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Weekly share-tip roundup: Buy Legal & General, sell Fever Tree

18 March 2016

Tempus warns the cost of expanding distribution is eating into margins for Fever Tree, but said the sell-off in Legal & General was unwarranted following a solid set of results.

By Tony Cross,

Market Analyst, Trustnet Direct

Wednesday’s Budget had a major impact on UK stocks, with tax breaks for oil producers helping the sector to surge, while the sugar tax hit a number of soft drinks producers. However, it had little bearing in this week’s roundup of share tips from Trustnet Direct.

 

Tuesday

Fever Tree – Sell

Tempus kicked off this week’s round-up by recommending investors sell out of Fever Tree – and this was before the realisation that the sugar tax announced in the Budget would apply to the tonic water it produces. Shares have soared over the last few years: having floated at 134p in November 2014, they closed on Monday at almost 600p, propelled higher by more solid results. The market for premium mixers still has plenty of potential, but the cost of expanding distribution is eating into margins for the business. Shares are currently selling on around a 40 times multiple, which is a little toppy for the column – now is probably a good time to exit.

Performance of stock since floatation

Source: FE Analytics

 

UDG Healthcare – Hold

Questor recommended selling out of UDG Healthcare. The company has been granted the regulatory approval to dispose of its distribution business and the column thinks this will leave a leaner operation as a result. This is an interesting situation – the distribution business was the biggest driver of revenues, but the profit margin was low. Scaling up this side of the operation was the only way to drive down costs, but instead by cashing out, the company now has capital to invest in more lucrative areas. There are high hopes for the drug packaging business it owns, which is expected to increase profits and revenues by 10 per cent over the next two years. While this sort of move could be regarded as a buying opportunity, shares have come up a long way over the last two years and currently trade on a 24 times multiple. A long-term "hold" is about as good as it gets.

 

Wednesday

Legal & General – Buy

Buy Legal & General, was the message from Tempus on Wednesday. The market reacted badly to Tuesday’s results despite the fact the company looks well positioned across the board. The only real chink in the armour appeared to be the fact the capital surplus wasn’t quite as high as that of its peers, although it was still comfortably above target. Given there is a solid dividend yield – which was again increased on Tuesday – the sell-off looks overblown, according to the column.

French Connection – Sell

Questor said investors should avoid French Connection. With only a quarter of sales coming through online channels, the retailer is seen as being more exposed than many of its peers to the fickle high street shopper. Wholesale and retail operations are struggling and despite store closures, the company is bleeding cash – the £23m in the bank at the end of January 2015 is now down to £14m. Shares currently trade at around 45p and although the stock may have an NAV of around 55p, this is mainly inventory and debtors. Any further deterioration in consumer confidence could leave investors badly exposed.

 

Thursday

Smiths Group – Sell

Avoid Smiths Group, was the message from Tempus yesterday. The company is set to drop out of the FTSE 100 next week and Wednesday’s results showed the five component parts of the engineering conglomerate are pulling in different directions. Work in the oil sector continues to prove sluggish, but the company has aspirations to increase its presence in emerging markets such as China. The medical arm of the business is also performing well and there is always the potential for the company to be broken up, but with a 4 per cent dividend yield and selling on 13 times earnings, the shares hardly scream “bargain”.

 

 

Friday

Kier Group – Buy

Tempus tipped Kier Group earlier this morning, pointing out the company appears to be on something of a roll when it comes to making astute acquisitions. The synergies delivered by the purchase of Mouchel last year and May Gurney in 2013 have exceeded expectations and the business is well placed to pick up the UK infrastructure contracts confirmed in this week’s Budget. With a yield of 5 per cent and trading on a multiple of just 12.5 times, this looks like a well-placed business given the strength of future workflows.

Gulf Keystone – Sell

Sell Gulf Keystone, was the message from Questor. The column reports that shares in the company tanked to a seven-year low on Thursday after it cautioned it may not be able to meet debt repayments that fall due in April. The group was put up for sale at the start of last year but has been unable to find a buyer. Although it is owed at least $100m from the Kurdistan government for oil exports, this needs to be put in the context of the fact there’s a $26m coupon payment and a $250m debt repayment both due in April. The company may be committed to strengthening its balance sheet, but this remains a challenging place to be – even as oil prices start to tick higher.

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