Performance of indices over 1yr
Source: FE Analytics
Here we look at broker Liberum’s top picks for the month of April, and two high profile stocks they say investors should sell.
Buy – Sirius Minerals
Sirius Minerals has been developing a potash mine in the North York Moors National Park, with controversies surrounding the environmental impact of any production. A final decision on planning permission won’t be made until November. Potash is used in fertilisers and is a lucrative business
The company unveiled plans for a more environmentally friendly way of transporting polyhalite from the mine via an underground conveyor belt.
The company hopes this will help its project get approval, and the initiative was welcomed by the local MP, citing the jobs it would bring to the area.
The company carried out a rights issue last month, which diluted the holding of shareholders, however, Liberum analyst Richard Knights says this should be the last such money-raising.
“Following a £43m capital raise in March, Sirius is resourced to deliver the York Potash Project through to planning approval and funding stage,” Knights said.
“We believe there is a logical path to resolution of permitting issues, particularly in light of the new transportation system, whilst progress is also being made on funding with the first binding offtake agreements signed earlier this year with a major US agribusiness.”
Sirius Minerals share price has been under serious pressure over the past year as concerns about planning permission hit.
Performance of stock vs indices over 3yrs
Source: FE Analytics
This means shares are not trading a little above 10p, and Knights sees serious upside.
The analyst sets a share price target of 29p in the medium term, with long-term potential for it to hit £1.50 plus. The 29p target could be upgraded once the ramifications of the new transportation system become clear.
Buy – John Menzies
Another stock to come under pressure over the last year is John Menzies, a small cap logistics company which distributes magazines and provides services such as cargo handling to the airline industry.
Performance of stock vs index over 1yr
Source: FE Analytics
At 703p the shares are trading on just 10 times next year’s earnings, and analyst William Shirley rates the stock a buy.
“A price to earnings of 10 times is cheap given recovery potential (Distribution), growth (Aviation) and strong balance sheet,” he said.
“Twenty-thirteen was a bad year: demotion from the FTSE 250, 15 per cent EPS downgrades and 20 per cent relative underperformance. The share price will benefit from the low expectations left behind.”
“Distribution trends are forecast to be worse than ever before in spite of some positive data on cover prices and from Smiths News. Aviation win rates are strong and Cargo is geared to recovery.”
After recent share price falls the stock is yielding a healthy 4.2 per cent, with the dividend forecast to rise in future.
Buy – Spectris
Liberum also expect FTSE 250 company Spectris to produce strong returns for investors. Spectris produces electrical instruments and 33 per cent of sales are in the US, 13 per cent in China and 29 per cent in Europe ex UK.
Analyst Ben Bourne says this focus on the developed world should feed through into strong performance in 2014.
“Western capex recovery should drive outperformance this year,” he said. “Lead indicators are encouraging.”
“There are opportunities in Asia (more automation) and a healthy new product pipeline. Cash conversion is strong, management are sensible and there is a healthy balance sheet to utilise (net cash by next year).”
Performance of stock vs index over 1yr
Source: FE Analytics
The stock is trading on a price to earnings ratio of 16 times, well below the FTSE 250 which is on over 20 times earnings.
Bourne says that the company is undervalued relative to its peers. He looks at the enterprise value to EBIT metric which takes into account the company’s debt. At 12 times this is 11 per cent below its peers and 15 per cent below its historic peers, he notes.
The stock may have underperformed its peers over the past year but over three and five year periods has done better, he points out.
The stock is yielding 2 per cent, three times covered by earnings.
Sell – ASOS
Liberum analysts Sanjay Vidyarthi and Adam Tomlinson say investors should sell internet retailer ASOS, setting a price target of 2500p for the stock which is currently trading at 4,932p.
ASOS alarmed the market last month by reporting it would invest more than expected, meaning that profits would come in lower than expected. The analysts warn that investors should expect this dynamic to continue.
Performance of stock vs indices over 1yr
Source: FE Analytics
“Our over-riding sense is that ASOS is 'back-filling' (maybe a harsh term, given the investment is ahead of sales growth) on investment and that this could continue for years to come as it builds distribution capacity around the world and an IT platform that is modular and scaleable,” they said.
“This investment was always going to be required - the business could not serve the world from the Barnsley DC forever - from the outside, the phasing and quantum were always going to be hard to ascertain and incorporate in forecasts.”
“The bulls will argue that this investment will lead to higher than previously forecast sales growth. That may be the case, but it's not a given and the market opportunity has not suddenly changed.”
“The competition, be it pure-play online or bricks and clicks, is hotting up. The likes of Zalando and Boohoo.com, for example, have very different business models (Zalando having invested upfront and borne deep losses) and we expect the market to start comparing and contrasting as more companies come to the listed market.”
Sell – Serco
Liberum analysts also recommend investors sell outsourcing firm Serco, which they expect to decline to 400p from the current 425p.
The company has recently issued two profits warnings and the analysts warn that this could easily lead to more as divisions in the company make more conservative forecasts in reaction to these disappointments.
They forecast a 5.5 per cent decline in sales, rising to 10 per cent in the UK.
Serco’s reputation took a hit from its involvement in a scandal over tagging of prisoners in the UKm and Liberum warns this has started to affect its reputation overseas which could lead to slower growth.
The business is “high visibility”, they explain, and having taken a long time to go wrong could take a long time to put right.
The stock is trading on a P/E ratio of 14.8 with a yield of 2.9 per cent.
