The Expert View: Greggs, Direct Line and Smith & Nephew

Our daily round-up of analyst recommendations and commentary, featuring Greggs, Direct Line, Smith & Nephew, Interserve and Kazakhmys.

Key stats
Market capitalisation	£480m
No. of shares out	101m
No. of shares floating	88m
No. of common shareholders	not stated
No. of employees	19504
Trading volume (10 day avg.)	0m
Turnover	£701m
Profit before tax	£45m
Earnings per share	44.29p
Cashflow per share	75.00p
Cash per share	19.78p

*Correct as at 10 Dec 2012

Shore Capital downgrades Greggs as CEO steps down

Clive Black, analyst at Shore Capital, has downgraded high-street bakery chain Greggs (GRG.L) from 'buy' to 'hold' on news the chief executive is stepping down.

Black said Ken McMeikan was the driving force behind the modernisation of Greggs, and he cited the development of a more efficient supply chain and changes in the company's real estate holdings as his key achievements.

McMeikan, who has been at Greggs for four years, is leaving to join private equity owned foodservices business Brakes Group.

'We cannot hide our disappointment for Greggs' shareholders on the announcement of Mr. McMeikan's resignation,' Black said.

'With the inevitable uncertainty that a change of such a key position brings, Shore Capital feels that it is right to downgrade our recommendation on Greggs' stock from Buy to HOLD until his replacement is known and the ongoing direction of the Company is understood.'

Shares in the group closed at 473.65p on Monday, down 12.85p or 2.6%.

Key stats
Market capitalisation	£3,006m
No. of shares out	1,500m
No. of shares floating	520m
No. of common shareholders	not stated
No. of employees	15309
Trading volume (10 day avg.)	2m
Turnover	£4,775m
Profit before tax	£249m
Earnings per share	16.60p
Cashflow per share	18.70p
Cash per share	91.99p

*Correct as at 10 Dec 2012

Deutsche Bank initiates Direct Line with 'hold' recommendation

Oliver Steel, analyst at Deutsche Bank, has initiated coverage of insurance group Direct Line (DLG.L) with a 'hold' recommendation, saying its strong balance sheet must be weighed against concerns about future growth.

'The most attractive aspect of the group is its capacity to return cash over and above its normal dividend payout, which is supported by a conservative balance sheet and potential capital release from the run-off business,' Steel said.

However, the analyst warned that beyond 2015 earning-per-share growth may begin to fall off. 'DLG’s principal business line, UK motor insurance, faces significant uncertainty from current regulatory and legal reviews,' he said.

'We think 40% of 2015e earnings will still be coming from reserve releases, a level that will be hard to sustain. Meanwhile top line growth is somewhat constrained by the group’s current high market shares in UK motor and home.'

Shares in the group closed at 200.25p on Monday, down 0.75p or 0.4%.

Key stats
Market capitalisation	£6,094m
No. of shares out	901m
No. of shares floating	891m
No. of common shareholders	not stated
No. of employees	11000
Trading volume (10 day avg.)	2m
Turnover	2,663m USD
Profit before tax	363m USD
Earnings per share	0.41 USD
Cashflow per share	0.58 USD
Cash per share	0.13 USD

*Correct as at 10 Dec 2012

Investec upgrades Smith & Nephew to 'buy'

Sebastien Jantet, analyst at Investec, has upgraded healthcare supplier Smith & Nephew (SN.L) from 'hold' to 'buy' following its acquisition of Healthpoint Biotherapeutics.

Jantet said buying the biopharmaceutical firm makes strategic sense for S&N. 'Whilst we are still of the view that the acquisition increases Smith & Nephew’s risk profile, now that we have more details on the transaction, we can support the entry price on the core business alone (10.4x prospective pre-tax earnings), without attaching any value to the riskier development pipeline,' he said.

The company's recent capital markets day also gave reasons for optimism, the analyst said. 'We sensed a real cultural shift and came away with the view that Smith & Nephew is truly on the front foot for the first time in many years,' he said. 'We think there is a lot going on behind the scenes that will become increasingly apparent over the next few years.'

Shares in the group closed at 674.5p on Monday, up 8.5p or 1.3%.

Key stats
Market capitalisation	£453m
No. of shares out	127m
No. of shares floating	121m
No. of common shareholders	not stated
No. of employees	50000
Trading volume (10 day avg.)	0m
Turnover	£1,848m
Profit before tax	£58m
Earnings per share	44.66p
Cashflow per share	74.07p
Cash per share	36.64p

*Correct as at 10 Dec 2012

Westhouse predicts strong year ahead for Interserve

Michael Donnelly, analyst at Westhouse, has initiated coverage of support services and construction company Interserve (IRV.L) with a 'buy' recommendation, saying he expects it to be one of the few contractors to deliver earnings upgrades next year.

Shares in the group have soared 48% since management issued ambitious earnings guidance back in 2011, Donnelly noted, but he said there's further to go.

'We believe that the shares will continue to outperform despite the likelihood of more modest delivery of these targets in 2013 as this will still be viewed as attractive, given our expectation of flat earnings elsewhere in the sector,' he said.

The shares trade at a 29% discount to the price-to-earnings ratio of the wider market (FTSE All-Share), he added, despite having traded with a market premium rating from 2005 to 2008.

'The discount continues to narrow post the 2009 nadir, and our sum-ofthe-parts valuation suggests a fair value of 432p, some 21% above the current share price.'

Shares in the group closed at 357.45p on Monday, down 1.75p or 0.5%.

Key stats
Market capitalisation	£3,954m
No. of shares out	524m
No. of shares floating	196m
No. of common shareholders	not stated
No. of employees	59249
Trading volume (10 day avg.)	2m
Turnover	2,222m USD
Profit before tax	874m USD
Earnings per share	1.64 USD
Cashflow per share	1.91 USD
Cash per share	2.25 USD

*Correct as at 10 Dec 2012

Canaccord lifts target price for Kazakhmys

Peter Mallin-Jones, analyst at Canaccord, has increased his target price for Kazakhmys (KAZ.L) on news the board has approved the mining group's Aktogay copper project in Kazakhstan.

The analyst now sees potential peak copper production of about 600,000 tonnes a year, up from 288,000 tonnes at the moment. He expects development of the $2 billion to begin in the second quarter of next year.

'In the medium term, the volume growth and cost reduction potential look interesting, but we expect investors to wait until closer to project completion to build confidence over timelines and capital budgets,' he said. The analyst has a target price of 785p on the shares, and a 'hold' recommendation.

Shares in the group closed at 754p on Monday, up 8.5p or 1.1%.