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The Expert View: Pearson, Reckitt Benckiser and Bovis

Our daily roundup of analyst commentary on shares, also including Cineworld and Tullow Oil

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Key stats
Dividend yield 1.8%
Market capitalisation £7,069m
No. of shares out 781m
No. of shares floating 774m
No. of employees 30,339
Trading volume (10 day avg.) 2.8m
Turnover £4,513m
Profit before tax £975m
Earnings per share 49.28p
Cashflow per share 129.53p
Cash per share 66.08p

Liberum: Pearson cost cutting masks bigger problems

Pearson (PSN) is in the mid-range of its profit guidance for the year, but Liberum says this is only down to extra cost savings, not on delivering what was expected from the educational publisher.

Analyst Ian Whittaker reiterated his ‘sell’ recommendation and target price of 450p on the stock, which fell 6% to 918.2p yesterday.

‘Pearson is expected to be in the mid-range of its adjusted operating profit guidance but it looks like it only met this by extra cost savings with revenues, implicitly, not delivering what was expected,’ he said.

‘That seems to be the message for full-year 2019 also, with adjusted earnings per share guidance in line with consensus despite newly announced cost savings.’

Whittaker said there is ‘only so much cost cutting you can do to mask the underlying problems facing the business, a lesson the newspapers know well’.

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Key stats
Dividend yield 2.7%
Market capitalisation £43,115m
No. of shares out 708m
No. of shares floating 682m
No. of employees 40,400
Trading volume (10 day avg.) 1.1m
Turnover £11,512m
Profit before tax £3,350m
Earnings per share 274.92p
Cashflow per share 314.99p
Cash per share 300.51p

Reckitt Benckiser boss steps down

The chief executive of Reckitt Benckiser (RB), Rakesh Kapoor, has stepped down, which AJ Bell says is not a surprise considering the consumer giant’s poor performance.

The group has reported Kapoor’s retirement but analyst Russ Mould said if he was leaving of his own accord ‘then he’s not exactly departing when everything is going well’.

‘The $16.6 billion (£12.9 billion) acquisition of baby milk manufacturer Mead Johnson in June 2017 was considered by many investors to have been a bad deal with Reckitt paying too much and buying a company not in as good condition as first thought,’ he said.

‘Growth has been slowing on a group basis, with Reckitt battling various issues ranging from cyber-attacks to factory problems.’

The new chief executive will need to be ‘focused and highly skilled as Reckitt will not be an easy company to run’, Mould said.

The shares fell 4.4% to £59.80 yesterday.

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Key stats
Dividend yield 5.6%
Market capitalisation £1,308m
No. of shares out 135m
No. of shares floating 132m
No. of employees 1,297
Trading volume (10 day avg.) 0.3m
Turnover £1,028m
Profit before tax £130m
Earnings per share 67.84p
Cashflow per share 68.97p
Cash per share 126.29p

Shore Capital ‘cautiously positive’ on Bovis Homes

Shore Capital believes Bovis Homes (BVS) will post stronger profits than its peers over coming years despite a slowdown in the market.

Analyst Robin Hardy retained his ‘buy’ recommendation but ‘more cautiously’ as the housebuilder increased its sales to housing associations, reflecting a private sector slowdown.

‘We still believe Bovis is likely to post a stronger profit performance in the next two-to-three years than its peers simply because it is putting right a range of issues that have dragged on margins and are easily fixed even without market support,’ he said.

‘However, more bullish valuations still give full credit to the group’s ability to deliver most, if not all, of the promised margin uplift and we believe that this is unlikely to be achieved.’

The ‘substantial premium’ the shares were trading at last summer is gone and as long as they remain close to Hardy’s fair value of 967p ‘we are happy to stick with a cautiously positive stance’.

The shares rose 3.8% to 962.2p yesterday.

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Key stats
Dividend yield 2.5%
Market capitalisation £3,616m
No. of shares out 1,371m
No. of shares floating 982m
No. of employees 10,232
Trading volume (10 day avg.) 2.4m
Turnover £1,147m
Profit before tax £255m
Earnings per share 21.04p
Cashflow per share 35.30p
Cash per share 14.83p

Numis: Cineworld could see another bumper year

More synergies savings and the potential for another record box office year mean Cineworld (CINE) has 2019 earnings potential, Numis says.

Analyst Richard Stuber reiterated his ‘buy’ recommendation and target price of 421p on the stock, which fell 6.8% to 257.8p yesterday.

The group reported 7.2% revenue growth for full-year 2018 in line with expectations but Stuber said the real ‘catalyst’ for earnings would come from guidance on synergies from its acquisition of US chain Regal in March.

‘Cineworld remains a core long-term ‘buy’, trading on 11.5 times price/earnings, as well as potential earnings upgrades from synergies, 2019 could be another record box office given the supportive film slate with further releases from Toy Story and Star Wars.’

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Key stats
Dividend yield 0%
Market capitalisation £1,782m
No. of shares out 911m
No. of shares floating 851m
No. of employees 2,071
Trading volume (10 day avg.) 8.3m
Turnover 1,483m USD
Profit before tax -88m USD
Earnings per share -1.15 USD
Cashflow per share -0.75 USD
Cash per share 0.23 USD

Tullow Oil dividend is deliverable despite headwinds

Tullow Oil (TLW) is facing a number of one-off headwinds but its $100 million (£78 million) dividend promise looks ‘deliverable’, Hargreaves Lansdown says.

The group expects to deliver revenues of $2 billion in 2018, although free cashflow of $410 million is below last year following a $200 million litigation payment and delays in Uganda.

Analyst Nicholas Hyett said the costs meant ‘some positive working capital flows being pushed back into 2019’ but ‘they’re one-off headwinds’ and if stripped out, ‘Tullow’s promise of at least $100 million in dividends from next year looks very deliverable’.

He said volatile oil prices would remain a headwind but ‘the group’s got over half its production hedged for next year, and a floor of $56.24 should help mitigate a worst-case scenario’.

The shares were flat at 199.7p yesterday.

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