The Expert View: Shell, British American Tobacco and Drax

We’ve chosen some of the best comment from analysts to give you their views on Shell, British American Tobacco, Drax, Pace and Daily Mail & General Trust.

Key stats
Market capitalisation	£138,629m
No. of shares out	6,350m
No. of shares floating	6,232m
No. of common shareholders	not stated
No. of employees	90000
Trading volume (10 day avg.)	5m
Turnover	389,894m USD
Profit before tax	25,639m USD
Earnings per share	4.12 USD
Cashflow per share	5.97 USD
Cash per share	1.51 USD

*Correct as at 26 Jul 2012

Oriel backs Shell despite earnings miss

Richard Griffith, analyst at Oriel, has reiterated his 'buy' recommendation on oil major Royal Dutch Shell (RDSb.L) in spite of second-quarter results that missed expectations.

In the three months to June profits came in at $5.72 billion, missing consensus expectations of $6.3 billion and down 13% on the same period last year. The group said production volumes and liquefied natural gas (LNG) prices were higher, but that this was offset by a 52% drop in US gas prices.

Despite the weak results Griffith remains positive: 'RDS shares outperformed both BG and BP over the last quarter underpinned by the clear strategy, project execution and secure dividend stream. The shares are not expensive trading on an estimated 2012 price-to-earnings multiple of 8.3x with a dividend yield of 5.2%.'

Over at Canaccord analyst Gordon Gray sounded more cautious: 'After the shares’ strength in the past two months we think their performance could pause in the short term. Although it looks likely that much of 2Q results weakness is due to temporary factors, the market may remain sceptical until results can be seen to improve again.'

Shares in the group closed at £22.08 on Thursday, down 57p or 2.52%.

Key stats
Market capitalisation	£64,091m
No. of shares out	1,948m
No. of shares floating	1,847m
No. of common shareholders	not stated
No. of employees	87813
Trading volume (10 day avg.)	3m
Turnover	£15,399m
Profit before tax	£3,095m
Earnings per share	156.16p
Cashflow per share	197.73p
Cash per share	114.32p

*Correct as at 26 Jul 2012

Deutsche Bank says 'hold' British American Tobacco on rich valuation

Jonathan Fell, analyst at Deutsche Bank, has reiterated his 'hold' recommendation on British American Tobacco (BAT.L), praising the group's solid first-half results but noting that its valuation means it'll need to do more than tread water for the shares to climb any higher.

Earnings in the first half were fractionally below consensus forecasts, Fell said, and organic profit growth of 6% was held back by last year's bumper profits in Japan and an excise windfall in Mexico.

'These results in themselves are admirably strong at a time when many companies and economies are struggling, but BAT's rating has reached a level when it probably needs to beat expectations regularly to move sustainably higher,' he said.

Fell's estimated 2012 price-to-earnings ratio of 15.9x is approaching an all-time high, he added.

Shares in the group, for which Fell has a target price of £32, closed at £33.39 on Thursday, up 58.50p or 1.78%.

Key stats
Market capitalisation	£1,645m
No. of shares out	365m
No. of shares floating	363m
No. of common shareholders	not stated
No. of employees	1150
Trading volume (10 day avg.)	1m
Turnover	£1,836m
Profit before tax	£465m
Earnings per share	126.42p
Cashflow per share	141.99p
Cash per share	63.81p

*Correct as at 26 Jul 2012

JP Morgan cuts target price for Drax on biomass rule change

Edmund Reid, analyst at JP Morgan, has reduced his target price for powerplant operator Drax (DRX.L) following a change in government policy on biomass subsidies that the analyst believes spells bad news for the group.

The changes to the policy mean that Drax now plans to convert three of its six generating units to be boimass-fuelled, rather than co-firing biomass and coal in all of its units.

Reid said that although on the face of it nothing has changed for Drax in that it will still be burning 50% biomass with a subsidy, the execution risk would be higher as a result of the new approach.

'Under the October consultation Drax could have chosen the conversion route, but preferred co-firing across the plant. In our view, this is because the execution risk was lower, the cash flow profile better and it provided more flexibility,' he said.

Shares in the group, for which Reid has a target price of 405p, down from 415p previously, closed at 469.00p on Thursday, up 27p or 6.11%.

Key stats
Market capitalisation	£402m
No. of shares out	305m
No. of shares floating	253m
No. of common shareholders	not stated
No. of employees	1629
Trading volume (10 day avg.)	1m
Turnover	1,489m USD
Profit before tax	25m USD
Earnings per share	0.08 USD
Cashflow per share	0.36 USD
Cash per share	0.10 USD

*Correct as at 26 Jul 2012

Jeffries ups target price for Pace

Lee Simpson, analyst at Jeffries, has increased his target price for set-top-box maker Pace (PIC.L) following the publication of a trading update that revealed improving profit margins.

In the six months ended 30 June pre-tax profit hit $21.4 million, down from $29.4 million a year ago. However, Simpson said that an improving profit margin and strong free cash flow of $94.6 million were the real news. The majority of the cash was used to pay down debt, which has fallen 24% to $243 million.

The figures for the period showed the scars of supply disruption in hard-disc drives (HDD), which Pace uses in its products. The company estimates that the issue cost it $76.8 million over the period.

Simpson has increased his target price from 148p to 168p, and retains his 'buy' recommendation on the shares.

Shares in the group closed at 143.75p on Thursday, up 8.50p or 6.27%.

Key stats
Market capitalisation	£1,696m
No. of shares out	383m
No. of shares floating	277m
No. of common shareholders	not stated
No. of employees	15157
Trading volume (10 day avg.)	1m
Turnover	£1,990m
Profit before tax	£112m
Earnings per share	29.12p
Cashflow per share	65.41p
Cash per share	45.80p

*Correct as at 26 Jul 2012

Canaccord sticks with 'hold' on Daily Mail & General Trust

Simon Davies, analyst at Canaccord, has reiterated his 'hold' recommendation on publishing company Daily Mail & General Trust (DMGT.L) following the publication of a solid set of quarterly results.

In the three months to July 1 group revenues rose 3% to £509 million, and the trading outlook for the year remains unchanged.

The group's business-to-business publications arm continues to do well, Davies noted, but the real surprise was in newspapers, where a combination of cost cutting and the success of the Daily Mail website has reaped rewards.

'Associated delivered an advertising recovery – a 69% uplift from digital (i.e. Mail Online) more than offset a 5% decline in print advertising, a potential tipping point,' he said.

'We have a sum of the parts valuation of 528p... but think a discount is justified, given the family ownership structure. We retain our Hold recommendation and 415p target price,' the analyst concluded.

Shares in the group closed at 444.50p on Thursday, up 7.75p or 1.77%.