Tesco's (LON:TSCO) results are out on Wednesday, and Cantor Fitzgerald thinks they could be very disappointing unless the revised strategy to rebuild the UK and group profits is convincing.
The broker is forecasting group operating profit of around £330mln, versus a market consensus of more than £400mln, and it fears new guidance for the 2016 fiscal year could see the projected group operating profit cut to around £950mln from £1.4bn previously, although some of the reduction in group operating profit is due to the sale of the retailer's South Korean operations and some accounting adjustments.
“Interestingly, the share price has not changed year on year, at c.180p (high 251p, low 165p), yet the group operating profit outlook is now substantially lower. Hence, we believe, management needs to discuss a longer term recovery strategy to 2020 although, in our view, this needs to be very convincing if Tesco is to avoid a rights issue and maintain the current share price. For now, we expect more profit downgrades, which redraws the starting line for any margin recovery,” the broker said.
News that the government is planning to entice small shareholders to help take the rest of the Lloyds Banking (LON:LLOY) shares off its hands has predictably cheered Richard Hunter, head of Equities at stock broker Hargreaves Lansdown, though he does have a few things to grumble about.
The 5% discount is equivalent to just 3.8p a share, and the portion being aimed at private investors is, reading between the lines of Hunter's press release, less than Hargreaves Lansdown would like to see.
“Nonetheless, it does provide a welcome opportunity for smaller investors to at least participate in a fraction of the sell-off, in what is currently a well-regarded bank, seen as something of a barometer for the UK economy. With a projected dividend yield which could nudge 4% and interest rates remaining in the doldrums, you can see this being of interest to income seeking investors in the current environment,” Hunter suggested.
Broking heavyweight Deutsche Bank (DB) has scaled back its price target for speciality chemicals player Johnson Matthey (LON:JMAT), after revising some of its earnings assumptions to reflect macro weakness, lower platinum group metals (PGM) prices and a persistently lower oil price.
The new target price is cut to £31 from £35, though DB remains a buyer of the stock.
Foreign exchange movements, PGM prices and the Volkswagen emissions scandal are likely to be areas of focus of the platinum refiner's results when they come out in mid-November.
Jefferies has taken an interest in the oil field support services sector, initiating coverage of Petrofac (LON:PFC) and AMEC Foster Wheeler (LON:AMFW).
The former kicks off at 'hold' with a price target of 777p, and the latter at 'under-perform' with a price target of 520p.
“Onshore backlog has grown to record levels but near-term head-winds still have to be navigated, predominantly Laggan Tormore,” notes Jefferies in reference to Petrofac.
“This puts our FY15 & FY16 net income estimates below consensus; however, with backlog driving group revenue to new record highs in 2016 and assuming Greater Stella finally comes on-stream, 2016 should see a return to stronger execution,” the broker adds.
As for AMEC, while the company is viewed as low risk compared to its peers, Jefferies is concerned that the dividend may not be sustainable, as that's one of the main appeals of the shares in the broker's view.
“Growth for Amec has come via acquisition historically but as AMFW, further growth must fuel both a progressive dividend and service increased debt,” Jefferies said.
Cenkos has been encouraged by news from Indian power generator OPG Power Ventures (LON:OPG) that the full 300 megawatt (Mw) plant at Gujarat is close to coming on stream.
The company announced on Monday that the construction of the multi-circuit transmission line for power evacuation of the 300Mw Gujarat plant has now been completed. Subject to testing and commissioning of other line-related infrastructure, the second 150Mw unit is expected to be commissioned in January 2016, as opposed to October 2015, which was the commissioning date the company had been hoping to achieve.
The company also announced that it has entered into three year sales agreements with industrial customers for the output of its units II and IV of its 414Mw Chennai plant.
“With the existing plants in Chennai performing strongly, this puts the group on track to meet our full year forecasts,” Cenkos said, adding that it backed management to deliver an optimal mix of long term contracts and shorter term, higher tariff, deals.
Cenkos repeated its 'buy' recommendation, saying that with free cash flow anticipated next year of more than £40mln, OPG will quickly reach an inflexion point where it can self-finance growth opportunities, or pay out an attractive dividend to shareholders, or both.
Cantor Fitzgerald also rates the shares a 'buy', and has a 134p target price, saying the timing of the commissioning is not significant while the pricing news is positive.
“While the previous expectation was for an October start, we had already built in a degree of conservatism over the ramp-up of the Gujarat project into our model and for the moment we remain happy with our forecasts despite an apparent delay in the commercial operations of this unit. OPG says that current trading is in line with expectations based on the performance of the existing operating assets,” Cantor Fitzgerald said.