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The Expert View: Merlin, Dixons and Thomas Cook
by Michelle McGagh on May 16, 2014 at 05:01
Our daily roundup of the best analyst commentary on shares, also including Kier and Lonmin.
Lego film fillip for Merlin Entertainments
The Lego Movie has helped to boost Legoland owner Merlin Entertainments (MERL), with the company trading ahead of analyst expectations.
Panmure analyst Karl Burns reiterated his ‘buy’ recommendation and target price of 446p following the company’s latest trading statement, covering the 18 weeks to 3 May. Shares were flat yesterday at 355p.
‘Merlin Entertainment has reported… like-for-like sales increasing by 12%, well ahead of our around 3% full-year forecast,’ said Burns. ‘However, this significant increase in like-for-likes is driven by favourable weather in North Europe, strong promotional activity and the launch of The Lego Movie benefiting the two Legoland parks and Discovery centres in the US.’
However, he added that despite the outperformance in the early part of the year management had not changed its full-year forecasts.
‘We retain our full-year forecasts but note Merlin is currently trading ahead of our estimates,’ said Burns. ‘We believe Merlin remains attractive with five-year double-digit earnings per share growth.’
Kier’s hardy outlook propels it ahead of peers
Building company Kier Group (KIE) has been upgraded as its latest trading update shows it will benefit not only from a recovering property market but is ahead of its peers in constructions.
Numis analyst Howard Seymour upgraded the stock from ‘add’ to ‘buy’ and retained a target price of £21.25. Shares were yesterday up 30p, or 1.8%, at £16.76.
‘Kier’s [trading statement] points to a more positive construction outlook that its peers, the benefits of its enlarged services business coming to the fore and property continuing to benefit from an improving market,’ said Seymour.
He added that Kier was one of the few companies in the sector showing increasing dividends and that it remained ‘our favoured stock in the construction service space to benefit from the improving macro conditions’.
Strikes and production woes hit Lonmin
Strike action and a ‘defensive’ business model is hitting platinum miner Lonmin (LMI).
Following a trading statement from the company, Investec analyst Marc Elliott retained a ‘sell’ recommendation and reduced the target price from 258p to 238p. Shares fell 7.4p, or 3.8%, to 254p yesterday.
‘The interims highlighted numerous challenges as strike action continues and platinum prices show little response thus far,’ he said. ‘The financial position was reasonable with net cash of $71 million (£42 million). However, the business model appears to be increasingly forced towards a more defensive stance, with capital programmes to be delayed and a focus on maintaining the production profile as market conditions cannot justify investment in growth.
‘We see long-term value but not at current levels.’
Elliott noted the strike action in South Africa was hanging over the company as four workers have died in recent violence and unions are resisting miners returning to work.
Dixons to be winner from Carphone Warehouse merger
Dixons (DXNS) is tipped to be the winner from its merger with Carphone Warehouse by Cantor analysts.
Analyst Freddie George retained a ‘buy’ rating and target price of 60p for electrical goods retailer Dixons following a trading update which was ‘broadly in line with market expectations, with sales behind market expectations but margins significantly better than forecast’. Full-year 2014 forecasts were moving towards the top end of the range, he added. Shares yesterday tumbled by more than 10% to 45.7p.
‘The anticipated merger of the company with Carphone Warehouse will overshadow the trading update,’ he said. ‘Carphone Warehouse…is seeking to develop sales in adjacent categories, such as tablets, while Dixons has been openly looking to increase its mobile offering…the merger in our view is more compelling to Dixons.’
George said that while there was scepticism about combining two companies with very different cultures ‘we believe the deal will be beneficial to Dixons’.
Thomas Cook on earnings upgrade path
After teetering on the brink of collapse just three years ago, the recovery at Thomas Cook (TCG) continues to go from strength to strength.
Jefferies analyst Mark Irvine-Fortescue retained a ‘buy’ recommendation and increased the target price from 200p to 230p. Shares yesterday fell 12.6% to 156.1p.
‘Thomas Cook is on a multi-year earnings upgrade path and we see [the first half] update as the next catalyst,’ he said.
He noted the company was not only trading in line with expectations but a further £20 million of cost savings had been identified in a cost-cutting exercise known as ‘wave 1’. A second exercise – ‘wave 2’ – is expected to identify £150 million of benefits for the company.
‘We continue to see better value at Thomas Cook than TUI Travel,’ said Irvine-Fortescue. ‘We think that its superior growth prospects and self-help opportunities mean that the current valuation discount [of TUI] is difficult to justify.’