Five shares

to watch - updated
Steve Clayton
Head of Equity Research
At the end of last year, I wrote about five shares I would be watching
in 2015 and now, halfway through the year it seems a good moment
to take stock of progress.

The investments highlighted are not personal advice, if you are

unsure about the appropriateness of an investment for your
circumstances please seek advice. All investments should be held
for the long term as their value can fall as well as rise, therefore
investors could get back less than they invest. Dividend yields,
where quoted, will vary over time, so income is variable and not
guaranteed. Past performance should not be seen as a guide to
future returns. All investments can fall as well as rise in value.
Source for performance figures: Bloomberg from 2 Jan 2015 to close
of business 8 July 2015, all other information correct as at 9 July
2015.

British Telecom
Robust progress, is there more
to come?
s 9.8%
BT Group has had an eventful few months. It has made progress
on its TV plans with a further acquisition of Premiership football
rights, via an auction which saw rival Sky pay an extraordinary
premium to secure its place at the table, whilst BT kept a cap on
the extra amount it was forced to pay up. Having initially used free
Premiership rights to bolster their broadband market share, BT is set
to monetise the value of its Champions League rights by introducing
paid-for channels.
So far, the market seems content with how BT is playing this game;
the shares are up 9.8% so far this year.
The restructuring of UK telecoms continues apace, with BT at the
centre of it all, through its acquisition of mobile operator EE. The
deal is still being pored over by regulators, but if it goes ahead,
BT will gain pole position in the UK mobile market, to add to its
dominance of broadband and landlines. Add in the increasingly
strong BT TV proposition and BTs ability to compete in the
emerging quad-play world looks good.
Rivals are not standing still; Vodafone and Liberty Global, owner
of Virgin Media are talking about asset swaps that could see their
two UK networks combine, adding fibre broadband to Vodafones
mobile network. Mobile operator Three has agreed to buy rival O
and there is chatter that BT could be obliged to spin-off Openreach,
its infrastructure business that runs the fixed line network.
Newspaper reports suggest that Vodafone and Vivendi are both
keen to acquire Sky, but so too are the Murdochs, through their 21st

How to
buy BT shares

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share price

Century Fox vehicle, which already owns 39%.

BT is paying most of the 12.5bn acquisition cost of EE with new
shares, issued to EEs former parents, Deutsche Telekom and Orange.
That will make them big investors in BT and we have seen stories in
the market suggesting that DT may be thinking of ultimately seeking
to merge with BT altogether.
Along the way, BT reported well received full-year numbers,
including a 14% increase in the dividend, with a promise to lift it
by 10-15% in the current financial year too. The pace of change in
BTs world is blistering at the moment, but with underlying progress
looking robust, and cash coming back to investors through the
rising dividend, I believe there still seem plenty of reasons to keep
BT on the radar.

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Five shares to watch in 2015

Ted Baker
lev radin / Shutterstock.com

Can they continue rapid growth?

s 29.23%
Ted Baker reported excellent first-quarter trading in June, having
previously released strong full-year results back in March. Just as
well, given that the stock price has risen strongly; the shares are up
29.2% so far this year.
The business has quite simply been trading its socks off. Wholesale
sales in Q1 were up over 40% on the prior year, whilst retail sales
were up almost 20%, on the back of new stores and strong like
for likes. The global reach of the brand is steadily increasing,
with stores opening in Hong Kongs Causeway Bay and London
Spitalfields, so far this financial year.

How to buy Ted

Baker shares

The longer-term outlook for Ted seems bright. Wherever Ted goes,
he seems to get a warm reception, suggesting that international
expansion could carry on for a long time to come. But fashion is not
without risk. Expectations are high, as witnessed by a valuation
that leaves Ted standing on circa 30x current year consensus
earnings, well above the groups typical forward rating of circa 17x.
It may be hard to match Q1s run-rate in the rest of the year.

View the latest

share price

could struggle to keep the pace up. The longer-term outlook still
appears to be one of steady growth, in the store estate, and the
range of the brand. If a weaker quarter or twos sales growth leads
to a pull-back in the stock, that could be an opportunity to gain
access to the longer-term growth profile at a lower rating than
currently demanded. Time will tell.

So Ted is a business performing well, but perhaps so well that it

Johnson Matthey
Paolo Bona / Shutterstock.com

A poor 6 months but still one to watch?

12.58%

Of the five shares, Johnson Matthey has been the laggard, with the
stock falling by 12.6% in the first half of the year. Recent results
showed a curates egg performance. Underlying growth in the
core Emission Control division, which makes exhaust catalysts
for cars and trucks, was strong, with profits up 21%. Precious
Metals Products earnings fell by the same percentage, reflecting
the already known loss of a contract to market platinum on behalf
of Anglo Platinum. Overall, the results showed encouraging
underlying progress.
Cash conversion though was weak, partly reflecting a build-up of
platinum stocks, taking advantage of a fall in the metals price, but
also reflecting the rising importance of Asian car manufacturers,
who demand longer credit terms than traditional clients. The
group also faces lower demand in some of its Process Technologies
businesses as a result of the slowdown in the Chinese economy and
the weaker oil price, which is affecting investment decisions in the
petrochemicals sector .
Life is clearly less straightforward for Johnson Matthey than I had
expected at the beginning of the year, but I think the longer-term
picture of constantly rising pressure to make transportation and
industry greener, will remain firmly in situ. There are very few large
scale manufacturers of catalytic converters, with Matthey one of
the top three, globally . As emissions standards tighten, the barrier
to entering catalyst markets rises, because the skill base required
becomes harder and harder to replicate.

How to buy Johnson

Matthey shares

View the latest

share price

At a time when the UK market feels quite highly rated, Johnson

Mattheys valuation looks interesting. According to Bloomberg,
the FTSE 100 has typically been valued at around 11x forward
earnings over the last decade or so. Today it stands on over 15x.
Johnson Matthey typically trades on around 16x forward earnings
, and today it is very close to its longer-term average, so investors
are paying little more than a market average rating for a business
that historically has grown well ahead of the market. One to keep
watching, I think.

02

Five shares to watch in 2015

Merlin Entertainment
AZIRULL AMIN ARIPIN / Shutterstock.com

Solid, with more global expansion?

s 7.67%

Merlin Entertainments made headlines for the worst reasons earlier

this year, when two rollercoaster carriages collided at Alton Towers.
Investors need to be dispassionate about these events, when they
happen, as sadly they inevitably do on occasions. Only one ride in a
business with over a hundred trading locations has malfunctioned.
Outside the UK, few will even be aware of the accident.
The market seems to be thinking this way too. An initial drop in the
price when news of the tragedy broke, looks to have been contained.
The company had previously reported solid trading results for 2014
and topped those up with 6.5% revenue growth in Q1. I think Merlin
has it all to play for. There are huge numbers of locations around
the world where Merlin should be able to open new attractions.
The outlook for consumer spending seems brighter than for some
time, with employment strong and consumer incomes rising once
more in the UK, whilst economic growth across the G20 is expected
to be 3% or more in each of the next few years. Thats a great
backdrop for a group that earns 60% or more of sales overseas.

How to buy Merlin

Entertainment shares

View the latest

share price

Shrek-themed attractions rolling out, I think there are plenty of

reasons to keep watching Merlin. Hopefully, the stock will build
further on the 7.7% gain seen so far this year, if it keeps delivering
on growth forecasts.

With new Legolands opening in Asia in the next few years and

ITV
High expectations but will they deliver?
s 21.43%
Still free to watch, but not as cheap to buy. ITV shares are up 21.4%
so far this year, driven by a near-constant stream of profit upgrades.
These have been driven by an improving advertising outlook and
a string of earnings enhancing acquisitions of production studios.
The acquisition of Talpa brought John de Mol onto the ITV team. He
founded Endemol which went on to develop the Big Brother reality
franchise. He is now committed to staying with Talpa, within ITV,
for years to come.
ITV looks to be in a good position; its balance sheet is sufficiently
strong to keep funding the acquisition of new production houses.
That gives ITV more content to use at home and to sell abroad.
Earnings are enhanced by the deals, and ITV becomes less
dependent on terrestrial advertising revenues, which are still the
most important source of income for the group . Already, ITV is the
largest independent production house in the USA. The company
intends to push borrowing to around 1.5x earnings before interest,
tax and depreciation, if it can find the right deals. That suggests it
could spend a further billion pounds or more.

How to buy
ITV shares

If ITV can find the right deals, at sensible prices, then it could
grow even faster than the market consensus currently predicts.
Expectations are for sales to rise from 2.6bn last year to 3.25bn
in 2017, with earnings per share compounding at 10% p.a although
there are no guarantees. There arent too many stocks out there that

View the latest

share price

have the potential to deliver that sort of growth, which is why I am

going to keep watching ITV a while longer.

03

Five shares to watch in 2015

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value
so you could get back less than you invest.

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