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The Expert View: London Stock Exchange, Babcock and Costain
by Michelle McGagh on Jun 27, 2014 at 05:01
Our daily roundup of the best analyst commentary on shares, also including SQS Software Services and Capital & Regional.
LSE under review after 'transformational' acquisition
Numis has placed London Stock Exchange (LSE) shares ‘under review’ following its acquisition of Russell Investments for £1.6 billion, the largest deal in its 213-year history, which prompted a 6.1% jump in its shares to £19.85.
Analyst James Hamilton placed the shares and target price ‘under review’ due to ‘the transformational nature of this deal’.
While he noted the acquisition of Russell Investments, also known as Frank Russell, ‘marks a substantial move into the US’ where the Russell 2000 is a key US small-stock performance index, he was unsure about how Russell’s asset management business would fit with LSE’s business model.
‘Russell also has an investment management business with $256 billion of assets under management. We can see no immediate links between this business and the rest of the LSE group and consequently the LSE is reviewing it,’ he said.
‘We suspect a sale is likely, possibly after the LSE has worked on its operating efficiency and profitability.’
Low valuation of Babcock make it a 'buy'
Engineering support services company Babcock International (BAB) has seen a pull back in the share price indicating a 'buy', according to Jefferies.
Analyst Kean Marden retained a 'buy' recommendation and target price of £14.50 for the shares, which are trading at £11.50.
He was positive about the 'elevated bid pipeline' and also the acquisition of helicopter company Avincis, which Babcock bought for £1.6 billion in March, that Marden is expecting to see revenue synergies from.
'We highlight likely contract decisions over the next six months and encouraging developments in Canada, reiterate our view that the Avincis acquisition will create value for shareholders,' he said. 'A 13.9x full year 2016 price-earnings ratio is too low, in our opinion. Buy.'
He added a '17.5x full year price-earnings multiple should be attainable' but risks included 'mobilising increasingly large contracts and managing international expansion'.
Costain on track and moving up the chain
Engineering and construction company Costain (COSG) continues its move up the value chain towards consultancy.
Liberium analyst William Shirley retained a 'buy' rating and target price of 300p on the shares, following a pre-close statement that the company is on track to meet its goals in its interim statement in August. Shares were trading at 249.8p at yesterday's close.
The order book is up 10% year-on-year and the level of rendering activity is strong but Shirley was most impressed by the positioning of the business.
'We continue to like Costain's unique focus on UK infrastructure, the strengthened balance sheet and the fact that Costain is gradually moving up the value chain into consulting and maintenance,' he said. 'Underlying enterprise value/earnings before interest and tax of 7x is not demanding.'
Good update for SQS but Panmure is taking a wait-and-see approach
Independent testing company SQS Software Services (SQS) may have published a positive business update but Panmure Gordon said this does not mean the group is on a sure footing.
Analyst George O'Connor retained a 'hold' recommendation and target price of 527p on the shares, which are trading at 515p.
SQS has announced a number of contract wins worth a combined €60 million (£48 million) and said it was experiencing ‘solid’ growth within its target sectors and most of the countries in which it operates.
And O’Connor said the group’s acquisition of fellow software tester Thinksoft in November last year had produced positive results.
‘We have had reservations on M&A integration with Thinksoft given the cultural differences between the firms but all seems to be on track.,’ he said.
However, he maintained a cautious stance despite the good news.
‘[It’s] a positive business – not trading – update from SQS [but] sadly history tells us that they can issue these and then follow with a warning,' he said.
Capital & Regional upgraded after share price falls
Shares in property company Capital & Regional (CAL) fell earlier this week, which Peel Hunt saw as a buying opportunity and upgraded the stock.
Analyst Kate Renn upgraded her recommendation from 'hold' to 'buy' and retained a target price of 50p on the shares, having placed them under review earlier in the week.
Renn said the 10% fall in share price, following news of an acquisition that doubled the size of the company and will convert it into a real estate investment trust, was a chance to buy in. Shares yesterday rallied, jumping 9.4% to 47p.
'Following a 10% share price fall from 48p over the past week, the low, current 43p share price provides a large 24% net asset value discount to our December 2014 forecast and a 6.7% dividend yield by full year 2016,' said Renn before the rise.
'We upgrade to “buy” now Capital & Regional has greater exposure to...inherent growth and an ability to pay rising dividends... there are also several share price catalysts and scope for surprise upside as management expand the business from here.'