Analysts queue up to downgrade supermarket group after profit fall, while non-farm data outweighs eurozone woes
Tesco fell to a two month low in a rising market, as investors checked out of the supermarket group's shares in the wake of its first profit fall for twenty years.
The company reported half year figures on Wednesday showing trading profits dropped 10.5% to £1.6bn, prompting concerns about its poor UK performance and growing problems in its international business. It closed down 2.8p at 315.35p, its worst level since the start of August as analysts queued up to downgrade the business. Kate Calvert and Freddie George at Seymour Pierce said:
The market was prepared for a decline in profits from Tesco, but we believe its first half results were disappointing even in that context. We have reappraised our forecast and cut 2013 and 2014 [earnings] by 8% and 14% respectively. With no visibility on where UK profitability will bottom and too many of its overseas businesses face trading issues shorter term, we reiterate our reduce recommendation and cut our target price to 290p from 310p.
Caroline Gulliver at Espirito Santo said:
The deteriorating outlook for Tesco's international business, for both structural and cyclical growth, leads us to cut our group pretax profit estimates by 10% for 2013 and 16% for 2014. We believe Tesco is in transition and may well emerge a well-run, mature retailer with operating margins of over 5% and a cashflow yield above 10%. At which point we would see value in the shares up to 380p. But we are not there yet and with several obstacles on the path we cut our fair value by 10% to 300p and keep our neutral rating.
Overall the market end the week on a positive note, boosted by better than expected US jobs figures, with the FTSE 100 finishing 43.24 points higher at 5871.02. Despite continuing concerns about the eurozone crisis - with the problems in Spain, Greece and Portugal far from resolved - the leading index added nearly 130 points over the course of the week.
Commodity companies were among the main gainers after the US data suggested brighter prospects for the global economy. Eurasian Natural Resources Corporation led the way, up 18.6p to 333.3p. Analysts at Credit Suisse said:
With the strong pick-up in nickel prices (lead indicator for stainless demand), rising stainless prices in Europe and potential supply risk in South Africa (strike risk spreading) we expect the fourth quarter to be a trough for prices and, given very weak recent performance, ENRC shares could see improved momentum near term.
Fellow Kazakh miner Kazakhmys climbed 31.5p to 738p, while Vedanta Resources rose 36p to £11.01. Evraz, the Russian steelmaker controlled by Chelsea football club owner Roman Abramovich, recovered from a fall on Thursday in the wake of news it was taking a majority stake in coal miner Raspadskaya. Its shares ended 9p to 254.1p. In a hold note, analysts at Societe Generale said:
The deal is somewhat unexpected but is the logical conclusion to a prolonged saga of love and resistance as Evraz made unsuccessful takeover attempts before. The valuation looks pricey but we expect limited impact on the share price.
But engineering and design firm WS Atkins fell nearly 5%, down 34p to 695p after reports its role in the West Coast franchise fiasco was being investigated. The franchise was taken away from the winner, FirstGroup, after irregularities in the bidding process. Atkins - along with law firm Eversheds - had reportedly been hired in January to give technical advice on the franchise process. David Brockton at Espirito Santo said:
Should any review find Atkins to have been at fault during this tender process, then clearly it could have a negative reputational impact for the group, given this represents a high profile tender.
Andy Brown at Panmure Gordon added:
[The report] is unlikely to be helpful for the share price in the short term. That said, Atkins has strong rail expertise so we expect it to continue to play an active role in a strategically important infrastructure sector over the medium term.
Previously it suffered from negative sentiment surrounding its involvement in Metronet [the Tube consortium] but that did not stop it winning future government related work.
Meanwhile FirstGroup fell 4.5p to 196.1p having lost 20% on the day the franchise was withdrawn.
Elsewhere energy services business Wood Group added 22.5p to 833.5p after an upbeat trading statement, with the company saying it was confident of meeting full year expectations. The engineering division continues to perform well, with a number of contracts in the Gulf of Mexico, and it confirmed its contract problems in Oman would lead to a $15m-$20m loss from its business there.
Keith Morris at Investec kept his hold rating an 800p price target:
Today's statement does not highlight any significant changes to the 2012 outlook since the Interims at the end of August. With a rating in line with its large cap peers, we see no specific catalysts for outperformance.
Kingfisher climbed 1.6p to 270.3p despite Morgan Stanley downgrading the DIY chain from overweight to equal-weight. It said the retailer's shares had been weighed down by concerns about its French business, but investors should possibly be more worried about B&Q in the UK:
B&Q has delivered just five quarters of positive like for like growth in the last 7.5 years. Gross margin improvements and cost savings have mitigated the top-line weakness thus far, but with first half profits down 24%, we fear that 'self help' may no longer be enough to sustain the chain's recovery.
AstraZeneca added 7.5p to 2918.5p, as traders suggested Monday's decision by new chief executive Pascal Soriot to halt its share buyback programme could mean it was on the takeover trail. US group Forest Laboratories was one name mentioned as a possible target.
Among the mid-caps, the biggest loser was Kcom. The telecoms group fell 5.6p to 78.75p after reporting lower than expected growth in its business and public sector markets.
Mitchells & Butlers rose 5.6p to 306.6p after this week's news that horseracing tycoons JP McManus and John Magnier had bought 7m shares in the pubs group through their Elpida vehicle, taking their stake to 22.47%. Joe Lewis, the billionaire currency trader, owns 26.3% and saw two bids for the business rejected last year. Shareholders have been unhappy about the dominance of the major shareholders, with no independent directors on the board.
In a buy note Nick Batram at Peel Hunt moved from hold to buy. He said:
Few would argue that M&B has not got a high quality estate, but extracting the full potential from its assets has proved frustratingly difficult. This has been further compounded by the boardroom sideshow played out over the past few years. However, we believe that a platform (built on management stability and culture change) is now in place to finally deliver the potential that M&B has long held.
Finally Pursuit Dynamics lost a quarter of its value, down 2.05p to 6.075p after the company said it was seeking new funding as it awaited firm orders for its process technology equipment. It hopes to provide an update by the end of the month. In March this year the company raised £9.4m with a rights issue, eight months after an £8m placing. It said:
[The company] has a growing pipeline of quotations and prospects in its public health & safety and brewing, food & beverage businesses, a number of which the board believes will be converted into orders in due course but their timing is such that they will not eliminate the need for additional funding.
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