Broker tips: Carillion, Pearson, Bellway

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Broker tips: Carillion, Pearson, Bellway

Tue, 11 July 2017
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Broker tips: Carillion, Pearson, Bellway

(ShareCast News) - Embattled construction and support group Carillion plummeted lower for a second day on Tuesday, as analysts picked apart the company's horrendous trading update at the start of the week.
After losing more than a third of their value on Monday, shares in the FTSE 250 company fell another 15% on Tuesday morning to reach levels not seen since late October 2000, before taking a further leg lower below 90p to make it a 55% fall in two days.

Interim chief executive Keith Cochrane will now start a strategic and balance sheet review which will be presented with interim results in September, with no options ruled out.

Analysts at UBS, which maintained its 'sell' rating on the shares, said the main question now was how can the company recapitalise itself, being "in a tough position" with leverage of around £1.45bn being more than six times estimated adjusted operating profits of £227m for the full year, even before taking account of £420m of average reverse-factoring.

With Carillion reassuring about its debt covenants UBS saw "no immediate liquidity issues" but said the strategic and balance sheet review could include the raising of fresh equity, a debt-to-equity swap, asset disposals or a combination of all three, though disposals may hit earnings.

"The potential outcome for current shareholders remains highly uncertain at this stage," the Swiss bank said, giving a sum-of-the-parts estimate of the shares of 78p.

Broker Investec has rated Pearson shares a 'hold' after the company on Tuesday announced a $1bn deal to sell a 22% stake in Penguin Random House to Bertelsmann.

The sale is designed to bolster Pearson's balance sheet, with £300m to be given back to shareholders in a buyback.

Investec said it had forecast a halving of the Pearson dividend later this year as the company looks to strengthen finances and pay off debt.

"There is no change to underlying business challenges, but this looks a tidy deal in our view to retain 25% of a cash generative business and helps the balance sheet," Investec said in a note.

Analysts at Credit Suisse hiked their target price on shares of Bellway, highlighting the company's improved guidance and its ability to increase its rate of completions still further thanks to strong demand for affordable housing.

Following the homebuilder's upwardly revised guidance for completions in fiscal year 2017, the Swiss broker reaffirmed the company shares as their 'top pick' in the sector.

In its latest trading update, Bellway boosted its forecast for the expected rate of growth in unit completions in 2017 from "in excess of 5%" to "approach 10%".

Should it beat that new target, it would mark its fourth consecutive year of double-digit volume growth, the broker said.

On that same occassion, Bellway also bumped up its forecast for its operating margins in 2017.

Credit Suisse believed the firm had the operational capacity to deliver more than 11,000 units per year, versus a run-rate for the current fiscal year of 9,593.

That led the analysts to project that the outfit's earnings per share would grow at an average rate of 15% between fiscal years 2017 and 2019.

They also called attention to the fact that the shares were changing hands at an 18% discount to those of its peers in terms of their price-to-tangible net asset value multiple.

Credit Suisse raised its target from 2,976p to 3,545p and stuck to an 'outperform' recommendation.