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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Why not enrich your investment portfolio with our tasty suggestions?
Thursday 19 Jan 2017 Author: Daniel Coatsworth

It’s the New Year, the perfect time to put some more money to work in the markets and give your investment portfolio a boost with some healthy new ingredients.

In particular, now is a good opportunity to use up any remaining bit of your ISA allowance to maximise tax benefits.

Not sure where to invest? Fear not, as we’ve got nine superb stock ideas in this article (and a bonus stock to watch). We’ve also got six fantastic fund ideas in our Investment Trusts section in this edition of Shares.

Investment ideas from the experts

The ideas have all been generated by the leading equity and fund analysts in the market. We explain in this article why they like the stocks and funds, and we also give our views. There are some very interesting names like publisher Bloomsbury (BMY), pipe manufacturer Polypipe (PLP) and food wholesaler Booker (BOK).

Researching the analysts’ tips has put a few stocks back on our radars including some like education technology products group RM (RM.) which we’ve not explored for a long time.

We hope the list also acts as a reminder for some of the stocks you may have forgotten, or acts as an introduction for names you find unfamiliar. There are also a few classic names which regularly appear in Shares – these are our true conviction ‘buys’.

Why should I care about the ISA allowance?

You can put up to £15,240 in your ISA before 6 April 2017 and not have to pay any tax on the dividends or capital gains generated from investments held in the wrapper.

Many people rush to use up this savings allowance at the end of the tax year. Why not take a more proactive approach and think about maximising your benefits now, rather than at the last minute?

It’s a case of ‘use it or lose it’ with the allowance. You can’t carry forward any unused portion once the new tax year starts on 6 April. On the flip side, you shouldn’t exceed the £15,240 limit. Doing so would mean you are not entitled to any tax advantages on the overpayments and you’d probably receive a call from the Her Majesty’s Revenue & Customs asking why you’ve broken the rules.


Bloomsbury (BMY) 164.18p

Market cap: £125m

Book publisher Bloomsbury is considered a 2017 winner by stockbroker Peel Hunt both on income (it has a 4.1% prospective yield) and takeover grounds. We also like the business and think its current transformation programme can help improve earnings quality and support a higher valuation.

Analyst Malcolm Morgan expects a progressive dividend policy despite the company ploughing a lot of its earnings back into the business to keep it competitive.

BLOOMSBURY PBL - Comparison Line Chart (Rebased to first)

‘Earnings per share progression is constrained not by market conditions or weak performance, but by a potentially exciting investment phase that sees the company look to accelerate the digital development within the Academic and Professional publishing element of the company,’ he says.

This shift in strategy comes under the ‘Bloomsbury 2020’ programme, launched in May 2016. The target is to achieve £15m of revenue and £5m of profit from its digital resources by the February 2022 financial year.

Several digital content sets are planned for the next few years including Bloomsbury Popular Music, Bloomsbury Design Library and Bloomsbury Architecture Library.

The company is recruiting staff to handle content acquisition as well as sales and marketing, particularly in the US. Broker Numis expects investment to peak at £2m in the financial year ending February 2018.

Huge pile of books

With a little under £10m in the bank, the remaining windfall from the big profit earned from the Harry Potter titles, Morgan thinks the company could either make acquisitions or be a takeover target itself.

The release of illustrated versions of the Harry Potter books and the success of the film version of spin-off Fantastic Beasts and Where to Find Them suggest there is remaining potential to profit from the Potter universe too. (TS)


Polypipe (PLP) 334.7p

Market cap: £663m

Shares in piping systems manufacturer Polypipe have advanced 16% since we flagged the stock’s appeal in August 2016. There could be more to come according to Numis: Polypipe is the investment bank’s top smaller company pick in the building and construction sector.

‘Polypipe has broad-based exposure to UK construction activity and a track record of outperforming its markets,’ writes analyst Christen Hjorth.

PLP - Comparison Line Chart (Rebased to first)

Operating profit at Polypipe is estimated by Hjorth to increase 27% to £69m in the year to 31 December 2016. Growth is expected to slow in 2017, although still show an improvement year-on-year.

Investors worried about the potential for a weaker UK economy in 2017 may be comforted by Polypipe’s strong performance in the 2009 recession. Earnings before interest, tax, depreciation and amortisation (EBITDA) declined only 10% that year. Chief executive David Hall says the company has a flexible cost base which can be adjusted quickly to market conditions.

Polypipe truck 1

A key risk for investors is Polypipe’s debt load, which it took on to fund the £145m acquisition of ventilation systems business Nuaire in 2015. Net debt was £191.3m at 30 June 2016, around 2.3 times trailing 12 month EBITDA. (WC)


Biffa (BIFF) 182.75p

Market cap: £456m

Waste management company Biffa is a top pick for 2017 at investment bank Peel Hunt and it looks like a good choice to us, too.

Increasing interest in the UK waste sector by foreign companies – a sign of industry strength – and a low valuation relative to a key sector peer are both grounds for optimism.

Overseas companies have been snapping up UK waste management assets in the last few months. Germany-headquartered waste management giant Remondis entered the UK market in November 2016 through the acquisition of JBT Waste Services. And in October PandaGreen, the largest waste operator in Ireland, bought five plants owned by Dorset-based New Earth Solutions.

Another bullish factor for Biffa investors is a relatively undemanding valuation following the company’s return to the London stock market in October 2016 following eight years of private equity ownership.

Biffa trades at an enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA) multiple of 5.5, a key metric used by dealmakers.

Biffa

Attero, the Netherlands’ largest waste management company, is in the process of being sold by private equity outfit Waterland for a multiple which looks more likely to be in the range of 6 to 7.5 times EBITDA. Margins are stronger at Attero and the potential deal read-across is only a very rough guide to value.

Another risk for investors is that Biffa’s former private equity owners still own 43% of the company’s stock. We would expect them to look for an exit sooner, rather than later. But we still like the investment story overall. (WC)


Cineworld (CINE) 583.97p

Market cap: £1.5bn

We all love to go to the cinema, despite the widespread availability of movies that can be watched from the comfort of your sofa at home via internet streaming services. This long-lasting appeal is a core reason why we believe every investor should have Cineworld in their portfolio.

The £1.5bn company operates 221 cinemas in eight countries including the UK, Poland, Israel, Hungary and the Czech Republic.

CINE - Comparison Line Chart (Rebased to first)

We consider Cineworld to be a very well-run business with plenty of growth potential. Pre-tax profit is forecast to advance from £107.4m in 2016 to £131.5m two years later, according to Investec estimates.

Dividends are have been growing steadily from year to year. The stock is now yielding 3.3% based on Investec’s forecast for 19.3p dividend per share in 2017. That’s a nice level of income from a stock that has also rewarded shareholders with 180% rise in the share price over the past five years.

Cineworld is one of N+1 Singer’s ‘Best Ideas’ for 2017 thanks to a very strong upcoming film release schedule. We definitely share the broker’s enthusiasm.

It also believes the company could make some more acquisitions which could generate shareholder value. Cineworld recently bought five cinemas from Empire in the UK; mainland Europe is expected to be its next hunting ground for deals.

Big films that could clean up at the box office in 2017 include new instalments in the Star Wars, Lego, Fast & The Furious and Toy Story franchises as well as a new version of Beauty & The Beast.

Cineword’s trading update on 11 January 2017 showed a very strong performance over the past year with gains across all types of revenue. That’s good given 2016 was considered to be a lacklustre year for film releases.

The company enjoyed 7% rise in sales at the box office; food and drink income was up 12.7%; and ‘other income’ rose 7% which is money from cinema advertising and distributing films to other cinema chains.

It is enjoying particular success with the roll-out of Starbucks shops in its cinemas and VIP sites. The latter features a VIP lounge where you can have a buffet before watching a film in luxury reclining seats.

Cineworld_4DX low res

Newly-appointed chief financial officer Nisan Cohen tells Shares the VIP sites aren’t cannibalising trade for Cineworld’s upmarket Picture House chain which is more of an arthouse experience with a restaurant at some sites.

Another successful innovation is the roll-out of 4DX where your seats move around in time with action on screen and you get special effects like smoke, smells and flashing lights in the cinema to reflect what’s happening in the film. Cineworld charges 30% to 40% extra per ticket for this experience, which Cohen claims is very popular. (DC)


RM (RM.) 141p

Market cap: £116m

Education software supplier RM has been in transformation mode for more than three years since chief executive David Brooks took charge. Investors are still waiting for meaningful progress, hence why the share price has been stuck in a range of approximately 120p to 170p since 2014.

Analysts believe the shares will eventually shoot up, thereby rewarding current shareholders’ patience.

RM - Comparison Line Chart (Rebased to first)

‘We think there is significant upside from the current price and for a catalyst, we have found both quantitative and qualitative evidence to suggest that industry dynamics may be better than the market assumes,’ says FinnCap.

These factors largely relate to better cost management by schools making more funds available to spend on teaching resources. RM is earning an increasing amount of revenue overseas and so should benefit from the weak pound. Its RM Education division may also return to growth this year, according to FinnCap.

The broker values the stock at 169p on a sum-of-the-parts basis or 200p fair value using a discounted cash flow model.

We believe RM’s valuation is the compelling factor. Enterprise value to earnings before interest and tax (EV/EBIT) sits at 8.7 times for the year to November 2017. In comparison, quality software businesses often trade in the mid-teens.

RM also trades on a mere nine times earnings for the current year which looks too cheap if it can beat market forecasts as predicted by FinnCap.

The broker forecasts a return to positive free cash flow in the present financial year, helping to end the period with estimated £30m net cash which is a quarter of the current market value of the business. (SF)


Renishaw (RSW) £26.99

Market cap: £1.9bn

Renishaw is a world leader in metrology equipment that monitors and analyses the work of sophisticated cutting tools in factories. It also has a healthcare division that provides specialist equipment for neurosurgery and dentistry.

RENISHAW - Comparison Line Chart (Rebased to first)

The precision engineer has made investors a lot of money over the years, yet it can be a volatile stock due to lumpy and unpredictable revenue streams.

Fundamentally it is a highly skilled company and flagged by stockbroker Numis as one of its top picks at the start of 2017. However, we only view this as a stock to watch near-term rather than a flat-out ‘buy’ at any price.

The company gave a vague outlook when it last commented on trading (13 October 2016). We want a more detailed update at the forthcoming half year results (26 Jan) before feeling confident enough to buy at current levels.

renishaw

The results should get a boost from sterling weakness as it is a classic UK exporter. Most of its costs are in sterling and it sells to foreign countries such as China, the US, Germany and Japan. (SF)


Booker (BOK) 185.9p

Market value: £3.3bn

Seekers of a secure, rising income stream should put UK food wholesaler Booker in their ISA, in our view.

Booker supplies groceries, alcohol and tobacco predominantly to independent retailers and caterers.

Its businesses include cash and carry operators Booker Wholesale and Makro, delivered wholesale arm Booker Direct, restaurant speciality food supplier Ritter Courivaud and Chef Direct.

BOOKER GROUP - Comparison Line Chart (Rebased to first)

Investec has Booker as one of its key picks for 2017. With a 210p price target, analyst Nicola Mallard explains: ‘As a large scale operator in its category we believe it should be able to keep its competitive positioning relative to smaller peers through this inflationary period.

‘We also foresee better underlying growth driven by the turnaround of Booker Retail Partners. A strong balance sheet and income attractions further support our “buy” case.’

Shares also has a positive stance on the high quality operator with a formidable record of cash generation and special distributions.

In the year to March 2016, Booker’s ordinary dividend of 4.6p (2015: 3.7p) was boosted by a further 3.2p per share capital return and boasting a plump net cash pile, Booker plans further returns of surplus cash.

Booker’s third quarter trading statement (12 January 2017) revealed excellent festive trading. Non-tobacco like-for-like sales grew by a forecast-busting 5.1% and the catering and retail sides of the business made progress. Its convenience stores Premier, Budgens and Londis all performed well. (JC)


BTG (BTG) 604.95p

Market cap: £2.3bn

Stockbroker Numis has flagged specialist healthcare company BTG as one of its top equity picks. BTG focuses on interventional medicine which aims to pinpoint issues inside the body and deliver treatments directly to where they are needed.

BTG - Comparison Line Chart (Rebased to first)

We share Numis’ positive stance as BTG is specialising in a fast-growing area of medicine that aims for better treatment outcomes and to reduce hospital admission times – all very topical.

The broker’s 900p price target implies nearly 50% upside from the current share price.

‘BTG’s blood clot and oncology businesses are genuinely world-class and with its technologies becoming better positioned in treatment guidelines, we see a business that can deliver strong growth over the medium term,’ says Numis.

a female operating nurse stands over a patient at the operating table and looks down to what she is doing in the operation. In the background the anaesthetist is looking over from his monitors . both surgeons or nurses are female in the foreground .

The broker estimates group pre-tax profit will jump from £91.6m in the year to March 2016 to £151.3m in 2018. (LMJ)


Saga (SAGA) 193.86p

Market cap: £2.2bn

Analysts at both Peel Hunt and Canaccord Genuity Wealth Management have flagged Saga as a stock to buy for 2017 and we certainly agree. It has a very strong brand and serves the richest and fastest growing demographic in the UK in the form of the over-50s. It also pays a handsome dividend, currently yielding 5.5% based on forecast 10.6p per share for the financial year ending March 2018.

SAGA - Comparison Line Chart (Rebased to first)

The insurer and travel provider said last week that it was on track to meet its full year expectations which equates to 5% to 7% pre-tax profit growth.

The company is doing work to analyse its customer base to identify high value customers and make sure it is marketing to the best people.

It is also moving away from insurance underwriting towards affinity broking which should enable Saga to pay more of its earnings out as a dividends – a shift that’s already begun.

‘Despite being best known for cruises, 90% of profits come from its insurance business,’ says Canaccord senior equity analyst Simon McGarry.

‘This is not your standard insurance company given that it runs both a home and motor insurance panel whereby third party insurers compete for new policies. This provides a platform to grow the insurance business in a capital light manner given it does not have to hold any reserves on third party policies. However, Saga staff performs all the customer service and claims management, allowing them to protect this well recognised and trusted brand,’ he adds.

The cruise business accounts for 3% of total profit at present, but this is set to increase significantly. A new ship will enter service in 2019 and there is an option for a second in 2021, with the two older ships being retired. These ships have 50% more capacity and are cheaper to run.

‘As a result the cruise business is expected to on average deliver an uplift of £60m, which equates to 34% of last year’s pre-tax group profit,’ reveals McGarry. (DC)


Next (NXT) £40.41

Market cap: £5.9bn

Shares in the fashion retailer are trading at a four-year low as a result of a series of profit warnings linked to a slowdown in its Directory arm and management having to reduce earnings guidance on several occasions.

NXT - Comparison Line Chart (Rebased to first)

We view the share price weakness as a superb level at which to buy a best-in-class retailer. You should be prepared for potential volatility in the price near term; but over time you may wish you’d bought even more at such a bargain price.

It has coped with difficult periods in the past and always recovered with great success. We don’t believe it will be any different this time.

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Canaccord shares our bullish view, saying: ‘this is a great opportunity to purchase an exceptionally well run, highly cash generative, shareholder friendly company at an attractive price.’ (DC)

 

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