for the last five years) and the group needs to ‘normalise’ its processes and management structure.’
Blogg added that Dialight was a ‘growth business’ but in order to be attractive it needed to ‘add robustness to its ability to predict’.
‘After a remarkably quick bounce in the share price, we pull our recommendation back… although we hope that Dialight will regain its investment cachet in due course’.
Good value Safestore is top pick for Liberum
Storage business Safestore (SAFE.L) is looking even more attractive to Liberum analysts as the shares trade lower than their March high.
Analyst Michael Burt retained a ‘buy’ recommendation and a target price of 267p on the shares, which closed yesterday up 11.8p, or 5.6%, at 220p.
‘Safestore’s shares are now 14% lower than their March high, leaving the company trading on 15.7 times 2014 price-earnings ratio,’ said Burt.
‘Safestore offers an attractive blend of earnings growth at a reasonable price-earnings ratio and dividend yield when compared to the universe of FTSE 250 and FTSE Small Cap companies.’
Burt added the company remained ‘our top small/mid cap pick in UK real estate given its combination of re-rating potential and earnings momentum’.