City view: 16 shares for 2015
12th December 2014 15:20
by Lee Wild from interactive investor
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Equities are ending 2014 in a bit of a muddle. A week ago, the FTSE 100 (UKX) was trading flat on its 2013 year-end mark, but the blue chip index has since lost over 5%. A late Santa rally will be required to make this a winning year. But never mind, Barclays has dusted down its crystal ball and picked 40 European stocks it thinks will outdo the rest in 2015. We've weeded out the 16 UK shares fancied to thrive next year.
Glencore
The Investment Case
The various strands to the Glencore investment case remain powerful, in our view. These are principally, we believe, very strong earnings growth driven by volume, most of which is coming at very attractive capital intensities, impressive cost reduction and intriguing supply/demand fundamentals over the next two to three years in a number of the company's principal commodity exposures – in particular copper, zinc and nickel.
Based on assumptions of rising base metals prices over the next couple of years, trades on 9.8 forecast earnings for 2015 and 7.6 times for 2016, says Barclays. A significant ramp-up in free cash flow should easily exceed the dividend yield, implying upside potential to increasing capital returns.
Barclays reckons the FTSE 100 will end 2015 at 7,000, generating 9% total return, and forecasts earnings per share (EPS) growth of 11% for the FTSE All-Share index.
Ophir Energy
The Investment Case
We see Ophir as a counter-cyclical investment in the out-of-favour European E&P sector. Although fundamentally a deepwater explorer, the current investment case centres on the value of its existing gas discoveries in Equatorial Guinea and Tanzania. Management aims to partially monetise both assets prior to FID in 2016. With cash-in-hand of $1bn Ophir can afford to be patient while pursing the right deal to maximise shareholder value.
Barclays believes is worth 260p a share, made up of pre-development liquefied natural gas (LNG) projects offshore Africa, the Asian production and development assets that the Salamander acquisition would add, plus net cash after deducting firm financial commitments. Historically, the stock has traded at a significant premium to Tangible net asset value (NAV).
Petrofac
The Investment Case
With backlog rebuilt, at a margin which we believe will still be industry-leading, we feel that Petrofac is on course to deliver strong earnings growth over the 2015-16E period. In an uncertain macro environment, we believe Petrofac's strong backlog and high exposure to National Oil Companies (NOCs) will help to underpin our earnings forecasts. However, current concerns over working capital and the start-up of projects mean that it trades at a discount to its peers. We believe these fears are overdone and the recent profit warning presents a good opportunity for investors to look at the stock.
Even assuming no value creation or destruction for the Offshore venture, and using mark-to-market exchange rates, Barclay's discounted cash flow (DCF)-based price target for is 1,400p, representing 74% upside potential.
Schroders
The Investment Case
Schroders is our Top Pick due to its gearing to Equities flow improvement, a strong Multi-Asset offering and good fund performance. Over 60% of group revenues are derived from outside the UK, offering attractive diversification at a time of increasing domestic revenue margin pressures. Inflow rate has been strong, particularly in higher-margin Intermediary, averaging nearly 8% annualized flow rate at 9M14. Management outlook is upbeat, highlighting strong momentum in Asian Multi-Asset flows and European Fixed Income. The Institutional pipeline is described as significant into 2015. Fund performance is strong with 80% of AUM outperforming the three-year benchmark at Sep-14. Schroders' P/E multiple is at a discount to its through-the-cycle average.
trades on 15 times forward earnings, or about 13 times adjusted for excess cash. That's only a small premium to the sector average and at a discount to the through-the-cycle average of 17, which is why Barclays reckons the shares are good value.
Prudential
The Investment Case
We believe Prudential to be the only large-cap long-term structural growth stock in European Insurance. Whilst many insurers chase growth through restructuring or M&A, Pru has a multi-decade organic expansion opportunity ahead of it, fuelled by its Asian business, which we consider to be amongst the most attractive insurance franchises in the world. Its US business is now the number one player in its niche, whilst the UK and asset management businesses are progressing well. Pru is "firing on all cylinders" and showing no signs of stopping.
premium valuation is more than justified by the quality of its returns and growth opportunity, says Barclays. But it trades on a forward PE ratio of 13.4 for 2015 despite anticipated growth of 13% through to 2019. The yield might lag its peers, but there are "many years of double digit growth rates ahead of it."
British Land
The Investment Case
We expect British Land's predominantly prime portfolio to continue to benefit from resilient investor demand, supporting its valuation yields. We expect rents to show accelerating growth, leading to valuation gains of 6% in FY2015 and 8.2% in FY2016.
With NAV forecast to grow 16% in 2015 and 15% next year, Barclays' economic profit valuation estimates 21% upside. The shares trade at a share price implied initial portfolio yield of 5.1% relative to previous 2007 peak of about 4.25%.
Wolseley
The Investment Case
Wolseley is our Top Pick in European Business Services as we think the business is capable of delivering 13% annual earnings growth and 19%+ TSR. We believe Wolseley will see 5% like-for-like growth in the next three years, which – as management focuses on ensuring cost efficiency – can deliver 10% average annual growth in trading profit in the next three years and 13% EPS CAGR. The normal dividend should contribute another 3% and share buybacks and/or bolt-on acquisitions 3-5%. We think this is achievable even with conditions in Europe remaining tough, driven by continued outperformance in the US business where nearly three-quarters of group trading profit is generated. On 15x CY2015E P/E, the shares look good value to us.
shares have risen about 15% since full-year results on 2 October, but the shares had done little in the 18 months before that, so don't be put off, says Barclays. A PE ratio of 15 for 2015 for a business capable of delivering at least 19% total shareholder return (TSR) "screens well across the sector."
International Consolidated Airlines
The Investment Case
More than any other European airline in our coverage, IAG is undergoing clear structural change, with a management team truly focused on cost competitiveness and shareholder returns, and a superior market positioning. While medium-term expectations are high, we see significant upside to numbers in 2015, and we argue for a further re-rating, as the business closes in on earning its cost of capital and paying its maiden dividend.
On less than 10 times forward earnings and 4.6 times 12-month forward enterprise value-to- cash profits, is trading at a discount to historical mid-cycle ratios of 5.4 at British Airways and 4.8 at Iberia. But the market is pricing in only 60% of IAG's promised structural cost savings, reckons Barclays, and 2015 targets look conservative. "We think the stock deserves a clear re-rating."
Melrose Industries
The Investment Case
Melrose management has a very strong long-term track record and the shares are currently trading at a c20% discount to our 315p SoP-derived price target. We estimate that the watermark of management's current LTIP is c202p. Very simplistically, at the current share price of 252p, the implied equity 'value added' since the Elster deal is £532mn. We feel this is too low as overall Elster profitability has increased by almost 50% since its acquisition in August 2012 for an EV of c£1.75bn, with its underlying operating margin increased from c13% in 2011 to 18.9% in H1 2014. Management is also seeking its next major acquisition.
Barclays bases its 315p price target on a sum of the parts valuation with 2015 estimates for enterprise value-to-cash profits of between 8.5 times and 13 times. recently agreed the sales of rope maker Bridon for £365 million, more than expected.
Barratt Developments
The Investment Case
Barratt's model is characterised by a measured degree of financial leverage (quite rare among the house builders at this stage of the cycle), and we believe this serves to accelerates its earnings growth. We also believe that the company's intention to return £950mn to shareholders (with its regular dividends supplemented by special payments) will be highly attractive to those seeking income.
With current house builder valuations driven by multiples to book value, the steep trajectory of NAV growth "will be reflected in a rapidly rising share price," says Barclays. Implied PE ratios of less than 9 for 2016, plus dividend yields following a promise to return £950 million to shareholders over the next three years, "are very attractive".
Ashtead
The Investment Case
With c90% of profits coming from its US business, Ashtead offers exposure to an economy which is forecast to perform relatively well in 2015. Ashtead has delivered strong earnings upgrades driven largely by structural growth and selfhelp, with a cyclical recovery really only beginning this year. We believe there is scope for further strong EBITDA growth and that the rating can be sustained over the next 12 months given the current stage of the cycle.
Despite trading at the top end of its historical trading range, Barclays reckons a de-rating of LSE:AHT:Ashtead's shares remains some way off given forecast three-year earnings per share (EPS) compound annual growth rate (CAGR) of 19%. Historically, a de-rating has occurred when end markets are significantly stronger than they are today, says Barclays.
Savills
The Investment Case
We believe that Savills has a highly-sustainable EBIT margin (sub-10% at present), a diversified (and defensive) mix of business streams and, following the acquisition of Studley, access to the growing US market, which it has coveted for some time.
Barclays reckons shares are worth 780p. It uses a DCF model and incorporates its assumptions about the company's long term growth prospects, together with estimates of the reinvestment needed to achieve that growth.
WPP
The Investment Case
WPP provides exposure to the advertising agency business model – global GDP proxies with some operational gearing. WPP has delivered 3.1% organic revenue and 10.2% EPS CAGR over the last 10 years, a full cycle including a recession. Going forward, we think it should continue to generate c10% EPS growth over a whole cycle (including recession and recovery). This year WPP is fully delivering on its strategy (3.5-4.0% organic, 30bp of margin improvement, rising dividend, 10-15% EPS growth, cash flow used for buybacks and M&A) and 2015 performance is expected to be very similar to 2014. Finally, we feel that the digitalisation of advertising is neutral to slightly positive for the agencies. Overall, we believe that the agency business model warrants a 10-15% premium to the market while WPP only trades at a 6% premium to the market on 14.9x 2015E P/E.
Barclays' price target of 1,500p is based on a 10% premium to the market's 2016 earnings estimates. currently trades on 14.9 times 2015 forecasts, which is a 9% discount to peers and only a 6% premium to the market.
Dixons Carphone
The Investment Case
Carphone's merger with Dixons unlocks significant imminent costs and revenue synergies that the market under-appreciates, in our view. Our analysis suggests at least £40mn of cost savings, while the launch of Carphone Stores Within A Store (SWAS) in the UK should be significantly profit accretive. P4U's bankruptcy should also prove significantly earnings-accretive for Dixons Carphone throughout 2015, while the launch of the iPhone 6 keeps us positive in the near term. We estimate a three-year EPS CAGR of 18%. On 15x CY15E P/E we find Dixons Carphone's risk/reward profile favourable.
trades in line with its longterm average and at a small premium to the general retail sector. Barclays estimate a three-year EPS CAGR of 18%, the second highest in its coverage universe after Boohoo.
Whitbread
The Investment Case
We see a c12% structural growth story with c2-3% boost from the 'cycle' resulting in a 14-15% EPS CAGR over the next three years. If we reflected our economists' UK macro forecasts the EPS CAGR would rise to c17-18% and TSR to c19-20%. We believe consensus forecasts underestimate the magnitude of the RevPAR recovery given that we are still c24% behind the last peak in real terms. Even in the absence of upside risk to forecasts we see Whitbread as a 'compounder' which deserves to hold its multiple given the high level of structural EPS growth potential.
PEG ratio of 1.4 is one of the cheapest in the sector. It trades on a 19.7 times calendar year 2015 PE and EPS CAGR of c14-15%. It also believes the current price reflects a "free" option on Costa succeeding internationally, a business it estimates could be worth £2 billion in 10 years' time.
JD Wetherspoon
The Investment Case
Our base case assumes a CAGR in EPS of 9% from FY14-17E assuming slight ongoing margin erosion and sector-leading LFL sales growth of 3-4%. Given the starting FCF yield of c10%, we believe that this is an attractive investment case and underpins our Overweight rating. With Repairs and Maintenance of £57mn (4% of sales) and Maintenance Capex of £56mn in FY14 (4% of sales), the company is now spending a record amount on these investment items. To say an "economic moat" is being built is an understatement, in our view. At 8% of sales, this is well above the long-term average since 1997 of 5.8%, and materially ahead of sector peers (4.9-7.4% of sales, based on our FY13 estimates). If spending reverted back to its long-term average, FCF would increase by £31mn (c34%), which would boost the FCF yield as high as 13%.
Only Enterprise Inns has a better free cash flow yield in the pub sector. With like-for-likes growing more by volume than price, and with outspending competitors on re-investment, Barclays thinks a lower FCF yield is appropriate. Â Using a forward PE of 18, toward the upper end of JDW's 10-year range, gives an upside case of 1,000p.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.