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The Expert View: Morrisons, APR Energy and IMI
by Harry Brooks on Sep 16, 2013 at 05:01
A roundup of some of the best analyst commentary on shares, also including JD Wetherspoon and Halfords.
Our daily round-up of analyst recommendations and commentary, featuring Morrisons, APR Energy, IMI, JD Wetherspoon and Halfords.
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'Sell' Morrisons, Cantor says
The recent rise in Morrisons (MRW.L) shares reflects misplaced optimism over the UK's economy and the supermarket's financial strategy, Cantor Fitzgerald has warned.
Analyst Mike Dennis has a 'sell' recommendation on the shares, which he said look overvalued compared with Tesco. 'Morrison’s shares trade on a 28% enterprise value/earnings premium to Tesco UK in 2013, which we see as unjustified given their increased debt, falling gross margins and return on capital employed,' he said.
On the supermarket's new financial strategy, which will see capital expenditure fall to £650 million by 2016 and about £500 million of assets put under the hammer, Dennis was unconvinced.
'This may provide capital for buy-backs but could add to costs at a time when Morrison’s sales, gross and net margins are falling faster than their UK peers,' he said. 'In our view, the potential capital return in 2014/15 could be partly offset by lower margins and profits.'
Shares in the group closed at 295.3p on Friday, down 7.2p or 2.4%.
UBS downgrades APR Energy
UBS has downgraded APR Energy (APR.L) from 'neutral' to 'sell', warning that the temporary power provider's valuable contracts in Libya will be up for renegotiation next year.
Analyst George Gregory said the market continues to underestimate Libya’s contribution to 2014 earnings, and with the contract up for renegotiation APR has plenty to lose.
'We believe that as this contract comes up for renegotiation in mid-14APR Energy’s pricing could be competed away as we see no structural reason why another power provider could not compete and at lower prices,' he said.
'Near-term numbers may rise but primarily driven by one contract and the near-term backdrop for temp power has worsened: we do not believe APR is immune.'
Shares in the group closed at £10.42 on Friday, down 18p or 1.7%.
Berenberg Bank on IMI: solid but pricey
Berenberg Bank has upped its target price for engineering specialist IMI (IMI.L), but it retains its 'hold' recommendation, arguing the valuation still looks full.
First-half organic revenues were down 3% year-on-year, but margins proved resilient.
'We update our model to reflect a decent H1 performance from IMI (strong margins despite organic growth declines), but reiterate our Hold recommendation as the valuation discount on which we had based our original Buy thesis has now disappeared,' analyst Alexander Virgo said. His target price rises from £13 to £14.20.
'The stock is now +37% year to date and valuation looks rich even on 2014E estimates, but the ongoing share buyback and the sale of the Merchandising business likely provide support for the shares in the near term.'
Shares in the group closed at £14.90 on Friday, up 13p or 0.9%.
Record profits for JD Wetherspoon
Profits at pubco JD Wetherspoon (JDW.L) may have come in ahead of Shore Capital's predictions, but the brokers still see better value elsewhere in the sector.
Underlying sales grew 5.8% in the 52 weeks to the end of July, with revenues up 7% and pre-tax profits before exceptionals up 6.3% to £76.9 million - a new record for the firm.
'We have modestly upgraded our 2014F pre-tax profits estimate by £2 million to £82.3 million (earnings per share: 50.4p), primarily on lower interest charge expectations, which reflect 2.5% like for like sales growth and broadly flat margins of 8.6%,' analyst Greg Johnson said, reiterating his 'hold' recommendation.
'We continue to espouse the merits of the managed pub sector but continue to see better value elsewhere.'
Shares in the group closed at 752p on Friday, up 17p or 2.3%.
Halfords on track for turnaround, Peel Hunt says
Peel Hunt has increased its target price for Halfords (HFD.L), saying the car and bike shop is a turnaround story with clear momentum.
Strong bike sales look set to bolster the second-quarter results, analyst John Stevenson said, even as the comparatives begin to get tougher.
'Looking ahead, we see some quick wins as management focuses on lifting depressed retail standards, while a targeted approach to market share opportunities underpins like-for-like sales expectations,' the analyst said.
The market remains unconvinced on Halfords' turnaround potential, he added, with poor performance over the past three years still weighing on investors' minds.
'With current trading already outperforming before the new initiatives begin to take hold, we believe market expectations will continue to be regularly challenged,' he said. The analyst's target price rises from 400p to 475p
Shares in the group closed at 406p on Friday, down 3.7p or 0.9%.