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The Expert View: GKN, Pendragon & Essentra

Our daily roundup of analyst commentary on shares, including Euromoney and Telecom Plus.

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Key stats
Market capitalisation£5,476m
No. of shares out1,717m
No. of shares floating1,707m
No. of common shareholdersnot stated
No. of employees51381
Trading volume (10 day avg.)18m
Profit before tax£1,082m
Earnings per share14.02p
Cashflow per share39.22p
Cash per share24.26p

Liberum: upside at GKN after warning and demerger report

Liberum has upgraded aerospace and car components maker GKN (GKN) as it believes reports that it is considering plans to split the business in two and the fact activist investors are watching the company shows potential upside for the stock.

Analyst Ben Bourne upgraded his recommendation from ‘sell’ to ‘hold’ with a target price of 300p as the shares gained 5%, or 15p, to 319p, after the Sunday Times reported the company was in the first stages of reviewing the case for a demerger.

Having cut his forecasts in January, Bourne has become more positive since last week’s third quarter trading update warned full-year profits would be lower as a result of weakness in the aerospace business and two external claims in the car division.

‘End markets look fragile but upside may come from the disposals,’ Bourne said. ‘Upside may come from a declining pension deficit, considered a key hindrance to a break-up. New management offer clues.’

Key stats
Market capitalisation£341m
No. of shares out1,427m
No. of shares floating1,336m
No. of common shareholdersnot stated
No. of employees9656
Trading volume (10 day avg.)2m
Profit before tax£159m
Earnings per share3.81p
Cashflow per share7.79p
Cash per share5.85p

Jefferies: Pendragon can turnaround after profit warning

Faltering consumer demand for new and second-hand cars has forced dealer Pendragon (PDG) to issue a profit warning, although Jefferies believes the strategy of its management could result in a higher return business.

Analyst Will Kirkness retained his ‘buy’ recommendation and target price of 55p after the company issued an unscheduled update warning that full-year profits would be around 20% lower than expected at £60 million.

The group expected a ‘resumption of growth in profits in 2018’ although Kirkness said it is likely there will still be a move down towards £70 million from the consensus view of £80 million.

The shares tumbled 5p, or 17%, to 24p.

‘The c.20% downgrade to full-year 2017 earnings per share will not be taken well but has been largely delivered by exceptional pricing pressure from two premium manufacturers,’ he said.

‘This in turn has driven an enhanced and accelerated strategic review of new and premium operations with the used objectives reiterated. If implemented successfully, this could drive a higher return business with greater consistency.’

As part of its turnaround, the board is aiming to double used-car revenues by 2021, only invest in premium franchise operations with attractive returns, and a review of US operations with no further acquisitions.

Key stats
Market capitalisation£1,346m
No. of shares out263m
No. of shares floating259m
No. of common shareholdersnot stated
No. of employees7908
Trading volume (10 day avg.)m
Profit before tax£148m
Earnings per share-19.80p
Cashflow per share5.52p
Cash per share20.55p

Essentra blown off track by hurricane, says Peel Hunt

Plastic products maker Essentra (ESNT) has calculated the cost of damage from hurricane Maria at its Puerto Rico sites which will hurt full-year results by more than expected, says Peel Hunt.

Analyst Charles Hall retained his ‘add’ recommendation and target price of 585p on the stock, which was trading up 1.7%, or 8.75p, at 511p after a third quarter trading statement.

This showed like-for-like growth was ‘modestly positive’ at 1-2%, compared to -4% in the first half of the year. However, the bill of repairing hurricane damage was higher than expected.

‘The company has quantified the hurricanes impact at £1.7 million to £2.5 million – before insurance recovery – thus far, which is likely to result in a slightly higher full-year impact than our initial forecast of £3 million,’ said Hall.

‘As a result we are reducing our 2017 forecast by £1 million, but make no change to 2018. The underlying performance continues to improve, albeit this year’s numbers are being held back by the hurricane impact.’

Key stats
Market capitalisation£1,238m
No. of shares out109m
No. of shares floating54m
No. of common shareholdersnot stated
No. of employees2262
Trading volume (10 day avg.)m
Profit before tax£108m
Earnings per share24.29p
Cashflow per share42.84p
Cash per share65.62p

Euromoney not as risky as it looks, says Numis

More risk than is warranted is reflected in Euromoney’s (ERM) share price as the business magazine publisher starts to reap the rewards from its year of transition, says Numis.

Analyst Gareth Davies reiterated his ‘buy’ recommendation and target price of £14.50 on the stock, which yesterday added 4p to £11.37.

‘2017 was flagged by Euromoney management as a year of transition,’ he said. ‘Results for 2017 have been a little ahead of expectations with both an improvement in some markets and the early benefits of self-help starting to come through.

‘Importantly, momentum has built since H1 and Euromoney feels positioned very well to run into 2018 with top line, margin and cash-flow moving in the right direction.’

Davies said European regulatory changes had heightened uncertainty around Euromoney’s key asset management end market but said, ‘we feel risk here is more than reflected at the current share price’.

Key stats
Market capitalisation£936m
No. of shares out78m
No. of shares floating54m
No. of common shareholdersnot stated
No. of employees1049
Trading volume (10 day avg.)m
Profit before tax£57m
Earnings per share37.81p
Cashflow per share56.81p
Cash per share23.29p

Opportunities at Telecom Plus, says The Share Centre

Telecom Plus (TEP), owner of Utility Warehouse, may be fighting against a difficult market but The Share Centre said it will not persist indefinitely.

Analyst Helal Miah recommended the shares as a ‘buy for higher risk investors with a balanced portfolio’, thanks to the ‘progressive dividend policy, which is helped by a solid balance sheet and cashflow’.

He said the company, which provides homes and small businesses with home phone, mobiles, broadband, gas and electricity, has seen an increasing number of customers take out more contracts.

‘Going forward the company has plans to provide car, home and boiler insurance along with water supply,’ said Miah. ‘Specifically, in the year ahead, the group is targeting an increase of 5-10% in the number of services provided.’

Although the group is currently ‘operating in difficult market conditions’ Miah said investors should note the chief executive has ‘recognised that this environment will not persist indefinitely’.

‘Moreover, management are confident that when wholesale commodity prices trend higher, customer growth rates will return towards past levels,’ he said. The shares shed 6p to £11.94 on Monday.

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