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The Expert View: Tesco, Diageo and Dunelm
by Harry Brooks on Sep 30, 2013 at 05:01
A roundup of analysts' commentary on shares, also including Faroe Petroleum and Amlin.
Our daily round-up of analyst recommendations and commentary, featuring Tesco, Diageo, Dunelm, Faroe Petroleum and Amlin.
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Make or break time for Tesco
Cantor Fitzgerald has reiterated its 'buy' recommendation on Tesco (TSCO.L) ahead of Wednesday's first-half update, but the analysts admitted there's a lot riding on turning around the UK operation.
Analyst Mike Dennis predicts group trading profits of £1.56 billion, down 6%, with UK trading profits up 0.9% at £1.125 billion.
'We believe investors will focus on how much Tesco has improved its UKtrading performance in Q2,' Dennis said, predicting like-for-like (LFL) sales to fall 0.3% in the second quarter compared with a 1% decline in the first.
'The profit outlook for H2/FY14E could very much depend on a positive UK LFL performance, higher gross margin and a credible explanation of how the multitude of investments in UK stores will improve the brand's overall performance,' he said.
'We will review our forecasts and recommendation post H1 but fear that Tesco’s UK operations have a lot to get right if they are to hold the current margin.'
Shares in the group closed at 362p on Friday, down 0.45p or 0.1%.
European recovery still two years off, Diageo warns
Analysts' earnings estimates for Diageo (DGE.L) are set to drop 2-3%, Liberum Capital has estimated, after the drinks giant warned that sales in Western Europe will continue to fall for the next two years.
In a conference call on Thursday Diageo said sales and margins will be down again in 2014, and it warned that 'stabilization' may still be 'a couple of years away'.
Analyst Pablo Zuanic said new taxes implemented in the past couple of years as part of austerity drives will inevitably hurt sales.
'In Ireland the decline in the on-premise sector has continued and DGE said ''no recovery is noted yet''; it implied a couple of good summer months may have flattered the pub sales data but that September shows no signs of an ongoing recovery,' the analyst said.
'The 20% excise tax for beer in Ireland resulted in 7% drops in sales. So after a 5% drop in beer sales in WE in FY13 it would seem a similar drop is in store for FY14.'
Zuanic repeated his 'hold' recommendation on the shares, saying Diageo's best bet is to focus on premium lines and ramp up innovation to drum up new business.
Shares in the group closed at £19.79 on Friday, down 8.5p or 0.4%.
Hot summer to dent Dunelm's sales
UBS has trimmed its target price for home furnishings group Dunelm (DNLM.L) ahead of Wednesday's trading update.
Analyst Andrew Hughes said the UK's unusually long and hot summer would hit sales at the group. 'Hot weather historically has been unhelpful for sector footfall,' he said, cutting his target price from £10.30 to £10.05 and reiterating his 'neutral' stance on the shares.
Hughes expects full-year profits of £120 million based on a 2.5% rise in like-for-like sales and a 50 bais point rise in gross margins.
'Dunelm trades on 20x 2014 price to earnings reflecting format strength, profit and cash flow record, and potential from new space and multi-channel development,' the analyst added.
Shares in the group closed at 929p on Friday, down 7.5p or 0.8%.
Finncap says 'buy' Faroe despite Norwegian Sea woes
Last week's production forecast downgrade at Faroe Petroleum (FPM.L) hasn't dampened Finncap's enthusiasm for the shares, which it still rates as a 'buy'.
The financial side of Thursday's interim update was largely positive, with a net profit of £12.2 million some £5.3 million higher than forecast, but broadly in line with expectations. However, the full-year production forecast was cut from 7,000-9,000 barrels a day to 5,500-6,500 as a result of the extended shutdown at its Njord field in the Norwegian Sea.
'While the circumstances are unfortunate, the downgrades demonstrate the risks of exposure to nonoperated or mature producing assets and may also expedite Faroe's acquisition strategy,' analyst Will Arnstein said.
'Undeterred by this set-back, we retain our Buy rating, believing its exploration portfolio and the near-term drilling programme can deliver significant growth in shareholder value.'
Shares in the group closed at 122p on Friday, down 1p or 0.8%.
Canaccord downgrades Amlin
Canaccord has downgraded insurance firm Amlin (AML.L) on valuation grounds.
Thursday's first-half results from Lloyd’s showed a 26% rise in underwriting profits due to a relatively low level of catastrophe claims. For Amlin, however, the big news was rising levels of competition, according to analyst Ben Cohen.
'We downgrade Amlin to a HOLD (previously Buy), on material cuts to earnings for 2014 and 2015, with the consensus earnings multiple now back around a four year-high,' he said.
'We also note Amlin’s overweight to reinsurance, where competition could increase if we have a clean end to the year.'
Shares in the group closed at 409.2p on Friday, down 6p or 1.5%.