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The Expert View: Balfour Beatty, Diageo and Interserve

Our daily roundup of analyst commentary on shares, also including Hollywood Bowl and Silence Therapeutics.

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Key stats
Dividend yield 1.7%
Market capitalisation £1,612m
No. of shares out 690m
No. of shares floating 687m
No. of employees 20,238
Trading volume (10 day avg.) 1.8m
Turnover £6,916m
Profit before tax £108m
Earnings per share 23.55p
Cashflow per share 30.81p
Cash per share 140.29p

Liberum shakes off Balfour Beatty falls

A rights issue from construction company Kier has impacted infrastructure group Balfour Beatty (BALF) but Liberum believes such nervousness isn’t warranted.

Analyst Joe Brent retained his ‘buy’ recommendation and target price of 350p on the stock, which fell 1.5% to 232.5p yesterday.

The shares had fallen 12% since the announcement of Kier’s rights issue as markets ‘shook first and asked questions later’, said Brent.

‘As the dust settles, we believe that the working capital impact on Balfour will be limited, and the advantage of its balance sheet strength will be clearer,’ he said.

He said that while construction sector was under pressure the negativity around Kier’s balance sheet had made creditors nervous.

‘At Balfour we expect less nervousness among creditors and banks given the strength of its covenant,’ he said.

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Key stats
Dividend yield 0%
Market capitalisation £52m
No. of shares out 71m
No. of shares floating 33m
No. of employees 50
Trading volume (10 day avg.) 0.1m
Turnover £m
Profit before tax £-14m
Earnings per share -2.31p
Cashflow per share -1.69p
Cash per share 61.07p

Peel Hunt puts Silence Therapeutics ‘under review’

Peel Hunt has put gene therapy company Silence Therapeutics (SLN) ‘under review’ after it reached a settlement and license agreement with Alnylam that has ended its patent battle.

Analyst Miles Dixon placed his ‘buy’ recommendation and target price of 277p ‘under review’ after Alnylam agreed to license patents from Silence, paying the group a tiered royalty on its US group’s polyneuropathy drug. The shares tumbled 21% to 68p yesterday.

Dixon said the group was keen to stress ‘that with risk and cost of litigation now behind it, it can focus on building its pipeline in the near future’.

‘We had previously included higher, albeit risk-adjusted, royalties and milestone payments for the Alnylam settlement but had not included the benefit of Silence’s growing pipeline in the valuation,’ he said.

‘We see [the] news as further validation of the competence that Silence has in [its specialised] therapeutics but take this opportunity to go to ‘under review’ in order to review assumptions with management on the pipeline.’

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Key stats
Dividend yield 2.4%
Market capitalisation £68,080m
No. of shares out 2,425m
No. of shares floating 2,416m
No. of employees 29,362
Trading volume (10 day avg.) 4.8m
Turnover £12,163m
Profit before tax £4,178m
Earnings per share 106.93p
Cashflow per share 126.57p
Cash per share 36.53p

Diageo can continue to grow, says Jefferies

Diageo (DGE) shares are getting close to a ‘natural ceiling’ but if the top line and margins continue to grow Jefferies believes they can continue their upward trajectory.

Analyst Edward Mundy retained his ‘buy’ recommendation and target price of £32.00 on the shares, which were trading at £28 yesterday..

He is expecting a ‘robust’ first-half report. ‘While the shares are getting closer to a natural ceiling on valuation, consistency of delivery is improving and we believe the shares can run further on continued top line acceleration and margin expansion,’ he said.

Mundy added that Diageo was ‘the most affordable way to get exposure to spirits’ that offering a ‘natural runway for growth’.

 

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Key stats
Dividend yield 0%
Market capitalisation £19m
No. of shares out 150m
No. of shares floating 143m
No. of employees 55,350
Trading volume (10 day avg.) 2m
Turnover £3,063m
Profit before tax £101m
Earnings per share -175.96p
Cashflow per share -131.63p
Cash per share 106.44p

Interserve is too big, says AJ Bell

Support services company Interserve (IRV) may have become too big and while the management tries to rectify the problem, investors will remain nervous, says AJ Bell.

A year after the collapse of Carillion, Interserve is losing the faith of investors. Despite employing 70,000 people it is valued at a little over £10 million.

‘Interserve has arguably got too big, with too many moving parts, and this left it particularly vulnerable when margins came under pressure,’ said analyst Russ Mould.

The company’s solution is a debt-for-equity swap to reduce the net debt-to-earnings and ‘such an effort is likely to result in significant dilution for existing shareholders’.

‘Management are doing their best to reassure that the future of the business is viable,' said Mould.

'However, the market is likely to remain nervous until the details of the deleveraging effort are revealed and confirmed, something which is planned for early 2019,' said Mould.

The shares tumbled 53% to 11.5p yesterday.

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Key stats
Dividend yield 2.2%
Market capitalisation £308m
No. of shares out 150m
No. of shares floating 143m
No. of employees 1,955
Trading volume (10 day avg.) 0.2m
Turnover £114m
Profit before tax £33m
Earnings per share 12.17p
Cashflow per share 19.18p
Cash per share 14.60p

Shore Capital expecting more from Hollywood Bowl

Hollywood Bowl (BOWL) continues to trade below its historic range despite ‘significant progress’, says Shore Capital.

Analyst Greg Johnson retained his ‘buy’ recommendation and ‘fair value’ of 245p on the stock after full-year results showed profit before tax increased 13% to £23.9 million which was ‘nicely ahead of our expectations’.

He said cash generation ‘was strong’ with free cashflow of £18.1 million which allowed the group to increase its dividend as well as pay a special dividend in the year.

‘Given the strong cash generation we see scope for these special payments to be recurring,’ he said.

‘Hollywood Bowl trades on a 2019 price/earnings ratio of 13.4 times…towards the bottom of its historic range since IPO despite the significant progress made in the period. We continue to see fair value at 245p based on the current operating profile.’

The shares jumped 14.4% to 210p yesterday.

 

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