Broker Forecasts

Individual broker forecasts used to calculate consensus values for Pre-tax profit, EPS and DPS forecasts. For Property companies, the Estimates panel shows forecast NAV (net asset value) in place of the ‘Pre-tax’ column.

1 Order of Listing

The contributing forecasts are listed in date order, with the most recent forecast shown last. The table has room for a maximum of 16 brokers, and if this is insufficient the oldest forecasts are not shown.

2 Date

The date shows when each current unaltered forecast was last confirmed. The date changes if an element of the forecast is revised. If the current forecast is an upgrade (or downgrade) of an earlier forecast for the same period, a plus (or minus) sign is shown against the appropriate forecast element.

If the current forecast has been reconfirmed since being first published, the reconfirmation date is recorded and, though not shown, is taken into account when date-weighting the consensus. When calculating the date-weighting, the reference point is moved forward to midway between first publication date and latest reconfirmation date.

3 Recomendations

This is the current recommendation which the broker published with the latest forecast. This can be a straightforward 'buy', 'sell' or 'hold', for example. More often, it lies somewhere between or even beyond these three terms, for example 'weak hold', or 'overweight', and each broker has a range of perhaps eight to twelve such gradations.

A full alphabetical list of abbreviated recommendations is reproduced below:

Abbreviation Recommendation Abbreviation Recommendation

ACCU Accumulate NEU1 Neutral 1

ADD Add NEU2 Neutral 2

ATR Attractive NEU Neutral

AVOI Avoid OUTP Outperform

AWEV Await Events OWGT Overweight

BINC Buy for Income PPER Peer Perform

BOW Buy on Weakness RED Reduce

BREC Buy for Recovery RED1 Reduce 1

BUY Buy RED2 Reduce 2

BUY1 Buy 1 SBUY Strong Buy

BUY2 Buy 2 SPER Sector Performer

BYIE Buy for Yield SOUT Sector Outperformer

CORE Core Sector Holding SUND Sector Underperformer

CORP Corporate SELL Sell

H/B Hold/Buy SPB Speculative Buy

H/S Hold/Sell SPEC Speculative

HADD Hold/Add SWIT Switch

HINC Hold for Income TOPS Top Slice

HOLD Hold TPR Take Profits

HRED Hold/Reduce TRB Trading Buy

HSPC Highly Speculative TRS Trading Sell

INL In Line UNDP Underperform

LTB Long Term Buy UVAL Undervalued

MPER Market Perform UWGT Underweight

NEG Negative WHOL Weak Hold

4 Interpreting brokers recommendations

It should be understood that a single recommendation from a given broker must be viewed in its full context, namely the entire text of the research it is based on, the share price at the time of writing, and the full range of recommendations employed by that broker.

5 Estimates

Estimates are shown for pre-tax profit (‘Pre-tax’), earnings per share (‘EPS’) and dividend per share (‘DPS’). Note that estimates for forecast Pre-tax profit and EPS should be compared with the normalised historic Pre-tax profit and EPS in the financial summary table.

The individual estimates for the current and following years provided by each broker are adjusted when circumstances dictate, so that direct comparison can be made with the estimates of other contributing brokers, and with the five-year historic values provided in the adjacent financial summary table.

The following topics explain when adjustments are necessary:

6 Revised estimates

The appearance of ‘+’ or ‘-’ alongside one or more of the forecast elements indicates an upward or downward revision of an earlier forecast.

7 Calculation of consensus values

Each aspect of the calculation methodology is outlined in this section. The method of calculation is demonstrated in a fully worked illustration.

To view a fully-worked illustration click here.

8 Annualised values

A standard length accounting period is taken to be 12 months or 52 weeks.

To enable different periods within the 7-year performance table to be reasonably compared, all relevant values for a non-standard period are arithmetically converted to an annualised basis; this includes the consensus forecasts. For example, a turnover value of £60m for a reported 9-month period, becomes £80m on an annualised basis.

Annualised values must, however, be regarded with caution, since they can signify seasonal variations in performance which a year-end change is often intended to smooth out.

The detailed individual broker forecasts, shown separately, are not converted in this way, and remain as reported by each broker (subject to any adjustment for share capital charges). Attention is drawn to footnotes describing the circumstances and period to which individual forecasts relate. Similarly, values given in the shaded panel for last historic normalised EPS, turnover and Pre-tax profit remain as reported by the company. When a suffix indicates a non-standard period, and its length in months, these three values are not annualised.

9 Foreign income dividends

Attention is drawn to the presentation of companies that declare all, or part, of their annual dividend as a Foreign Income Dividend (FID).

FID's do not carry a tax credit for tax exempt shareholders to reclaim. To compensate, the FID element of the dividend declaration is enhanced by 25% with UK Income Tax becoming payable by shareholders who are assessed for it.

For comparison purposes, the net amount of the enhanced FID is treated as part of the historic net dividend record, and the gross amount is treated as part of the gross dividend yield. This treatment is consistent with the dividend forecasts received from brokers.

10 Share capital changes

When a significant share capital change occurs which gives rise to a share price adjustment, a mathematical correction is applied to any existing per share values, such as EPS or share prices, in order to maintain comparability with any values added subsequently.

A factor, or fraction, is applied retrospectively to any existing values when one of the following events occurs:

Rights issues or open offers
Scrip or capitalisation issue
Share consolidation or subdivision

The key test as to whether a factor should apply in the event of a share capital change, is simply whether the share price changes as a direct result of the event when it takes effect in the market and the shares are first traded ‘ex - event’.

When two or more events occur together, e.g. a subdivision of 25p shares into 5p followed immediately by a rights issue, then the individual factors calculated for each component are multiplied together.

11 Annualisation

Introduction
If a company changes its financial year end, for example from 31st December to 31st March, then its next annual accounts will cover a reporting period of either 3 months or 15 months, rather than the regular 12 months. In this situation, many of the statistics for the non-standard period are adjusted to compensate, and are shown on a per annum basis and not as reported.

Examples of figures which would need to be adjusted to an annualised basis, or which would be affected by such adjustments, include EPS, earnings growth, annual DPS, PER, ROCE, and PCF. Note that this is not an exhaustive list.

Examples of figures that would not need to be annualised include gearing, margin, tax rate, and interest cover.

Annualised values must be regarded, however, with caution, since they can magnify seasonal variations in performance which a year-end change is often intended to smooth out.

Illustration
Below is an illustration of how the inclusion of a non-standard period can distort a trend, and how the distortion can be corrected by adjustment to a per annum basis:

A company regularly increases sales by 20% each year. Having reported to 31st December 1993, it decides to change its year-end to 31st March, so that the next accounts cover the 15 months to 31st March 1995. The sales figures would appear on an ‘as reported’ basis as follows:

Period End	31-Dec 1992	31-Dec 1993	31-Mar 1995	31-Mar 1996



Duration	12m	12m	15m	12m
Sales (£m)	1,200	1,440	2,160	2,074

The annual increase in sales, without compensating for the change in year end, would appear as follows:

Period End	31-Dec 1992	31-Dec 1993	31-Mar 1995	31-Mar 1996



Increase	+20%	+20%	+50%	-4%

To adjust the sales figures to an annualised basis, the sales for the non-standard period are divided by the number of days in that period (456 days in the example), and then multiplied by 365 (the number of days in a standard period).

                365
   2,160   X    ---      =   1,729
                456

The sales for the 15 months to 31st March 1995 are adjusted as follows, and the sales figures are shown on an annualised, or per annum, basis:

Period End	31-Dec 1992	31-Dec 1993	31-Mar 1995	31-Mar 1996



Duration	12m	12m	15m	12m
Sales (£m)	1,200	1,440	1,729pa	2,074

The annual increase in sales, after compensating for the change in year end, is now in line with expectations as follows:

Period End	31-Dec 1992	31-Dec 1993	31-Mar 1995	31-Mar 1996




Increase	+20%	+20%	+20%	+20%

12 Notional dilution

In some cases, the future conversion of other classes of share capital or debt will cause a potential dilution of earnings per ordinary share, or of net tangible asset value per share. When this produces a measurable difference, hemscott shows historic earnings per share (EPS) and NTAVPS on a fully-diluted basis.

Any statistic or calculation which incorporates, or invites comparison with, historic EPS or NTAVps also presented on a fully-diluted basis. Those statistics affected include:

historic and forecast EPS
historic cash flow per share
prospective price-earnings ratio (PER)
price-earnings growth factor (PEG)
historic and forecast EPS growth
historic net tangible asset value per share (NTAVps)

Calculations based on full notional dilution assume that any future share issues, which could take place upon conversion of other classes of debt or share capital, have already occurred. This can involve adjusting earnings and assets as well as increasing the actual number of shares. Adjustments to earnings can reflect, for example, a lower dividend or interest pay out, as with convertible fixed dividend securities or debt, or a notional increase in earnings capacity through a larger capital base, as with options or warrants to subscribe for ordinary shares.

13 Forecast elements excluded from the consensus

The appearance of any suffix against a given forecast, apart from ‘+’ or ‘-’ indicating an upward or downward revision, denotes exclusion from the consensus. The following suffix codes explain the reason why that forecast is excluded:

W - Warning, i.e. the company’s recent announcement of a ‘profit warning’ has overtaken the forecast, and a revised forecast is awaited.

S - Structural change in the company, such as a merger or de-consolidation, renders the forecast obsolete.

A - Age - the forecast is old and is overtaken by events, for example it is out of line with a subsequent interim announcement.

R - Results actually achieved have overtaken the forecast. This most often appears when preliminary results are announced after the date of the forecast, and the actual result for the period is materially different from what is expected. When this difference is more than 5%, the forecast is excluded from the consensus. If the EPS forecast is within 5% of the actual result, but the dividend forecast is not, then the dividend forecast alone is excluded.

D - Different basis. An analyst, for example, may be including certain costs that the majority are not.

B - Broker is disqualified temporarily from issuing a new forecast by reason of currently acting for the company in a transaction, e.g. a rights issue, or an acquisition.

14 Calculating the date-weighted consensus

Having excluded any elements that fall into the categories above, the consensus can then be calculated. The calculation has been refined to reduce the impact of maverick forecasts. A date-weighting method is applied which gives progressive emphasis to the most recent forecasts, after first excluding any which fall significantly outside the norm. The steps followed are:

A date-weighted average of all qualifying forecasts is calculated.
When there are more than two qualifying forecasts, the standard deviation’s established.
Any forecast with more than one standard deviation either side of this date-weighted average is eliminated.
A date-weighted average of the remaining forecasts gives the consensus.

To summarise, the consensus is the date-weighted average of those forecasts lying within one standard deviation of a date-weighted average of the whole population of forecasts.

15 Standard deviation calculation

Standard deviation is a statistical measure of variance from the mean value, and is known as the ‘root mean square deviation’. The method of calculation is demonstrated in a fully worked illustration. The standard deviation measures the degree to which individual numbers tend to spread about their mean, or average, value. In statistical analysis, it is accepted that for a given sample of measurements, two-thirds of the sample normally fall within one standard deviation of the mean. For example, if there are 18 estimates, it can be assumed that 12 of them lie within plus or minus one standard deviation of the average.

16a One month change

Where a consensus forecast value for the relevant period existed one month previously, the change indicates in pence the amount by which the latest consensus value has moved up (+) or down (-). The calculation is as follows:

           Latest consensus value
   -       Consensus value 1 month ago

   =      Change

16b Three month change

Where a consensus forecast value for the relevant period existed three months previously, the change indicates in pence the amount by which the latest consensus value has moved up (+) or down (-).

The calculation is as follows:

 Latest consensus value
   -    Consensus value 3 months ago

   =    Change