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The Expert View: Royal Mail, EasyJet & Centrica
by Michelle McGagh on Mar 26, 2014 at 05:01
Our daily roundup of the best analyst commentary on shares, also including 888 Holdings and IG Group.
Royal Mail still a buy after redundancy news
News of 1,300 redundancies has not dampened Shore Capital’s enthusiasm for Royal Mail (RMG.L) as it maintained its ‘buy’ recommendation.
Robin Speakman said the redundancies, which fall under the group’s efficiency programme, will not make a significant change to his forecasts.
‘An addition of around £100 million cost is to be taken in the current year to March 2014, resulting in total transformation costs this year of approximately £230 million; annual cost savings are put at around £50 million post full year 2015, with approximately £25 million achievable next year,’ he said. ‘This goes some way to ameliorating additional pension costs of around £75 million per annum from next year.’
He added that the staff leaving were ‘mid-tier management and back office support’ rather than front line staff.
‘We believe that the context of these additional redundancies should be noted, being amongst a total UK core network of some 140,000 staff and against a competitive background, and a long term pay agreement with the Communications Workers Union. We do not expect to make any significant changes to our forecast from this news and retain a “buy” stance.’
Panmure bets on EasyJet’s long-term prospects
Markets reacted well to a trading update from EasyJet (EZJ.L) as it predicted increased revenue and a cut in losses.
Panmure analyst Gert Zonneveld retained a ‘hold’ recommendation and a target price of £18.00 on the shares.
‘Easyjet has revised its earnings guidance for H1 on the back of better revenue per seat expectations and lower cost per seat excluding fuel,’ he said. ‘It expects pre-tax interim losses of between £55 million and £65 million compared with previous guidance of losses of £70-90 million.’
Revenue per seat is expected to rise 1.5% compared with previous guidance of ‘very slightly up’ and there is more capacity for growth.
‘Whilst we continue to remain hugely optimistic about the long-term prospects of this business, in the near term we expect the shares to pause for breath,’ said Zonneveld. ‘We retain our “hold” recommendation and target price of 18.00.’
Taking a gamble on 888 pays special dividends
Full-year results from gambling group 888 Holdings (888.L) have come in ahead of expectations leading to special dividend pay-out for shareholders.
Peel Hunt analyst Nick Batram retained a ‘buy’ recommendation and a target price of 170p on the stock.
‘888 has once again beaten expectations and is rewarding shareholders with a special dividend,’ he said.‘Current trading is strong and continues to reflect a business performing well against its peers.’
Batram noted that the ‘visibility’ issues across the sector in the US and regulatory concerns were hitting sentiment but he was confident that 888 ‘continues to perform strongly, generate cash and return this to shareholders where appropriate’.
IG Group investors could benefit from bonus payout
Spread betting company IG Group (IGG.L) is set to benefit from the rise of self-investment in the UK and future rises in interest rates that could lead to a special dividend for investors.
Numis analyst James Hamilton maintained an ‘add’ recommendation and a target price of 665p for the company on the basis that the self-invested market in the UK, although relatively small at the moment, will continue to grow.
‘Self-directed retail investment penetration in the UK is low at 20% compared to 47% in the US,’ said Hamilton. ‘We expect this to change, with the major beneficiaries being direct-to-retail platforms such as IG. IG should do well from rising interest rates… adding just 0.72% to the expected 0.78% interest turn for 2016 would add £10.9 million to our forecast.’
Hamilton added that with a strong balance sheet IG could seek to increase ‘more than the 60% of profits it currently pays to shareholders as dividends either through special dividends or share buy backs’.
Centrica faces long-term threat from independent suppliers
Barclays has reiterated its ‘underweight’ recommendation for energy company Centrica (CNA.L), flagging the long-term threat of competition to the firm’s future.
Barclays decreased the target price on the stock from 285p to 275p and said government pre-election action to curb energy costs for consumers was only part of the problem for Centrica.
‘Whilst investors appear to have digested the potential for a Centrica supply margin squeeze around the UK election, we believe the market has failed to price in a more long-term threat: that increasing levels of competition could lead to a permanent structural decline in margins,’ it said.
Barclays said it anticipated a ‘step-change in the competitive landscape over the next three years’ as new ‘hard discounting’ independent suppliers emerged, coupled with greater ease of switching and further policy interventions. ‘We reiterate our ‘underweight’ rating, with our price target implying 17% downside,’ it said.