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The Expert View: Dixons, Persimmon & British American Tobacco
by Michelle McGagh on Feb 26, 2014 at 05:01
Our daily roundup of analysts' share recommendations and commentary, also including Capital & Counties and & FirstGroup.
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Dixons reiterated as a ‘buy’ after merger talks
News that Dixons (DXNS.L) is in merger talks with Carphone Warehouse made shares jump and led Cantor Fitzgerald to reiterate its ‘buy’ recommendation.
Analyst Freddie George placed a target price of 60p on Dixons shares (current price 50p). The merger would create one of the country’s biggest technology retailers which George believes could bring some problems.
‘Carphone Warehouse is the largest retailer of mobile phones in the UK but is seeking to develop sales of adjacent categories, such as tablets, while Dixons has been openly looking to increase its mobile offering in view of the growth in mobile commerce and the convergence of technologies, especially in the home,’ he said.
‘The merger in our view is more compelling to Dixons.’
However George anticipates that a merger would be referred to the Competition Commission ‘in view of the convergence of the technologies and the service dominance of the two businesses even though there is limited overlap in the categories’.
He reiterated his ‘buy’ based on Dixons’ strong sales and pipeline.
Big names boost Capital & Counties' returns
Property investment and development company Capital & Counties (CAPC.L) delivered ‘spectacular’ returns in its 2013 full year results and there is ‘more to go’.
Liberum analyst Michael Burt retained a ‘hold’ recommendation and a target price of 351p on the shares (current price 392p).
The 23% total return reported was due to ‘exceptional valuation performances’ by Earls Court and Covent Garden, both of which are owned by CapCo, although net asset value (NAV)was ‘modestly below consensus’ at 249p.
‘The 23% total return delivered by CapCo in 2013 was comfortably ahead of the 12.7% sector average we forecast for the UK real estate sector,’ said Burt. ‘There are clear opportunities for future NAV growth at both Earls Court and Covent Garden, which point to sustained outperformance by CapCo. However, this is already substantially reflected in a 53% premium to December 2013 NAV in our view.’
Persimmon increases divi payout
Homebuilder Persimmon (PSN.L) will increase its dividend payments, which Jefferies analysts said would ‘underpin the current share price’.
The company has announced the dividend will increase from 10p to 70p on 4 July and a dividend of 95p will be paid in 2015. A dividend of at least 10p per share will be paid in both 2016 and 2018.
‘We would expect to see payments of dividends greater than 10p in 2016 and 2018, in addition to the scheduled 110p payment planned for 2017,’ said analyst Anthony Codling, who placed a ‘hold’ recommendation and a target price of £13.29 on the shares (current price £14.65).
‘The acceleration of the dividend payment is welcome and helps to underpin the current share price. However, following the FY2013 results we retain our ‘hold’ rating. There is little double that Persimmon is a high quality company, which we believe is reflected in the price.’
Tobacco under fire but BAT still alight
British American Tobacco (BAT.L) shares have underperformed and regulatory worries are brewing but the tobacco behemoth is still a top pick for Barclays.
Analyst Simon Hales remained ‘overweight’ and placed a target price of £38.00 on the shares (current price £31.72).
‘BAT is one of our top picks in European Consumer Staples,’ he said. ‘The shares have underperformed…since the beginning of 2013 as regulatory worries have de-rated the shares to 10 year lows and the group’s exposure to softer emerging market foreign exchange markets have driven -10% earnings downgrades.
‘Although we don’t expect a reversal of either headwind in the near term, we see the tobacco growth and cash return model as far from broken.’
He added that BAT has the opportunity to ‘use its balance sheet to drive further earnings upgrades’ and take a larger stake in Reynolds American. ‘We estimate acquiring the 58% it doesn’t already own would be between 7% and 10% earnings accretive,’ he said.
Shore Capital believes FirstGroup is getting back on track
Martin Brown, analyst at Shore Capital, has reiterated his ‘buy’ recommendation for bus and train company FirstGroup (FGP.L) following a capital markets day that outlined its turnaround programme.
Brown placed a target price of 207p on the shares (current price 140p), stating that the day ‘provided some important detail’ on its plans.
‘Investors remain somewhat sceptical of FirstGroup’s turnaround programme, although having digested the details from the capital markets day we upgrade our forecast for three out of five divisions,’ he said.
Brown said the bus division is ‘starting to deliver positive passenger volume growth’ after losing c40% of commercial passengers in 2005/06 and ‘new dynamic pricing and yield management system’ should drive returns for the Greyhound and First Transit arms.
‘Our rail forecasts remain unchanged. However, it is worth noting that FirstGroup is shortlisted for the first five rail franchise awards and it is conceivable that it will be shortlisted for eight out of the first 10 franchise awards.’