The Expert View: Capita, Tate & Lyle and Connect

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Key stats
Market capitalisation£1,295m
No. of shares out667m
No. of shares floating661m
No. of common shareholdersnot stated
No. of employees74755
Trading volume (10 day avg.)16m
Profit before tax£641m
Earnings per share5.55p
Cashflow per share44.20p
Cash per share178.57p

Capita recovery will take a long time, says Shore Capital

Shore Capital believes there is continuing operational risk at Capita (CPI) and the turnaround at the outsourcing giant will be a long time coming.

Analyst Robin Speakman retained his ‘sell’ recommendation on the shares, which fell 2% to 191.2p yesterday.

He said the process of rebuilding the company was only just beginning and the market is focusing on the capital strength of the group pending the £700 million rights issue.

‘We believe that many hurdles remain to be overcome, Capita has now admitted that it has problems, a prescription has been written, but the cure is still to be taken,’ said Speakman.

‘Our analysis reveals sharply rising debt levels from known liabilities, weak new business, high levels of contracted revenues up for renewal, active competition with margin pressure, and we suspect low morale among staff... in short, high risk is our perception.

‘We believe the sightline on recovery is likely to be long - so we would avoid and retain “sell”.’

Key stats
Market capitalisation£2,663m
No. of shares out466m
No. of shares floating458m
No. of common shareholdersnot stated
No. of employees4146
Trading volume (10 day avg.)4m
Profit before tax£437m
Earnings per share54.12p
Cashflow per share85.74p
Cash per share56.17p

Tate & Lyle: Jefferies ‘chastened’ buyer after sell-off

Jefferies remains a ‘chastened’ buyer of Tate & Lyle (TATE) after an underwhelming update in the midst of stock market turmoil last week saw the shares slump.

Analyst Martin Deboo retained his ‘buy’ recommendation but reduced the target price from 750p to 665p on the shares, which fell 2% to 570.4p yesterday.

‘A superficially anodyne update has prompted a 10% sell-off,’ he said. ‘It also sends a message to incoming chief executive Nick Hampton that fresh thinking is going to be required to restore value.’

‘The combination of trough valuation, an impetus for decisive action and belief in Hampton keeps us chastened buyers.’

He added that ‘the reality is that Tate is now a cheap asset, earning below-average margins, in an industry that might be ripe for consolidation’.

Key stats
Market capitalisation£153m
No. of shares out248m
No. of shares floating241m
No. of common shareholdersnot stated
No. of employees5951
Trading volume (10 day avg.)1m
Profit before tax£79m
Earnings per share10.93p
Cashflow per share24.05p
Cash per share2.22p

Peel Hunt downgrades Connect on divi fears

Peel Hunt has downgraded parcel delivery business Connect Group (CNCTC) after it failed to dispose of its books division to German investors Aurelius.

Analyst Christopher Bamberry downgraded his recommendation from ‘add’ to ‘hold’ and reduced the target price from 124p to 67p after a trading update that showed revenue was in line with expectations. The shares fell 1.1% to 61.7p yesterday.

‘With the failure of Aurelius to complete the acquisition of the books division before the agreed 31 January 2018 deadline, we remove the anticipated consideration from our forecasts’.

He said the shares offered a ‘historic dividend yield of 15.9%’ and while they were covered by earnings they were not by free cashflow ‘and as a consequence net debt increases year-on-year’.

‘Therefore, in our opinion there is likely to be a review of the distribution policy,’ he said.

Key stats
Market capitalisation£899m
No. of shares out222m
No. of shares floating182m
No. of common shareholdersnot stated
No. of employees345
Trading volume (10 day avg.)m
Profit before tax£75m
Earnings per share26.66p
Cashflow per share27.38p
Cash per share0.23p

St Modwen set for significant growth, says Liberum

Property developer St Modwen (SMP) is expected to deliver ‘significant’ future growth after enhancing return on capital, says Liberum.

Analyst David Brockton retained his ‘buy’ recommendation and target price of 445p on the shares, which rose 3p to 403.6p yesterday.

‘St Modwen’s efforts to enhance return on capital and accelerate asset turn set the scene for significant future growth,’ he said.

‘The group’s large development pipeline is well-placed for superior returns in a mature real estate cycle, particularly given activity is weighted to two of the strongest sectors: industrial and residential.’

Brockton added that as ‘returns are delivered, we see scope for a continued re-rating in the shares trading on 2018 profit/net asset value of 0.81x’.

Key stats
Market capitalisation£3,953m
No. of shares out1,552m
No. of shares floating1,539m
No. of common shareholdersnot stated
No. of employees592897
Trading volume (10 day avg.)5m
Profit before tax£583m
Earnings per share13.00p
Cashflow per share24.77p
Cash per share57.68p

The Share Centre: G4S is share of the week

The Share Centre has named security business G4S (GFS) share of the week after the stock fell off from its summer highs.

Analyst Graham Spooner retained his ‘buy’ recommendation for ‘medium-risk investors’ on the stock, which was trading up 0.5%, or 1.5p, at 255p at the time of writing.

‘We think the shares are attractive at present as they have fallen off since their summer highs, potentially providing investors with a better entry point,’ he said. ‘Moreover, despite concerns over the sector, there have been two analyst upgrades already this year, which implies an underlying confidence in the sector.’

Spooner said the demand for security work was unlikely to fall in ‘an unsettled world’, adding the company has shown signs of ‘improvement in emerging markets’.

Management is also implementing a transformation program and ‘addressing the financial situation of the company in order to cut costs, debt, and improve efficiency’, he said.

He added that ‘there could be more recovery to come over the longer term’.