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The Expert View: Pearson, Marks and Spencer & BT

Our daily roundup of analyst commentary on shares, including Xeros and Debenhams.

by Michelle McGagh, Daniel Grote on Jul 12, 2017 at 05:01

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Key stats
Market capitalisation£5,398m
No. of shares out823m
No. of shares floating813m
No. of common shareholdersnot stated
No. of employees32719
Trading volume (10 day avg.)3m
Profit before tax£-2,337m
Earnings per share-286.82p
Cashflow per share-241.90p
Cash per share180.38p

Pearson to feel income fund squeeze, says Liberum

Shares in Pearson (PSON) will feel the squeeze from income funds selling their holdings in anticipation of a big dividend cut, according to Liberum.

The educational publisher was the FTSE 100's biggest faller yesterday, down 4.7% at 658p at the time of writing, after management signalled a bigger-than-expected dividend cut following the sale of a 22% stake in Penguin Random House.

Investors had already been primed for a cut from last year's full-year 52p payout, but comments from management suggesting a mid to high-teens pence dividend sparked a sell-off.

'Pearson's conference call on its disposal of 22% of Penguin Random House does not seem to have gone well with investors,' said analyst Ian Whittaker. 'We suspect one of the main issues is the dividend.'

Management said dividend cover would be two times earnings, which will fall by around 15p per share following the sale, which would equate to around 16p to 17p on current forecasts.

'Since this would give just over a 2% dividend yield, this is likely to mean the stock loses its appeal to income funds, which had held it because of its formal dividend yield. That could put pressure on the stock moving forwards,' said Whittaker.

Key stats
Market capitalisation£5,254m
No. of shares out1,625m
No. of shares floating1,596m
No. of common shareholdersnot stated
No. of employees85209
Trading volume (10 day avg.)7m
Profit before tax£117m
Earnings per share7.18p
Cashflow per share42.54p
Cash per share29.73p

Don't panic over M&S, says Peel Hunt

Peel Hunt has trimmed its target price for Marks and Spencer (MKS) after a subdued trading statement from the clothing and food retailer.

Analyst Jonathan Pritchard cut his price target from 500p to 450p, maintaining his 'buy' rating, after M&S reported a 1.2% fall in like-for-like sales in its clothing and home division and a 0.1% fall in like-for-like food sales.

'The first quarter hasn't been a stellar period for the industry or for Marks and Spencer: like-for-like sales in both general merchandise and food are both towards the low end of expectations but we see no reason to panic,' he said.

'However, we must admit that we didn't expect a negative showing on the food side, especially given that external conditions should have been favourable. We are trimming our (very) high end forecasts and easing back our price target a bit, but we still think there is a great deal of value here, not reflected by the 11 times price-earnings ratio.’

The shares fell 5.5% yesterday afternoon, down nearly 19p to 320p.

Key stats
Market capitalisation£28,729m
No. of shares out9,961m
No. of shares floating8,346m
No. of common shareholdersnot stated
No. of employees106400
Trading volume (10 day avg.)23m
Profit before tax£1,908m
Earnings per share19.09p
Cashflow per share54.83p
Cash per share20.56p

BT must consider radical options, says Deutsche Bank

Reports that BT (BT) is considering a major restructuring and sale of part of the business show there is no ‘quick fix’ for the beleaguered telecoms giant, according to Deutsche Bank.

Analyst Robert Grindle retained his ‘sell’ recommendation and target price of 265p on the stock yesterday after The Telegraph reported that BT had hired consultants McKinsey to see whether its global services division can be split into a UK arm and international arm, the latter of which would be sold.

After an early dip on Tuesday morning the shares were trading virtually unchanged, 0.25p softer at 288p.

Grindle believes there is scope for cost savings though ‘the contemplation of more radical and likely expensive restructuring suggests that there is no quick fix for BT’s current problems’.

He questioned whether the accounting irregularities in Italy triggered the break-up of global services or whether ‘the business has simply become too unwieldy to manage’ and its global ambitions too expensive.

‘Management are right to consider all options, even radical ones,’ he said. ‘We at this stage do not rule out the possibility that additional radical steps such as a more ambitious UK fibre roll-out plan, are likely also under consideration.’

Key stats
Market capitalisation£273m
No. of shares out88m
No. of shares floating61m
No. of common shareholdersnot stated
No. of employees98
Trading volume (10 day avg.)m
Profit before tax£-100,000m
Earnings per share-9,999,999.00p
Cashflow per share-9,999,999.00p
Cash per share33.64p

Jefferies: contract win shows momentum building at Xeros

A new contract with a tannery just two months after a move into commercial laundry shows momentum is building at cleaning technology company Xeros (XSG), says Jefferies.

Analyst Ken Rumph reiterated his ‘buy’ recommendation and maintained his 349p target price on the stock after the company secured a 10-year contract with ‘lead customer’ Wollsdorf in leather tanning under its new Symphony commercial laundry brand.

He said it shows the ‘multi-faceted business case’ for Xeros, including reduced inputs of chemicals and water, reduced effluent to treat and ‘more consistent higher quality product’.

‘Trials with five more tanneries support our estimates of rapid uptake: following progress on Symphony in commercial laundry and in high-performance workwear, momentum is building well,’ said Rumph.

By Tuesday afternoon, the shares were trading up 2.3%, or 7p, at 315p.

Key stats
Market capitalisation£533m
No. of shares out1,228m
No. of shares floating1,128m
No. of common shareholdersnot stated
No. of employees8392
Trading volume (10 day avg.)3m
Profit before tax£86m
Earnings per share7.00p
Cashflow per share15.84p
Cash per share4.59p

Berenberg expects more disappointment at Debenhams

There could be disappointment from high street stalwart Debenhams (DEB) later this year as it struggles to grow its top line, says Berenberg.

Analyst Conrad Bartos retained his ‘sell’ recommendation and lowered his target price from 46p to 37p following poor third quarter results that showed like-for-like growth down 2.4%. The shares firmed 1.75%, or 0.75p, at 43.75p at the time of writing.

Bartos noted the results were ‘characterised by UK retail market volatility’ but he still believes ‘the top-line weakness is driven by Debenhams’ lack of differentiation and as such, could lead to further disappointment at full-year results in October’.

He added: ‘A reduction in head office wage costs, supply chain efficiencies and lower sales volumes mean operating costs are expected to grow by only 1% this year, however, we believe the high fixed cost base and gross margin pressures in years ahead are underestimated.’

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  • Pearson PLC (PSON.L)
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  • Marks and Spencer Group PLC (MKS.L)
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  • BT Group PLC (BT.L)
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  • Xeros Technology Group PLC (XSG.L)
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  • Debenhams PLC (DEB.L)
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