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The Expert View: Provident, Hargreaves and Dunelm

Our daily roundup of analyst commentary on shares, also including Domino’s Pizza and Britvic.

by Michelle McGagh on Oct 12, 2017 at 05:00

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Key stats
Market capitalisation£1,182m
No. of shares out148m
No. of shares floating144m
No. of common shareholdersnot stated
No. of employees3261
Trading volume (10 day avg.)1m
Profit before tax£263m
Earnings per share179.95p
Cashflow per share197.54p
Cash per share151.38p

Barclays downgrades Provident Financial despite rebound

Barclays has downgraded doorstep lender Provident Financial (PFG) as it can see no reason for the recent share price recovery.

Analyst Toni Dang downgraded her recommendation from ‘equal weight’ to ‘underweight’ and reduced the target price from 600p to 584p. The shares fell 4.6% to 797.8p yesterday.

‘Provident Financial shares are down 68% year-to-date, falling 66% on the day of the second profit warning on 22 August. However, the shares have recovered by 42% from the trough, despite no new guidance on the consumer credit division or resolution of the Financial Conduct Authority’s (FCA) investigation into Vanquis’ repayment option plan product,’ she said.

Dang said she was ‘cautious on the shares’ due to her lack of confidence in a turnaround of the home credit business and ‘the unquantifiable size of potential FCA redress’.

‘We perceive further tail risks of Provident Financial not being able to meet its October 2019 debt obligation,’ she said. ‘These assumptions are not baked into our base case but we believe could have a meaningful impact on earnings and cost of funding.’

Key stats
Market capitalisation£7,070m
No. of shares out474m
No. of shares floating259m
No. of common shareholdersnot stated
No. of employees1043
Trading volume (10 day avg.)1m
Profit before tax£212m
Earnings per share44.57p
Cashflow per share45.92p
Cash per share54.82p

Hargreaves Lansdown: high earning multiple justified, says Numis

Numis believe Hargreaves Lansdown (HRGV) offers investors a long-term growth story, and the added bonus of taking Barclays’ stockbroking clients.

Analyst James Hamilton retained his ‘add’ recommendation and target price of £14.97 on the stock after a good first quarter, which saw revenue increasing 15% to £104.1 million and assets under administration jumping 4% to £82 billion. The shares edged a penny higher to £14.94 yesterday.

He said Hargreaves Lansdown would be the ‘largest beneficiary’ from the troubled launch of Barclays’ new Smart Investor platform that has been plagued by problems.

Hargreaves cited ‘operational issues on a competitor platform’ as driving ‘significant transfer activity’ over the period, and Hamilton said he expected the benefit to persist into the second quarter, given the transfer problems Barclays customers were encountering.

'As well as clients not being able to log into their accounts and not receiving their dividends, the exit process appears to be delayed as well,' he said.

'Consequently, we expect a lag between clients choosing to move to Hargreaves Lansdown and the assets under administration arriving,' he added.

‘We continue to believe Hargreaves Lansdown offers investors an attractive medium to long-term growth story and consequently we believe it more than justifies its 29x earnings multiple.’

Key stats
Market capitalisation£1,502m
No. of shares out202m
No. of shares floating96m
No. of common shareholdersnot stated
No. of employees5675
Trading volume (10 day avg.)m
Profit before tax£73m
Earnings per share36.09p
Cashflow per share51.04p
Cash per share8.63p

Confidence gaining around Dunelm, says Peel Hunt

First quarter trading at homeware retailer Dunelm (DNLM) has rebounded and Peel Hunt is ‘gaining confidence’ in the potential for recovery.

Analyst John Stevenson retained his ‘hold’ recommendation and target price of 620p on the stock after the company delivered first quarter like-for-like sales growth of 9.3%. The shares jumped 5.3% to 738.3p on the news.

‘Retailers are often ridiculed for blaming the weather, but it does have a profound impact on short-term trading periods,’ he said. ‘Up against weak weather comparatives for last year and benefiting from favourable normal conditions this year, Dunelm has delivered predictably strong first quarter like-for-like sales growth.’

Despite the lack of chief executive at the business, Stevenson said ‘we can see investors gaining further confidence in Dunelm’s recovery potential’.

‘Weak comparisons and weather might not be the strongest catalysts, but positive numbers will certainly go some way to lifting the shares, which remain on a low multiple for a structural growth retailer at c.15x price/earnings ratio,’ he said.

Key stats
Market capitalisation£1,647m
No. of shares out490m
No. of shares floating485m
No. of common shareholdersnot stated
No. of employees911
Trading volume (10 day avg.)5m
Profit before tax£65m
Earnings per share12.93p
Cashflow per share14.41p
Cash per share4.63p

No clear plan at Domino’s, says Liberum

A lack of a plan for next year and low earnings visibility means Liberum has more questions than answers for Domino’s Pizza (DOM).

Analyst Wayne Brown retained his ‘sell’ recommendation and target price of 250p on the stock despite expecting the takeaway pizza chain to meet its full year 2017 guidance. The shares were up 3p at 332.4p yesterday.

‘Earnings visibility is low,’ he said. ‘Management stated that it is too early to take a view on pricing of food for next year and they will come up with a plan through the course of the year that delivers a balance between offering value and a pricing/promotion strategy.

‘Seems rather late in the current year to not have set a plan for full year 2018.’

He said there were ‘more questions than answers’ at Domino’s and ‘we feel a cautious stance remains warranted’.

Key stats
Market capitalisation£2,048m
No. of shares out264m
No. of shares floating259m
No. of common shareholdersnot stated
No. of employees4358
Trading volume (10 day avg.)1m
Profit before tax£115m
Earnings per share43.50p
Cashflow per share62.31p
Cash per share78.33p

Jefferies: robust delivery at Britvic

Jefferies is expecting robust profits at soft drinks manufacturer Britvic (BVIC) but believes the 2018 sugar tax still presents a challenge for the group.

Analyst Edward Mundy retained his ‘hold’ recommendation and increased the target price from 680p to 750p. The shares edged 7p higher to 778.7p yesterday.

‘Despite the poor summer, we expect robust delivery and maintain our full year 2017 earnings estimates of £189 million,’ he said.

‘Stock has rerated in 2017 from 2018 price/earnings of 11.4x to 14.2x on stronger revenue growth… medium-term we see a favourable outlook with profits underpinned by cost savings. However, we question if significant further multiple expansion is possible given uncertainties over the sugar tax in 2018.’

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Look up the shares

  • Provident Financial PLC (PFG.L)
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  • Hargreaves Lansdown PLC (HRGV.L)
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  • Dunelm Group PLC (DNLM.L)
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  • Domino's Pizza Group PLC (DOM.L)
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  • Britvic PLC (BVIC.L)
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