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The Expert View: Tesco, Royal Mail and Kingfisher

Our daily roundup of analyst commentary on shares, also including Thomas Cook and Cineworld.

by Daniel Grote on Feb 06, 2018 at 05:00

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Key stats
Market capitalisation£16,336m
No. of shares out8,191m
No. of shares floating8,032m
No. of common shareholdersnot stated
No. of employees133041
Trading volume (10 day avg.)24m
Profit before tax£2,637m
Earnings per share0.88p
Cashflow per share16.70p
Cash per share83.57p

Shore welcomes Tesco’s dividend promise

Shore Capital has welcomed Tesco’s (TSCO) announcement it will pay a 2p final dividend for its 2018 financial year, building on November’s 1p payments, its first since 2014, when the company was mired in an accounting crisis.

‘Such a declaration is a modest but welcome return to the income paying roster for a group that, until it hit the buffers, had an enviable dividend growth track record,’ said analyst Clive Back.

Tesco also yesterday published its deal prospectus for the takeover of the Booker convenience store chain, and Black said the deal was likely to prove positive for payouts.

‘With Booker set to be on-board relatively soon, bringing with it strong additional free cash generation, Tesco should be more rewarding from an income perspective for its shareholders in the medium term, which we deem to be welcome news,’ he said.

Black retained his ‘buy’ rating on the shares, which fell 1.3% to 199.6p yesterday.

Key stats
Market capitalisation£5,113m
No. of shares out1,000m
No. of shares floating996m
No. of common shareholdersnot stated
No. of employees158955
Trading volume (10 day avg.)5m
Profit before tax£1,013m
Earnings per share27.29p
Cashflow per share58.70p
Cash per share29.90p

Clouds lift over Royal Mail

Berenberg believes the strike cloud has lifted over Royal Mail (RMG), after the postal group struck a deal with the Communication Works Union over pay and pensions.

Analyst Joel Spungin retained his ‘hold’ rating and upped his target price from 415p to 460p. The shares rose 3p to 511.4p yesterday.

‘This has removed the threat of a debilitating strike and provided much-needed certainty about personnel cost development,’ he said.

Spungin also raised his earnings forecasts for 2018 and 2019 after the group announced earnings forecasts of around 5% more than had been expected.

‘We have increased our price target to reflect our higher profit forecasts and diminished risk to earnings from industrial action,’ he said.

‘We retain some concerns about the lack of long-term organic growth, falling mail volumes and intense competition in the parcels market, but the group has little debt and the dividend looks secure for the foreseeable future.’

Key stats
Market capitalisation£7,738m
No. of shares out2,161m
No. of shares floating2,148m
No. of common shareholdersnot stated
No. of employees77000
Trading volume (10 day avg.)9m
Profit before tax£1,046m
Earnings per share26.96p
Cashflow per share38.14p
Cash per share35.49p

Homebase retreat could provide boost to Kingfisher

Jefferies is alive to the potential for Australian group Wesfarmers to pull the plug on its Homebase and Bunnings UK home improvement stores, which could provide a big boost to B&Q owner Kingfisher (KGF).

‘Wesfarmers’ massive write-down of its investment in BUKI [Bunnings UK and Ireland] underlines the growing chances of a market exit by Homebase / Bunnings,’ said analyst James Grzinic.

‘Pulling the plug on B&Q’s largest competitor would have major benefits for Kingfisher. 2018 will be critical for the process, and the chances of major capacity exits lifting Kingfisher must now be higher than 50/50.’

Wesfarmers’ review of its UK operations led to a £454 million write-down, and Grzinic said it felt like ‘the beginning of the end’ for the division.

‘The benefits of a Bunnings exit from the UK are self-evident for Kingfisher, given sales of £1.2 billion by BUKI in the year to June,’ he said.

Grzinic retained his ‘buy’ rating and 400p target price on the shares, which rose 2.5% to 358p yesterday.

Key stats
Market capitalisation£1,916m
No. of shares out1,536m
No. of shares floating1,355m
No. of common shareholdersnot stated
No. of employees21788
Trading volume (10 day avg.)4m
Profit before tax£588m
Earnings per share0.85p
Cashflow per share15.82p
Cash per share91.61p

Numis upgrades Thomas Cook

Numis has upgraded Thomas Cook (TCG), arguing the travel group’s focus on improving its product and service quality is starting to pay off.

Analyst Kathryn Leonard moved the stock to a ‘buy’ rating, from ‘reduce’, with a 149p target price. The shares were broadly flat at 125.1p yesterday.

‘Despite a myriad of strong headwinds threatening to destabilise the business over the last two years, the group’s strategy has been well executed, as it continues to focus on (a) improving the quality of its hotel portfolio, customer service and online proposition and (b) lowering the cost of supply as it shifts away from its “complementary” product,’ she said.

‘A normalising geopolitical landscape, an improving foreign exchange backdrop, control obtained over its UK retail footprint and the outsourcing of its complementary hotels to Expedia and Webjet underway, should all enable it to at least defend its share going forward.’

Key stats
Market capitalisation£671m
No. of shares out274m
No. of shares floating192m
No. of common shareholdersnot stated
No. of employees9946
Trading volume (10 day avg.)2m
Profit before tax£169m
Earnings per share30.30p
Cashflow per share51.96p
Cash per share20.85p

Deutsche buys into Cineworld’s new story

Deutsche Bank has reiterated its ‘buy’ rating on Cineworld (CINE) as the cinema group issued more shares into the market as part of its rights issue to fund the acquisition of US group Regal Entertainment.

Analyst James Wheatcroft adjusted his price target from 825p to 360p to account for the rights issue. The shares were adjusted from 518.5p to 230.8p on Monday, and rose 6.4% to 244p.

‘We like Cineworld’s acquisition of Regal,’ he said. ‘We conclude that a strong cash flow will rapidly reduce debt and fund material Regal estate investment.

‘The Cineworld equity story has now become a majority USA business with a refurbishment / cost savings / management story,’ he added.

‘However, just because the story has changed does not mean that the new story does not have merit.’

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Look up the shares

  • Tesco PLC (TSCO.L)
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  • Royal Mail PLC (RMG.L)
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  • Kingfisher PLC (KGF.L)
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  • Thomas Cook Group plc (TCG.L)
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  • Cineworld Group PLC (CINE.L)
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