City Wire:
Expert View: Numis – 10 New Year value share tips
By Michelle McGagh 03 Jan, 2019
We select 10 of the non-corporate clients from Numis Securities’ latest monthly review of share buying opportunities.
BT off the back foot
Telecoms giant BT (BT) has the ‘best arsenal’ to grow in the fast-moving world of ‘fixed/mobile converged’ (FMC) services and is under no threat from alternative networks.
Numis analyst John Karidis retained his ‘buy’ recommendation and target price of 340p on the stock, which at 238p has fallen 7% in the past month and is down 12% over the past year.
Karidis said Europe was ‘moving fast’ to FMC, which removes the differences between fixed and mobile networks’ and ‘in Britain, BT has by far the best arsenal – networks plus distribution muscle plus premium content - to grow value as a result of this trend’.
In addition, the group is building on its regulated OpenReach assets with an unregulated all-fibre network ‘knowing that the government, Ofcom, and...customers will want this to be economically viable’.
‘We think it is facile to think alternative networks like CityFibre and Infracapital/TalkTalk will stress Openreach,’ said Karidis.
Capita’s recovery is not priced in
Capita (CPI) has been dogged by bad news on a number of contracts but Numis analyst Julian Cater is looking past this to the recovery potential at the outsourcing behemoth.
Cater retained his ‘buy’ recommendation and has a 205p target price on the stock, which has more than halved to 112p in the past 12 months. Over three months the shares have slid 19% hit by negative publicity on its performance on contracts related to Army recruitment, the NHS and the London Borough of Barnet.
‘Crucial to any re-rating of the shares will be execution and validation of the cost savings plan,’ said Cater.
‘We expect management to confirm that it is on track to deliver £70 million of savings in 2018, and reiterate its current profit before tax expectation of £250-£275 million.’
He added that a 2019 price/earnings of 7.8 times – which he said was a ‘trough earnings per share’ – was ‘too low given the recovery potential within the business’.
Cranswick’s maximum value
Sausage-maker Cranswick (CWK) has been upgraded by Damian McNeela who praised the food producer’s ‘pig carcass value maximisation’ for establishing a lead in niche areas.
The Numis analyst lifted his recommendation from ‘hold’ to ‘buy’ with a target price of £34.50 on the stock, which has fallen 21% to £26.32 in the past year.
‘Cranswick’s approach to pig carcass value maximisation, and investment in its supply chain, has allowed it to develop leading positions in premium niches, such as super-premium sausages,’ he said. ‘These sub-categories are typically faster growing and higher margin,’ he added.
McNeela believed the group was ‘well positioned to drive the development of both the pork and poultry categories in the UK, delivering good growth’ and while its current price is at a premium to its wider UK food peers ‘this is justified by good earnings per share growth, solid free cash-flow generation, and strong balance sheet’.
Derwent London trades on a ‘wide’ 20% discount
Property developer Derwent London (DLN) is carrying on with its work, opening up a value opportunity as investors run scared of the capital, says Numis analyst Robert Duncan.
‘Derwent London refuses to sit on its hands to be carried along by the cycle, and is continuing to actively create value through its development pipeline, as well as capturing the reversion locked within its existing assets,’ he said.
Duncan said the group brings ‘high quality space’ in ‘fringe locations at mid-market rents’, which will remain in demand.
‘The equity market is viewing London with caution given Brexit risks and political uncertainty, but at -20% versus net asset value, the discount is too wide,’ he said.
‘While we remain cognisant of the cycle, we believe that an exodus from London is unlikely...There are few explicit event catalysts to cause a sudden rerating, but as negativity subsides we believe many investors will look back on this as a value opportunity.’
Duncan retained his ‘buy’ recommendation and has a target price of £37.45 on the stock, which has slipped 8% to £28.53 in the past year.
Essentra is turning round
Essentra (ESNT) shares went into meltdown last year but Numis analyst James Beard believes the market is too negative on the plastic packaging provider’s prospects.
Beard retained his ‘buy’ recommendation and has a target price of 485p on the stock, which has fallen by a third to 342p in the past year.
‘We believe that Essentra’s underperformance during this time suggests the market could be anticipating another profit warning, which we view as unlikely,’ he said.
‘In fact, recent positive developments in packaging could leave forecast risk to the upside.’
Beard said the turnaround at the group was ‘taking longer than the market initially anticipated’ but there is ‘light at the end of the tunnel, and with the shares now trading on about 12.5 times 2019 price/earnings, we see value emerging, supported by an attractive 6% dividend yield’.
‘Undemanding’ Petrofac a December winner
Numis analyst James Hubbard has replaced Wood Group with Petrofac (PFC) as his top oilfield service pick after the latter was ‘the winner from the December trading updates’.
He said Wood Group, along with Hunting, provided December updates that ‘added uncertainty to their 2019 outlooks’ and GMS drove its share price down 70% in one day on its trading statements, while ‘Petrofac reassured and in fact guided to faster than expected debt reduction as of end-2018’.
Beard said Petrofac was ‘less capital intensive’ and ‘less exposed to oil price swings’ as well as an ‘attractive valuation’.
‘Petrofac is currently trading on an undemanding 2019 enterprise value/EBITDA of 3.1 times and 2019 price/earnings of 5.4 times, with a 7.4% 2019 dividend yield,’ he said.
Beard has a ‘buy’ recommendation and a target price of 821p on the stock, which has dropped 27% to 477p in the three months as the price of oil has tumbled.
Smurfit Kappa on track
Smurfit Kappa (SKG), Europe’s largest corrugated packaging company, is benefiting from the growth in online shopping and sustainable living, said Numis analyst Kevin Fogarty.
‘An inflationary price environment supports margin recovery and recovered paper cost comparatives ease in the second half of 2018,’ he said.
A nine-month trading statement in October showed the momentum from the first half of the year had continued into its second half.
‘Valuation multiples are highly attractive, based on our estimates, and confidence over the full-year outlook and continued financial delivery is likely to act as a near-term share price catalyst,’ he said.
Fogarty has a ‘buy’ recommendation and a target price of £33.00 on the shares, which have fallen 31% to £20.82 in the past three months.
St James’s Place offers good growth
Wealth manager St James’s Place (SJP) is a ‘growth company on a value rating’, according to Numis analyst David McCann.
McCann has a ‘buy’ recommendation and a target price of £15.75 on the stock, which has retreated 18% to 944p in the past three months.
‘We believe the business will continue to demonstrate that it is one of the most consistent and resilient asset gatherers and retainers, regardless of the economic conditions,’ he said.
He said management’s growth target of 15-20% a year, a 2019 free cash-flow yield of 6.9%, and a dividend yield of 5.9% means the shares are ‘offering good growth at a reasonable price’.
Urban & Civic should make progress
Now is the ‘time’ for property developer Urban & Civic’s (UANC) and the market is not giving it enough credit, said Numis analyst Robert Duncan.
Duncan retained his ‘buy’ recommendation and target price of 410p. Formerly called Terrace Hill Group, the stock has slid 11% in the past month to 262p.
He said ‘momentum is building’ and there is ‘an increasing sense that this is the master developer’s time as visibility over returns improves and delivery accelerates’.
This is due to the company’s model of ‘leveraging planning expertise’ to develop land, which is the opposite of ‘housebuilders’ desire for rapid access to oven-ready land’ and that means ‘while returns are predominantly capital value-focused at present, we see a shift over the coming years to cash-flow, as sites progress from capital consumption to cash generation’.
Defensive Whitbread means business
Whitbread (WTB) has simplified its investment case since selling Costa Coffee but analyst Tim Barrett said the market was ‘yet to fully appreciate’ this.
Barrett retained his ‘add’ recommendation and target price of £54 on the stock, which has slipped 2% in the past three months.
The owner of Premier Inn is a ‘defensive business’ he said but he market is ‘yet to fully appreciate the fundamental change in risk profile’ by selling Costa and the benefits of Premier Inn.
‘Premier Inn’s customer base is more than 50% business users with a wide distribution across the UK,’ he said. ‘This is in direct contrast to “old” Whitbread, such as Costa where 60% of the estate was still high-street located.’
He added that Premier Inn’s property backing is ‘critical to unlocking value’ and that as 60% of the estate is freehold it gives scope for ‘selective sale and leasebacks’ and the company had ‘impressive margin resilience’, which was a ‘sign of strong management’.
https://citywire.co.uk/funds-insider/ne ... s/a1188091
My picks: Derwent London and Essentra.