The Expert View: Rio Tinto, ABF and Wood Group

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Key stats
Market capitalisation £63,447m
No. of shares out 1,719m
No. of shares floating 1,121m
No. of common shareholders
No. of employees 46,807
Trading volume (10 day avg.) 4m
Turnover 31,033m USD
Profit before tax 13,912m USD
Earnings per share 3.96 USD
Cashflow per share 5.89 USD
Cash per share 5.13 USD

Liberum upgrades Rio Tinto on promising China property market

Improvement in the property market of top metals consumer China has led Liberum to upgrade its rating on mining giant Rio Tinto (RIO).

Analyst Richard Knights raised his rating to ‘hold’ from ‘sell’ and upped his target price from £27.50 to £36. The shares were trading at £36.98 yesterday.

‘China’s property market appears to have turned, albeit we don’t think sustainably, minimising downside risks to Rio’s share price in the short term,’ he said.

‘Apparent steel consumption is more closely linked to real estate fixed asset investment (FAI) which is lifting, not infrastructure FAI which has faltered, but is being addressed.

‘We don’t think this uplift has the foundations of another full upcycle given the weakness in credit growth, but given the July acceleration in Chinese floor space new starts, sales and prices, it’s difficult to see how bulk metals demand won’t be supported in the short term.’

Key stats
Market capitalisation £18,288m
No. of shares out 792m
No. of shares floating 347m
No. of common shareholders
No. of employees 132,590
Trading volume (10 day avg.) 1m
Turnover £15,357m
Profit before tax £1,843m
Earnings per share 151.65p
Cashflow per share 225.57p
Cash per share 195.79p
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Jefferies eyes ‘ideal opportunity’ to buy ABF

Jefferies has maintained its ‘buy’ rating on Associated British Foods (ABF) ahead of a market update from the food group and Primark owner next month, believing the bad news surrounding the stock to be priced in.

‘ABF’s 10 September pre-close update should reiterate ongoing sugar pricing pressures and pre-empt input challenges to Primark’s margin,’ said analyst James Grzinic.

‘We believe the shares already price in these commodity-related, temporary challenges. We remain on ‘buy’ and believe current conditions represent an ideal opportunity for fundamental investors to get involved.’

Grzinic cut his estimates of Primark’s margins, resulting in his target price falling from £32 to £28, still ahead of yesterday’s £23.20 share price.

He has pinned his ‘buy’ case on potentially improving margins and international expansion for Primark, an easing of the European sugar market and the shares’ ‘valuation attraction’, on less than 17 times 2019 earnings.

Key stats
Market capitalisation £5,192m
No. of shares out 678m
No. of shares floating 649m
No. of common shareholders
No. of employees 29,301
Trading volume (10 day avg.) 2m
Turnover 4,182m USD
Profit before tax 282m USD
Earnings per share -0.06 USD
Cashflow per share 0.27 USD
Cash per share 1.50 USD

‘Optimistic tone’ powers Wood Group shares

Numis has raised its target price on Wood Group (WG) after strong half-year results from the oil services company.

Analyst James Hubbard, who has an ‘add’ rating on the shares, upped his target from 740p to 820p after the group delivered first-half profits towards the top end of forecasts.

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The shares have risen by nearly 10% since Tuesday’s results, and were yesterday trading at 726.4p.Hubbard said the results featured ‘an unambiguously more optimistic tone’, and that this, rather than just the numbers, was driving the share price response.

‘We believe the share reaction was more driven by management commentary, not just for the second half of the year, where margin guidance leaves consensus earnings of $632 million looking easily achievable, assuming continued modest activity gains, but also for the medium term (‘good prospects and improving conditions across energy and industrial markets’).’

Key stats
Market capitalisation £475m
No. of shares out 106m
No. of shares floating 103m
No. of common shareholders 8,909
No. of employees 4,118
Trading volume (10 day avg.) 0.1m
Turnover £1,684m
Profit before tax £52m
Earnings per share 30.55p
Cashflow per share 37.68p
Cash per share 235.62p

Costain offers ‘good value’ infrastructure play

Peel Hunt is sticking with its ‘buy’ rating on Costain (COSG), believing shares in the engineering and construction group offer ‘good value’ as a way to tap into infrastructure spending.With the shares trading on 11 times 2019 earnings and offering a 4.1% yield, analyst Andrew Nussey said they were ‘one of the best positioned plays on UK infrastructure’.

‘The order book, preferred bidder work and management’s confidence in the bid pipeline provides a high degree of certainty over our near-term expectations,’ he said.

‘The shares are attractively positioned to benefit from increasing infrastructure investment as well as from management’s continuing focus on driving further earnings quality.

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‘Moreover, the underlying 2018 net cash position provides management with options to not only maintain the pace of organic growth but support further modest bolt-on acquisitions.’

Key stats
Market capitalisation £1,899m
No. of shares out 238m
No. of shares floating 217m
No. of common shareholders
No. of employees 12,222
Trading volume (10 day avg.) 0.4m
Turnover £2,716m
Profit before tax £202m
Earnings per share 53.60p
Cashflow per share 72.16p
Cash per share 106.90p

Grafton keeps a lid on expectations

AJ Bell believes Grafton (GFTU_u) could be ‘under-promising in the hope of over-delivering’ as the building materials supplier unveiled strong first-half results.

‘Better than expected profits and a robust start to the second half suggests that unchanged full-year guidance could be a bit conservative,’ said investment director Russ Mould.

‘As well as providing some scope for outperformance it also provides a measure of insurance if the UK or Irish businesses are impacted by Brexit-related uncertainty.

‘Encouragingly the acquisition of central London DIY chain Leyland SDM, which completed earlier this year, is making a good early contribution to the business.’


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