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The Expert View: William Hill, HSBC and St. James's Place

Our daily round-up of analyst recommendations and commentary, featuring Faroe Petroleum and Egdon Resources.

Our daily round-up of analyst recommendations and commentary, featuring William Hill, HSBC, St. James's Place, Faroe Petroleum and Egdon Resources.

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Key stats
Market capitalisation£2,361m
No. of shares out706m
No. of shares floating702m
No. of common shareholdersnot stated
No. of employees16900
Trading volume (10 day avg.)3m
Turnover£1,137m
Profit before tax£115m
Earnings per share16.28p
Cashflow per share26.56p
Cash per share16.28p

*Correct as at 5 Nov 2012

UBS downgrades William Hill

Jonathan Leinster, analyst at UBS, has downgraded betting shop William Hill (WMH.L) from 'buy' to 'neutral', saying the investment case has fundamentally changed over the past year as the value of the shares has soared.

Year to date the shares are up some 70%, outperforming the FTSE All Share index by about 60%. This rise is a result of excitement about possible acquisitions, Leinster said, with the Australian arm of online gaming business Sportingbet as well as Playtech's minority holding in William Hill's internet division both targets.

The analyst has increased his target price on William Hill from 315p to 360p to take these plans into account, and if successful he expects them to add 12% and 18% to 2013 and 2014 earnings respectively.

However, he cautioned that investors' anticipation of these deals effectively changes the investment case for the business. 'In essence these acquisitions have altered the investment case for William Hill from that of positive earnings momentum and under appreciation of the Retail operations, to a new investment case based on the successful execution of acquisitions and consolidation in the international online gaming sector,' he said.

William Hill features in the top holdings of the Jupiter Growth & Income fund, run by Citywire A-rated Philip Matthews.

Shares in the group closed at 330.8p on Monday, down 12.4p or 3.61%.

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Key stats
Market capitalisation£112,751m
No. of shares out18,402m
No. of shares floating18,355m
No. of common shareholdersnot stated
No. of employees271500
Trading volume (10 day avg.)18m
Turnover39,321m USD
Profit before tax10,125m USD
Earnings per share0.56 USD
Cashflow per share0.72 USD
Cash per share4.82 USD

*Correct as at 5 Nov 2012

Investec reiterates 'hold' on HSBC, warns shares set to fall

Ian Gordon, analyst at Investec, has warned that HSBC (HSBA.L) shares are set to suffer after a disappointing trading update that included a hefty provision for payment protection insurance (PPI) mis-selling and a likely fine for money laundering in the US.

Pre-tax profits came in at £2.19 billion in the third quarter, well below Gordon's £2.62 forecast. The bank has set aside an extra £719 million for a fine it expects as a result of the US money laundering scandal and for increased compensation to UK customers mis-sold PPI.

Gordon said the decision to fence off a sizable chunk of cash to deal with the US money laundering issue isn't surprising given the wide-ranging charge sheet levelled at the bank and recent 'fine inflation' in the country. He added that the provision for PPI compensation remains 'modest' compared with other UK banks.

Overall, the analyst remains unconvinced by the shares. 'We remain cautious on what we see as an overvalued sector. Hold and total net asset value-derived 590p target price unchanged.'

Shares in the group closed at 617.59p on Monday, down 8.51p or 1.36%.

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Key stats
Market capitalisation£1,978m
No. of shares out505m
No. of shares floating488m
No. of common shareholdersnot stated
No. of employees746
Trading volume (10 day avg.)0m
Turnover£-547m
Profit before tax£107m
Earnings per share21.20p
Cashflow per share39.65p
Cash per share472.07p

*Correct as at 5 Nov 2012

Shore Capital says 'buy' St James's Place amid possible Lloyds exit

Eamonn Flanagan, analyst at Shore Capital, has reiterated his 'buy' recommendation on investment salesforce St. James's Place (STJ.L) amid reports that Lloyds is selling its 60% stake, saying there'd be no shortage of takers for the shares.

According to a report in the Sunday Times Lloyds is set to sell its stake in order to raise £1 billion to shore up its balance sheet. St. James's Place's chief executive, David Bellamy, is reportedly keen on the idea too.

Flanagan said a disposal would be a 'no-brainer' for Lloyds. 'Whilst we sympathise with the Lloyds position... why should it sell out of a highly performing stock with excellent prospects in a post-retail distribution (RDR) world... to us, its 60% stake is increasingly incongruous, when it gets little for it strategically and when the regulators are baying for more capital.'

An impressive track record should mean it's not hard to find buyers for the shares, the analyst said. 'The recently reported Q3 2012 new business figures, up 8% with strong performances in September and October, demonstrates the potential from this quality salesforce, especially as the life industry enters a post-RDR world.

'Whilst we cannot ignore price, we do not believe there will be any issues placing the 60% stake, with investor demand likely to be strong.'

Shares in the group closed at 393.9p on Monday, down 4.6p or 1.15%.

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Key stats
Market capitalisation£314m
No. of shares out212m
No. of shares floating150m
No. of common shareholdersnot stated
No. of employees37
Trading volume (10 day avg.)0m
Turnover£80m
Profit before tax£47m
Earnings per share20.15p
Cashflow per share25.49p
Cash per share52.54p

*Correct as at 5 Nov 2012

Canaccord downgrades Faroe Petroleum as Shetland disappoints

Charlie Sharp, analyst at Canaccord, has downgraded Faroe Petroleum (FPM.L) from 'buy' to 'hold' on news that the oil explorer is to sell two of its oil fields to the west of the Shetland Islands.

Faroe is selling the Fulla and Freya fields after deciding that no economically viable development is possible. Fulla reportedly has good quality oil shows but is too small to develop, and the bigger Freya prospect has much lower quality oil and a more ‘difficult’ reservoir.

Sharp has cut his target price by 26% to 170p as a result of the news, and he cautioned that it raises questions about other holdings in the region. 'Perhaps of greater concern is the turnaround in the company’s view on these fields and the implications for other projects in the portfolio, most notably, the two west of Shetland gas discoveries, Glenlivet and Tornado.'

'As a result of our valuation change, and bearing in mind current market sentiment towards disappointing exploration, we reduce our rating from buy to hold,' he added.

Shares in the group closed at 149.5p on Monday, down 0.5p or 0.33%.

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Key stats
Market capitalisation£9m
No. of shares out131m
No. of shares floating60m
No. of common shareholdersnot stated
No. of employees13
Trading volume (10 day avg.)0m
Turnover£2m
Profit before tax£4m
Earnings per share3.10p
Cashflow per share3.66p
Cash per share2.63p

*Correct as at 5 Nov 2012

Seymour Pierce cuts target price for Egdon Resources

Sam Wahab, analyst at Seymour Pierce, has reduced his target price for oil explorer Egdon Resources (EDR.L) after revenues failed to meet expectations as a result of ongoing production problems.

Revenues rose 9.9% year-on-year to £2.61 million, missing analyst expectations, and the company lost £2.89 million as a result of an impairment charge of £3.15 million relating to three of its production sites. The cash balance remained largely flat at £3.33 million, slightly down from £3.69 million last year.

Egdon's chairman, Philip Stephens, said production problems were compounded by regulatory and planning delays.

Wahab's target price falls from 18p to 16p, although he retains his 'buy' recommendation. 'Following an internal strategic review, the company now intends to focus on fewer assets in three core areas and will look to monetise non-core assets and farm-out opportunities to fund growth,' he said.

'Given the continued issues with Ceres and Kirkleatham, we expect full year production for FY13 to be in line with current levels, although sustained production at Ceres and a contribution from Kirkleatham could increase this substantially.'

Seymour Pierce acts as a market maker for Egdon.

Shares in the group closed at 6.65p on Monday, down 0.22p or 3.27%.

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