The Expert View: Morrisons, Kingfisher and Bodycote

Our daily round-up of analyst recommendations and commentary, featuring Morrisons, Kingfisher, Bodycote, Pennon and Keller Group.

Key stats
Market capitalisation	£6,175m
No. of shares out	2,409m
No. of shares floating	2,051m
No. of common shareholders	not stated
No. of employees	57169
Trading volume (10 day avg.)	9m
Turnover	£17,663m
Profit before tax	£690m
Earnings per share	26.03p
Cashflow per share	38.86p
Cash per share	9.52p

*Correct as at 16 Nov 2012

UBS downgrades Morrisons, warns of 'trading vulnerability'

Mike Tattersall, analyst at UBS, has downgraded supermarket giant Morrisons (MRW.L) from 'buy' to 'neutral', warning that sales momentum has fallen 'alarmingly adrift' of the competition in recent months.

Tattersall said the weight of analyst opinion has moved decisively against the supermarket, with consensus estimates down about 10% in the year to date.

'The second half margin outlook is decidedly weak. Although ostensibly Morrison has lower operational gearing than some in the sector, its vertically integrated supply chain may be more vulnerable if negative volume trends persist,' he added.

Although he said the shares are not patently expensive at a 2012 price-to-earnings ratio of 9.3x and a 4.8% yield, he said they don't warrant any premium.

'Trading vulnerability and the risk of ongoing downgrades suggest, however, that a sector premium is not appropriate – our target price, set using earnings, dividend and asset valuation methodologies, comes down to 270p and our rating is cut from Buy to Neutral,' he concluded.

Shares in the group closed at 256.2p on Friday, down 2.7p or 1.04%.

Key stats
Market capitalisation	£6,566m
No. of shares out	2,370m
No. of shares floating	2,316m
No. of common shareholders	not stated
No. of employees	67386
Trading volume (10 day avg.)	8m
Turnover	£10,831m
Profit before tax	£640m
Earnings per share	26.95p
Cashflow per share	37.90p
Cash per share	24.78p

*Correct as at 16 Nov 2012

Seymour Pierce says 'sell' Kingfisher

Freddie George, analyst at Seymour Pierce, has reiterated his 'sell' recommendation on B&Q owner Kingfisher (KGF.L) following the release of disappointing French retail data.

On Thursday Banque de France published a summary of retail sales data, showing sales volumes in DIY down 7.1%. George said taking into account a slightly positive calendar impact this translates into a fall of about 5%, confirming there has been a marked deterioration in trade since elections in the country.

'We estimate that over the quarter the Banque de France quarter figures were down by between 2.5% and 3.0% which would lead us to expect Kingfisher’s like-for-like sales to be down by a similar amount after taking into account new space growth,' George said. 'This figure, in our view, will be viewed as being disappointing by the market.

'The stock is rated at 12.9x FY13 our revised forecast earnings. It has the support of a relatively strong balance sheet enabling the company to consider a share buyback or a special dividend. The re-rating over the year partly due to hopes of a cyclical recovery, however, we believe, has gone far enough. We reiterate our sell recommendation.'

Kingfisher features in the top holdings in the JOHCM UK Equity Income fund, run by Citywire AA-rated Clive Beagles and James Lowen.

Shares in the group closed at 274.2p on Friday, down 1.2p or 0.44%.

Key stats
Market capitalisation	£730m
No. of shares out	191m
No. of shares floating	183m
No. of common shareholders	not stated
No. of employees	5533
Trading volume (10 day avg.)	0m
Turnover	£571m
Profit before tax	£56m
Earnings per share	29.43p
Cashflow per share	56.48p
Cash per share	9.46p

*Correct as at 16 Nov 2012

FinnCap sticks at 'hold' on Bodycote

David Buxton, analyst at FinnCap, has reiterated his 'hold' recommendation on metals coating business Bodycote (BOY.L) following a trading update that hit expectations.

Friday's interim management statement covered the period from 1 July to 15 November, and showed revenue growth of 2.9% (7.6% at constant exchange rates), with organic growth accounting for 2.6% of this.

Buxton noted that as expected the group's various divisions had very different fortunes, with the high-margin aerospace group doing well and the automotive unit reporting heavier weather.

'This in-line statement is reassuring if somewhat predictable, and in our opinion provides some limited relief to the shares the shares, but fundamentally have limited upside to our fair value,' he said. 'The valuation places the shares on a current price-to-earnings ratio of 10.4x dropping to 8.8x for 2013. We retain our Hold rating.'

Shares in the group closed at 376.4p on Friday, up 13.7p or 3.78%.

Key stats
Market capitalisation	£2,229m
No. of shares out	364m
No. of shares floating	360m
No. of common shareholders	not stated
No. of employees	4592
Trading volume (10 day avg.)	1m
Turnover	£1,233m
Profit before tax	£172m
Earnings per share	47.77p
Cashflow per share	89.03p
Cash per share	84.09p

*Correct as at 16 Nov 2012

JP Morgan cuts target price for Pennon on profit warning

Ian Mitchell, analyst at JP Morgan, has cut his target price for water and sewerage services business Pennon (PNN.L) on the back of a profit warning that wiped over 6% off the value of the shares.

The warning related to the group's waste division, Viridor, where profits are now expected to come in below the bottom end of analyst's estimates when the half-yearly results are released on 29 November.

Mitchell's group profit forecasts for 2013 and 2014 fall 6.2% and 8.9% respectively based on the lower Viridor profits, but he reiterated his 'overweight' recommendation.

'We continue to believe that Pennon is structurally well placed to grow its waste business,' he said. 'We also think that if recyclate prices remain weak then gate fees are likely to rise. However, in our estimates and valuation we now assume no material recovery in average recyclate revenues, leading us to lower our price target by 14% from 780p to 670p.'

Shares in the group closed at 599.5p on Friday, down 29p or 4.6%.

Key stats
Market capitalisation	£397m
No. of shares out	64m
No. of shares floating	61m
No. of common shareholders	not stated
No. of employees	7000
Trading volume (10 day avg.)	0m
Turnover	£1,154m
Profit before tax	£16m
Earnings per share	24.35p
Cashflow per share	90.20p
Cash per share	77.78p

*Correct as at 16 Nov 2012

Peel Hunt lifts target price for Keller Group on improving US outlook

Robin Hardy, analyst at Peel Hunt, has increased his target price for ground engineering business Keller Group (KLR.L) on the back of signs of improvement in the US construction market.

'Markets in the US are improving and there has been a shift in the operational bias that is allowing Keller’s businesses to outperform,' the analyst said. His overall pre-tax profit forecast for this year rises 12% to £41.8 million, pushing his target price from 625p to 685p.

'We are still using a simple price to earnings (P/E) on 2013E EPS, but have slightly pushed ahead on the multiplier used to make the valuation,' he said. 'We had previously used a target PE of 12.25x but, given the greater sensitivity to improving trends evident in this upgrade, we are pushing this up to 12.5x.'

Hardy reiterated his 'buy' recommendation on the shares.

Shares in the group closed at 610.5p on Friday, down 12.5p or 2%.