MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK’s financial pages.
Three to buy
Melrose
Shares
This turnaround specialist has a solid record of creating shareholder value using its “buy, improve, sell” model: it has returned surplus cash worth a combined 463p a share to investors since 2007. Now, having finally won the £8.1bn battle for UK engineer GKN, there is “substantial scope” to improve GKN’s profit margins. Once Melrose’s management spells out the scale of the probable upside, the share price should start rising. 218.5p
Hotel Chocolate
Investors Chronicle
The confectionery group has grown sales by 12% over the past financial year, which reflects new store openings, a strong online showing and new products. Hotel Chocolate will have around £1m-worth of exchange-rate-related expenses this year, but it is keeping a tight lid on costs across the rest of the business. A 34 times forward earnings price tag may “feel a touch rich”, but this is one of the most compelling brands to emerge from the sector in recent years. 340p
Alphabet
The Times
Google’s parent owns Gmail and YouTube as well as making the Android mobile operating system. It has a venture-capital business and develops driverless cars through its Waymo subsidiary. Its second-quarter results last week showed that revenues rose by 25.5% to $32.7bn in the three months to June compared with the same period last year, far exceeding analysts’ expectations. Alphabet’s earnings are so high that it can buy its way out of trouble with regulators. The stock is valued at 66 times last year’s after-tax profits. In this case, it’s worth it. $1,258
Three to sell
Vodafone
The Times
The telecoms giant is suffering from weak markets in Spain and Italy. Its first-quarter revenues were down 4.9% owing to new accounting rules, while underlying sales were 1.1% higher. This “lacklustre update” was not a great exit for outgoing CEO Vittorio Colao. In May Vodafone paid Liberty Global €18.4bn for cable networks in Germany and eastern Europe. Its 7.4% dividend yield will tempt income investors. Still, regulatory headaches mean the stock is best avoided. 175p
Metro Bank
Investors Chronicle
The challenger bank became profitable last year, but the price of progress has been steep. Metro Bank recently raised £300m – representing about 10% of previously issued share capital– via a share placing. Loan growth is outstripping deposit growth and regulatory capital levels have fallen. The move follows a £278m placing last year. The shares are on 2.7 times Investec’s forecast net tangible assets at December 2018. That’s at the upper end of the sector and a valuation unwarranted by its weak returns on equity: just 1.2% in 2017. 3,374p
Travis Perkins
The Sunday Times
This builders’ merchant often cites the weather to explain its fluctuating performance. First, the chilly Beast from the East turned homeowners off DIY. Then a warm start to the summer had families searching for garden sheds. Because Travis Perkins has no overseas business to offset domestic trouble, it is vulnerable to swings in consumer confidence. In May it was forced to axe a third of its head-office jobs. Avoid. 1,338p
…and the rest
The Daily Telegraph
Interactive display maker Zytronic is leading its market. (467.5p). Thanks in part to its largest-ever acquisition, engineer Weir Group expects to double profit growth over the next five years (1,940p).
The Times
Investors should wait until online publisher Relx has rejigged its dual Anglo-Dutch listing to make London its main home before buying in (1,713p). Shares in advertising giant WPP look cheap, but there is too much uncertainty as it attempts to adjust to changes in the advertising industry – sell (1,191p). Sthree is the smallest and the most specialised of Britain’s public recruitment companies, but “offers the best value if you’re tempted by the sector” (351.5p).
The Mail on Sunday
Tax Systems provides software for the UK’s biggest firms, helping them navigate the government’s increasingly complex demands (85.5p).
Shares
Following two profit warnings and a restructuring, household-to-personal-care products supplier McBride, whose brands include Surcare, is a “much simpler business with a clearer focus” (139.5p). Data regulation worries have bogged down digital marketing firm DotDigital this year, but now its stock has scope “to run fast and far” (95p).
Investors Chronicle
Copper mining company KAZ Minerals is forecasting a threefold increase in shareholders’ equity by the end of 2020 (785p). Last year foreign-exchange provider FairFX posted its first profit since listing in 2014, and 2018 could be an even better year for the group (126p). Life-insurance business Chesnara has a solid track record of raising the dividend – some analysts are forecasting a 5.4% yield this year (386p).
A German view
The Navigator Company, Europe’s top producer of uncoated printing and writing paper, is one of Portugal’s biggest brands, says WirtschaftsWoche. It accounts for 3% of the country’s total exports; 70% of group sales take place in Europe. The paper division comprised three-quarters of the group’s €817m turnover in the first half of 2018. Navigator’s wood waste powers biomass energy plants; the energy division is worth 10% of turnover. The company is fully energy self-sufficient. Navigator recently sold a US pellets business, allowing it to make a significant dent in its borrowings. The shares look reasonably valued on a 2018 price-earnings ratio of 15 and yield almost 5%.
IPO watch
Server and cloud-computing group UKFast is considering an initial public offering (IPO) at a reported valuation of £350m to finance further acquisitions. The Manchester-based group, founded in 1999 by Lawrence and Gail Jones, acquired public-sector cloud and security specialists Secure Information Assurance (SIA) last year, expanding its access to government contracts. The group now provides dedicated servers and cloud services to more than 5,000 public-sector and commercial organisations. The vast majority of its sales are generated within the UK. Last year UKFast reported an 18% rise in organic revenue to £47m alongside profit margins of almost 50%.