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The Expert View: Royal Mail, GKN and Virgin Money

Our daily roundup of analyst commentary on shares, also including Close Brothers and Premier Foods.

by Michelle McGagh on Nov 17, 2017 at 05:00

If you would like to receive news alerts on any of the stocks mentioned in The Expert view, click on the star icons below to add them to your favourites.
Key stats
Market capitalisation£3,925m
No. of shares out1,000m
No. of shares floating996m
No. of common shareholdersnot stated
No. of employees158955
Trading volume (10 day avg.)6m
Profit before tax£1,013m
Earnings per share27.29p
Cashflow per share58.70p
Cash per share29.90p

Long term problems at Royal Mail, says Liberum

Royal Mail (RMG) may have delivered better-than-expected results but Liberum is still concerned about the cost savings and improvements that will be needed in the long term.

Analyst Gerald Khoo retained his ‘sell’ recommendation and target price of 385p on the stock, which rose 6.5p to close 1.6% up at 395.5p on Thursday.

Adjusted pre-tax profits dipped to £250 million from £252 million in the six months to September on revenues 2% higher at £4.8 billion.

‘The results were ahead of our forecasts, with an encouraging revenue performance in parcels and ongoing outperformance at GLS (General Logistics Systems),’ Khoo said.

‘Management has struck a cautious tone on the outlook for costs in the second half. Even if parcels revenue strength can be extrapolated into the long term, which is by no means certain given ongoing competition, cost savings and productivity improvements are still needed.’

He added that any savings would be harder to make due to rising inflation and troubled industrial relations at the group.

Key stats
Market capitalisation£5,081m
No. of shares out1,717m
No. of shares floating1,707m
No. of common shareholdersnot stated
No. of employees51381
Trading volume (10 day avg.)7m
Profit before tax£1,082m
Earnings per share14.02p
Cashflow per share39.22p
Cash per share24.26p

Hargreaves: is GKN a broken business?

GKN (GKN) shares dropped 4.7% or 15p to 296p after the engineer announced a write-off of up to £130 million in its US aviation business, costing the job of its incoming chief executive who had won promotion after running the division.

Chief executive designate Kevin Cummings left with immediate effect despite the current chief executive Nigel Stein retiring at the end of the year. Non-executive director Anne Stevens will step in as interim chief executive.

Hargreaves Lansdown analyst Nicholas Hyett said there had been a series of ‘nasties’ at GKN. ‘Working capital write-downs happen from time to time, but when they come in waves of ever increasing size investors start to get worried, and with good reason. If US aviation is broken, what about the rest of the business?,’ he asked.

‘The board have taken drastic action. But while losing one chief executive is unfortunate, effectively losing two at once starts to suggest carelessness. Hopefully whoever takes over from last minute substitute Anne Stevens, gets to kick a ball before they’re unceremoniously hauled off the pitch.’

Key stats
Market capitalisation£1,163m
No. of shares out445m
No. of shares floating283m
No. of common shareholdersnot stated
No. of employees2394
Trading volume (10 day avg.)2m
Profit before tax£263m
Earnings per share29.05p
Cashflow per share36.00p
Cash per share319.57p

Virgin Money shares are too cheap, says Shore Capital

Virgin Money (VM) shares are ‘far too cheap’ considering the roll-out of a new digital banking proposition and better net interest margins (NIM), says Shore Capital.

Analyst Gary Greenwood retained his ‘buy’ recommendation and ‘fair value’ price of 345p on the stock, which slid over 14p, or 5.2%, to 260.6p after saying its share of the mortgage market would be at the low end of its previous forecasts and that its NIM would shrink.

Greenwood said he was unconcerned about the ‘moderation in growth appetite’ in mortgage lending as he was positive about the plans for digital banking to be rolled out in 2019.

‘At the heart of the launch is a new personal current account with the aim of raising £5 billion of balances within five years of launch, which we expect to be beneficial to the overall cost of funding for the group,’ he said.

Greenwood said factoring in a more ‘conservative stance in lending growth, positive guidance on margin and impairment for 2018 and improved guidance for the medium-term return on tangible equity, we think the shares look far too cheap’.

Key stats
Market capitalisation£2,116m
No. of shares out152m
No. of shares floating148m
No. of common shareholdersnot stated
No. of employees3114
Trading volume (10 day avg.)m
Profit before tax£363m
Earnings per share127.50p
Cashflow per share165.60p
Cash per share531.83p

Peel Hunt upgrades inexpensive Close Brothers

Peel Hunt has upgraded Close Brothers (CBRO) after share price weakness in recent months.

Analyst Stuart Duncan raised his recommendation from ‘hold’ to ‘buy’ with a target price of £16 on the stock after a first quarter update showed a good performance in banking and higher trading activity in its market making arm Winterflood. The shares jumped 5.3% or 70p to £13.86.

‘There should be little surprise that Close has had a good start to the year, with little change to the general trends reported over the last year or so,’ he said.

‘Over the last few months, Close shares have continued to drift lower, and now stand on an annualised December 2018 price/earnings ratio of 9.6x. The dividend yield stands at an attractive 5.1%. We believe that the shares do not look expensive given the consistency of returns and yield support.’

He believed there was 20% upside to the target price, hence the upgrade.

Key stats
Market capitalisation£340m
No. of shares out837m
No. of shares floating663m
No. of common shareholdersnot stated
No. of employees4132
Trading volume (10 day avg.)1m
Profit before tax£132m
Earnings per share0.66p
Cashflow per share7.10p
Cash per share0.37p

Premier Foods boosts numbers but caution remains, says Jefferies

A decent first half performance from Premier Foods (PFD) has given Jefferies hope that it might translate into a positive set of full-year results.

Analyst Martin Deboo retained his ‘hold’ recommendation and target price of 43p on the stock after sales grew 6.3% in the second quarter. The shares gained 2.5p or 6.5% to 41.25p.

‘A strong second quarter hints at a better second half and management seem poised and confident,’ he said.

‘But the second quarter comparison was easy and we have witnessed false dawns at Premier Foods too many times before to want to shed our carapace of instinctive caution just yet. Our numbers don’t change, but our level of optimism lifts.’

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Look up the shares

  • Royal Mail PLC (RMG.L)
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  • Virgin Money Holdings (UK) PLC (VM.L)
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  • Close Brothers Group PLC (CBRO.L)
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  • Premier Foods PLC (PFD.L)
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