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The Expert View: Babcock, Serco and IG Group

Our daily roundup of analyst commentary on shares, also including B&M and Mothercare.

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Click on the arrow to the right of the picture to view the slides. The arrows to the top right then allow you to move back and forth between them.

To see all the slides on the same page, click here.

Leave a comment!

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Key stats
Dividend yield 6.5%
Market capitalisation £2,185m
No. of shares out 506m
No. of shares floating 499m
No. of employees 35,427
Trading volume (10 day avg.) 2.8m
Turnover £4,660m
Profit before tax £465m
Earnings per share 66.50p
Cashflow per share 106.79p
Cash per share 56.63p

Peel Hunt downgrades Babcock on reduced forecasts

Peel Hunt has downgraded Babcock International (BAB) following another estimates downgrade that means it is ‘difficult’ to see the shares rerating.

Analyst Christopher Bamberry downgraded his recommendation from ‘add’ to ‘hold’ and reduced the target price from 578p to 461p. The shares were yesterday trading at 434.6p, down 15% since Wednesday's warning.

Although full year 2019 results were in line, 2020 forecasts were reduced by 7% ‘primarily reflecting the weakness in short-cycle contracts’.

‘Another downgrade to estimates in a long series of downgrades,’ said Bamberry. ‘It is currently difficult to envisage a catalyst to positively re-rate the shares, therefore despite the shares trading on only 6.9 times full-year 2020 earnings per share, we lower our recommendation.’

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Key stats
Dividend yield 0%
Market capitalisation £1,460m
No. of shares out 1,112m
No. of shares floating 1,096m
No. of employees 40,384
Trading volume (10 day avg.) 1.2m
Turnover £2,837m
Profit before tax £128m
Earnings per share 5.99p
Cashflow per share 9.76p
Cash per share 5.62p

Serco gains US string to its bow

Serco’s (SRP) acquisition of a US defence business has reminded investors that the outsourcing business ‘is still alive’, says AJ Bell.

Chief executive Rupert Soames has been working to fix the business for five years, and it has ‘been through the wars’ with banks and shareholders both worried about its debts and customers losing faith, said analyst Russ Mould.

Full-year results showed 40% growth in underlying trading profit and free cashflow was positive for the first time since 2014.

‘Now the new US deal changes the shape of the group and means less reliance on the UK,’ said Mould.

‘This deal will give a boost to earnings which is another tick in the box for Soames. Having geographic diversification is very important at a time when there are big questions about the pace of new public sector contract awards in the UK amid Brexit chaos.’

The shares rose 7.7% to 130.4p yesterday.

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Key stats
Dividend yield 8.7%
Market capitalisation £1,995m
No. of shares out 369m
No. of shares floating 365m
No. of employees 1,597
Trading volume (10 day avg.) 1m
Turnover £595m
Profit before tax £299m
Earnings per share 61.20p
Cashflow per share 65.96p
Cash per share 95.58p

A clear buy: Liberum upgrades IG Group

Liberum has upgraded IG Group (IGG) despite a ‘weakish’ fourth quarter as the spread betting firm has ‘stunning’ new medium-term targets.

Analyst Ben Williams upgraded his recommendation from ‘hold’ to ‘buy’ but reduced the target price from 687p to 693p.The shares were trading at 531p yesterday.

Williams said the company had unveiled ‘stunning new medium-term new market and product growth targets, by a willingness to invest serious operational expenditure to achieve these, and by a steadfast holding of a barely-covered dividend’.

‘If targets are hit, 2022 earnings will be 50% higher than this year,’ said Williams.

‘With an 8% yield on top...the stock is already clearly a “buy”, hence we upgrade our recommendation.’

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Key stats
Dividend yield 2%
Market capitalisation £3,642m
No. of shares out 1,001m
No. of shares floating 849m
No. of employees 32,042
Trading volume (10 day avg.) 1.3m
Turnover £3,030m
Profit before tax £287m
Earnings per share 18.58p
Cashflow per share 22.25p
Cash per share 9.08p

B&M remains a ‘leading disruptor’, says Numis

Discount chain B&M (BME) is a ‘leading disruptor’ and its growth is underpinned by plans for new UK stores and success in Europe, says Numis.

Analyst Simon Bowler retained his ‘buy’ recommendation and target price of 475p on the shares, which fell 5.3% to 360p yesterday.

B&M reported in line full-year 2019 results, with profit before tax of £249.4 million, supported by a strong end to the year in the UK which has continued into this year.

Profit is expected to be down in 2020 due to the cost of opening a new distribution centre but once it is operational ‘our outer year forecast revisions are limited to 2% to 3%’.

‘We continue to view B&M as a leading disruptor, with growth well underpinned by a UK store roll-out and optionality from success in Europe,’ said Bowler.

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Key stats
Dividend yield 0%
Market capitalisation £71m
No. of shares out 342m
No. of shares floating 242m
No. of employees 2,791
Trading volume (10 day avg.) 0.1m
Turnover £655m
Profit before tax £38m
Earnings per share -37.30p
Cashflow per share -25.73p
Cash per share 0.00p

Shore Capital shrugs off Mothercare premins delay

Baby good retailer Mothercare (MTC) is delaying its prelims by a day which is unnerving for investors, but it is a ‘storm in a teacup’, says Shore Capital.

Analyst Clive Black retained his ‘hold’ recommendation on the stock, which fell 5.6% to 20.1p yesterday.

He said the delay was ‘not ideal’ but ‘not the end of the world’, after the difficult few years the retailer has endured. The management has ‘engineered a textbook financial recovery involving a complex fund raise, the sale and leaseback of its head office, and the sale of The Early Centre’.

This work has ‘structurally deleveraged the group, providing calmer waters with which to trade’.

The premlims delay is ‘a little unnerving for investors’ but is ‘a storm in a teacup compared to the much choppier waters faced by Mothercare in recent times’.

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