5 Picks and Pans from UK Markets

05/03/2013 7:00 am EST


Royston Wild

Equity Market Sector Correspondent, Shares Magazine

Royston Wild of The Motley Fool UK studies this group of London-traded stocks to see if any are buys.

Although Britain's foremost share index has risen 9.3% so far in 2013, I believe many London-listed stocks still have much further to run, while conversely others are overdue for a correction.

So how do the following five stocks weigh up?

BT Group
I believe that BT Group (London: BT-A) is ready to accelerate earnings in coming years, as its "triple play" services covering the television, broadband internet, and telephone spaces move significantly higher.

The company is stepping up the fight with broadcasting behemoth British Sky Broadcasting Group prior to the launch of its BT Sport channel in the summer, which it hopes will reshape the sports broadcasting landscape in Britain and attract customers away from its rivals.

Earnings per share are ready to edge 5% higher in 2013, according to broker estimates, results for which are due on May 10. A 1% advance has been penciled in for the following year, before picking up in 2015 to growth of 7%.

And BT Group offers investors access to chunky dividends ahead of an average forward yield of 3.3% for Britain's 100 largest-quoted companies. An expected yield of 3.4% for 2013 is anticipated to rise to 3.8% and 4.4% in 2014 and 2015 respectively, with a projected dividend of 9.4p for 2013 expected to advance to 10.7p in 2014 and 12.1p in 2015.

The firm currently deals at a P/E rating of 11.3 for 2014, representing a chunky discount to a prospective earnings multiple of 14.7 for the entire fixed line telecommunications sector, and 14.9 for broadcasting rival Sky. I believe that this is temporary given BT's solid earnings potential and progressive dividend policy.

I reckon that education and media publisher Pearson (London: PSON) is a hugely risky stock selection at present, as severe weakness in its key markets persists and its £150 million ($233 million) restructuring plan to address nose-diving profits carries heavy uncertainty.

The firm reported a 59% slump in pre-tax profits in 2012, to £434 million, as difficulties in its traditional markets weighed on performance. The firm has outlined an aggressive transformation program to hasten the move to digital from print, and improve operations in developing markets.

City forecasters predict earnings per share to drop 6% in 2013, to 79p, before rebounding to post 14% growth next year to 90p. The company was recently changing hands at a P/E rating of 14.5 for 2013, representing a premium to a prospective earnings multiple of 12 for the whole media sector. But its P/E is projected to fall to 12.7 in 2014.

Pearson has continued to build the dividend in recent years, and raised the full-year payout to 45p last year from 42p in 2011. And analysts expect these to come in at 47p and 49.8p this year and next, carrying yields of 4.2% and 4.4%.

However, I believe that the potential for fresh earnings pressure represents makes Pearson too risky a pick at present, a scenario which could herald yet more severe share price weakness.

Royal Bank of Scotland
I believe that the multitude of issues which continue to loom over RBS (London: RBS) present too much earnings risk, and believe that investors can find better value and less potential turbulence amongst other banking stocks at the current time.

The bank has attracted a fresh flurry of bad press in recent weeks. In March, the Financial Policy Committee announced the existence of a £25 billion capital shortfall in the British banking sector, funds required to cover the fallout from recent scandals over payment protection insurance (PPI), bad loans, and other risks.

In addition, fresh legal action was launched by the RBS Shareholders Action Group against the firm's former directors. The collective is seeking up to £4 billion in compensation, claiming that directors "sought to mislead shareholders by misrepresenting the underlying strength of the bank and omitting critical information" relating to the rights issue back in 2008.

Investec expects earnings per share to come in at 8p this year, recovering from massive losses per share of 54.3p in 2012. This is then anticipated to surge more than 160% in 2014, to 21p.

However, Royal Bank of Scotland was recently trading at a P/E reading of 37.6 for 2013 and 14.3 in 2014, which compares extremely unfavorably to a prospective earnings multiple of 12.7 for the whole banking sector. I believe that these ratings are unreasonable given the degree of doubt still circling the group, which could whack earnings further down the line.

Aberdeen Asset Management
I am backing shares in Aberdeen Asset Management (London: ADN) to gain momentum once again and punch fresh highs on plump earnings growth prospects and increasingly lucrative dividends.

The company announced last month that assets under management rose 10% to £212.3 billion as of the end of February from the close of 2012. As well, net new business inflows during the five months up to February's end stood at £4.6 billion, versus a £1.4 billion net outflow during the corresponding 2012 period.

And City analysts expect activity to keep rolling, with earnings per share predicted to advance 13% in 2013 to 28p, before treading 18% higher in the following year to 33p.

As well, investors can look forward to an increasingly generous dividend policy, with last year's full-year 11.5p payout expected to increase to 13.8p this year and 16.3p in 2014. These prospective payments carry yields of 3.4% and 4.1%.

Aberdeen Asset Management currently trades at a P/E ratio of 15.2 for this year, providing a significant discount to a prospective earnings multiple of 20.6 for the whole financial services sector, and it is projected to drop even further to 12.8 in 2014. In my opinion, this presents outstanding value.

Intu Properties
I believe that real estate investment trust Intu Properties (London: INTU) is set to experience renewed share price weakness amid enduring difficulties for the beleaguered High Street shopper.

Almost all of Intu Properties' portfolio consists of assets outside London, making it even more prone to ongoing difficulties in the UK retail sector.

The firm—which placed 86 million shares in February to fund the purchase of the Midsummer Place shopping centre in Milton Keynes—announced in the same month that net asset value per share remained flat at 392p in 2012, while the occupancy rate fell to 96% as of the end of last year, from 97% previously.

Earnings per share are set to drop 1% to 15.9p in 2013, according to analyst forecasts, before edging 3% higher during the following 12 months to 16.4p. The company has continued to build dividends, and the full-year payout for this year and next carry yields of 4.4% and 4.5%. However, the emergence of heavy earnings pressure could potentially force these lower.

Intu Properties was recently dealing at a P/E ratio of 21.3 and 20.7 for 2013 and 2014 respectively, cheap at first glance when compared with a forward earnings multiple of 25 for the entire REIT sector. But I believe that the firm's lower rating is justified given its meager medium-term earnings potential.

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