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The Expert View: Tesco, Rio Tinto, Paypoint, Babcock & Dixons

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by Chris Marshall, Caelainn Barr, Gavin Lumsden on Dec 03, 2012 at 05:01

Our round-up of the best analyst commentary on shares.

Our daily round-up of analyst recommendations and commentary, featuring Tesco, Rio Tinto, Babcock, Dixons and PayPoint.

Key stats
Market capitalisation£57,319m
No. of shares out1,847m
No. of shares floating1,661m
No. of common shareholdersnot stated
No. of employees67930
Trading volume (10 day avg.)4m
Turnover37,744m USD
Profit before tax3,639m USD
Earnings per share1.88 USD
Cashflow per share3.41 USD
Cash per share3.41 USD

*Correct as at 30 Nov 2012

‘We would buy shares of Rio now’

There is no quibbling from analysts at Jefferies: ‘We would buy shares of Rio now’, they wrote in a note on Friday.

The shares are inexpensive, Rio will benefit from China’s improving economy and the mining company can ‘deliver c40% EPS [earnings per share] growth from 2012 to 2015 even if commodity prices do not increase from average 2012 levels,’ they said after attending an investor day in Sydney.

Analysts at Societe Generale were also in attendance and subsequently raised their target price for Rio to 3,660p from 3,430p to reflect higher earnings forecasts. Like Jefferies, they were encouraged by Rio’s cost-cutting efforts, while noting that Rio Tinto shares are ‘trading at a sharp discount to the shares of its closest peer BHP Billiton’.

They said: ‘The combination of positive company-specific catalysts, the attractive relative valuation and improvement in the macro outlook surrounding the sector are likely to result in a sharp increase in Rio Tinto’s stock price over the next few months in our opinion.’

Key stats
Market capitalisation£26,355m
No. of shares out8,041m
No. of shares floating8,002m
No. of common shareholdersnot stated
No. of employees519671
Trading volume (10 day avg.)14m
Turnover£64,539m
Profit before tax£2,948m
Earnings per share36.64p
Cashflow per share55.36p
Cash per share43.02p

*Correct as at 30 Nov 2012

Tesco faces pressure at home and abroad

Analysts are taking a look at the prospects for Tesco ahead of its full-year results, which will be posted on Wednesday. The stock has fallen 19% so far this year and £4 billion was wiped off the company’s market value in January when the group warned it would see ‘minimal’ profits growth in 2012.

The day of reckoning is almost here and analysts at Seymour Pierce say even with results out this week it will be too early to call whether the retailer’s ‘Build a Better Tesco’ programme is working, and investors will have to wait until the second half of 2013 to know where the profitability of its UK business is headed.

That hasn't put off Citywire's Smart Investor who last week rated the shares a bargain.

There are also concerns about the pressures facing its branches in Europe, with the eurozone crisis, and South Korea, where an estimated £100 million in profit is expected to be lost due to a change in opening hours.

Kate Calvert analyst at Seymour Pierce, adds: ‘With too many of its international businesses also facing trading issues currently, we reiterate our ‘reduce’ recommendation. The shares may not be the most expensive, trading on a current 2013 price-to-earnings ratio of 9.9 times earnings and yielding 4.7%. However, we see much more interesting investment opportunities elsewhere in the non-food sector...’

Key stats
Market capitalisation£570m
No. of shares out68m
No. of shares floating64m
No. of common shareholdersnot stated
No. of employees580
Trading volume (10 day avg.)0m
Turnover£200m
Profit before tax£27m
Earnings per share39.81p
Cashflow per share44.67p
Cash per share52.33p

*Correct as at 30 Nov 2012

Liberum downgrades Paypoint (PAYP.L) after good interims

Analysts at Liberum Capital have cut their rating on Paypoint shares to 'hold' from 'buy' but upped their price target to 840p from 800p after the payment system operator's half-year results last week.

Joe Brent and William Shirley 'nudged up' their forecast for next year's earnings per share by 2% to 44.7p. They said the interims showed 'the established businesses are still growing. Early stage businesses are becoming profitable. However, the share price appreciation [up 52% year to date] leaves the shares on a demanding rating. We identify near term risks on DWP [a big contract for the Department for Work and Pensions] and longer-term risks from smart meters.'

They remain keen on the company though, saying its internet business is growing strongly, its operations in Romania are profitable and its Collect+ arm 'should have a bumper Christmas, helped by its relationswhip with Amazon'.

The company also has a fan in Harry Nimmo, the Citywire AA-rated manager of the Standard Life Investments UK Smaller Companies fund, who bought into the stock earlier this year. The share price closed Friday down 3.5p or 0.4% AT 839.5p.

Key stats
Market capitalisation£1,007m
No. of shares out3,612m
No. of shares floating3,572m
No. of common shareholdersnot stated
No. of employees36446
Trading volume (10 day avg.)14m
Turnover£8,193m
Profit before tax£-154m
Earnings per share-4.28p
Cashflow per share-0.54p
Cash per share8.98p

*Correct as at 30 Nov 2012

Time to dump Pixmania?

Electricals retailer Dixons has had a turnaround performance so far this year, with shares taking on 180%. In a further confidence boost the group made its first profit in the UK and Ireland in over five years in the six months to the end of October, as tablets and televisions boosted sales.

However problems at French online shopping group, Pixmania, are weighing on Dixons’ balance sheet which pushed it into a £80 million pre-tax profit loss.

Analysts at Morgan Stanley say investors should be asking some questions about the group’s plans to take market share from failing rival Comet and how much it would be to close loss-making Pixmania.

Geoff Ruddell, analyst at Morgan Stanley, commented: ‘Our price target of 38p is based on a 20% discount to our intrinsic valuation. This is in line with the 10% discount we apply to other UK listed general retailers to reflect ongoing macro-related earnings risk as well as a further 10% to reflect investors’ structural concerns about electrical retailers.

‘Key downside risks include a further deterioration in the macro environment and failure to control the losses at Pixmania and southern European businesses.’

Key stats
Market capitalisation£3,600m
No. of shares out360m
No. of shares floating354m
No. of common shareholdersnot stated
No. of employees25325
Trading volume (10 day avg.)1m
Turnover£2,848m
Profit before tax£154m
Earnings per share42.76p
Cashflow per share75.61p
Cash per share28.87p

*Correct as at 30 Nov 2012

Babcock is number one in business services

Babcock is investors’ best hope among UK business services companies, say analysts at Berenberg who have slapped a ‘buy’ recommendation on the stock.

Berenberg analyst Simon Mezzanotte says that debt-tackling governments are having to outsource, and Babcock is ‘ideally placed to take advantage of this’, particularly in the defence market which it depends on to generate more than half of its sales.

Despite a 33% rise in Babcock’s share price so far this year, Mezzanotte reckons there is more to come, with a 1,180p price target.

Babcock has ‘much more attractive growth prospects’ than Capita, but is not significantly more expensive, Mezzanotte added.

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