Paddy Power, DCC, Kingspan top Davy ‘conviction’ list for 2017

Shares in bookmaker Paddy Power Betfair, oil distribution to IT services conglomerate DCC and insulation maker Kingspan offer the upside for investors this year, according to Davy, whose research team has compiled a new "conviction list" from 120 companies it covers.

In a note to clients on Tuesday, the country’s largest securities firm said its €124 price target on Paddy Power Betfair suggests it should rise by 30 per cent, while it sees a 26 per cent upside from where DCC is currently trading, and 24 per cent at Kingspan.

Dalata Hotel Group, Ryanair, Netherlands-based DSM, the world's largest vitamin-maker, and DSV, a Danish transport and logistics group, complete the list. All have share price targets at Davy that suggest they could rise at least 10 per cent in value.

“Our ideas are based on deep fundamental knowledge of these companies as well as the sectors in which they operate,” said Davy. “This list will be reviewed and updated on a regular basis as our ideas work [or don’t work!]”

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Earnings upgrades

The attraction in Paddy Power Betfair, the product of a merger in February last year, is its “excellent scope for earnings upgrades over time” as its profit margins are seen widening amid the group’s “unrelenting pursuit of efficiency”, said Davy, adding that the debt-free company should generate over £1 billion (€1.2bn) of free cash flow between 2016 and 2018.

Davy said DCC, which moved its main listing to London from Dublin three years ago, may also enjoy earnings upgrades if it is able to follow up on “transformational” acquisitions in the European fuel-supply industry in recent years.

While Kingspan’s shares were rattled in the middle of 2016 by the outcome of the Brexit referendum given its large UK exposure, Davy said that earnings estimates for the group rose by 20 per cent over the course of the year.

“The group’s valuation is now at its lowest level in a number of years. Fears over UK risks are overdone,” said Davy, noting that the stock is currently trading at 17 times 2017 earnings-per-share estimates, compared to an average of 18 over the past five years.