Why I Would Sell Centrica PLC, Game Digital PLC And Lamprell Plc

Royston Wild explains why investors should give Centrica PLC (LON: CNA), Game Digital PLC (LON: GMA) and Lamprell Plc (LON: LAM) short shrift.

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Today I am looking at three London-listed stocks poised I believe are set to experience enduring difficulties.

Centrica

Of all the stocks across the FTSE 100, I expect utilities plays like Centrica (LSE: CNA) to be wringing their hands the most ahead of May’s UK general election. Just last month Labour’s Ed Miliband vowed to let regulator Ofgem impose tariff reductions should his party win the run-off, and follows his plans to freeze prices for 20 months.

The rest of the Westminster pack has been quick to follow Labour’s lead, with the Lib Dems’ Ed Davey vowing to break up the country’s largest suppliers should an ongoing Competition and Markets Authority (CMA) investigation into the industry reveal that Centrica et al are generating excessive profits at the expense of their customers.

With the energy play being forced to slash tariffs at its British Gas arm amid rising political and regulatory pressure — not to mention a backcloth of intensifying competition — Centrica is expected to follow last year’s 28% decline with an additional 6% drop in 2015. However, a slight 2% rebound is anticipated for 2016.

Still, I expect that an increasingly-challenging environment for its retail operations, as well as the impact of cost pressures and declining oil prices across its upstream activities, undermine the possibility of any earnings bounceback any time soon. And with the business changing hands on P/E ratios of 14.3 times and 14.2 times prospective earnings for 2015 and 2016 correspondingly, I do not believe the risks facing the business are currently factored into the share price.

Game Digital

Xbox and PlayStation parlour Game Digital (LSE: GMD) has emerged as one of the FTSE’s laggards in Thursday business and was recently trading around 9% lower on the day. The retailer’s share price has collapsed in recent months amid signs of worsening trading difficulties, and followed January’s shock profit warning with news last month that pre-tax profits slipped 1.8% during the first half of the fiscal year to £33.2m.

City analysts expect Game to post a modest 1% earnings decline for the 12 months concluding July 2015, although a meaty 18% rebound is predicted for the following year. These figures push the firm’s earnings multiple from 13.6 times for this year — any reading below 15 times is widely considered attractive value — to an even-better 11.5 times for fiscal 2016.

But in my opinion a figure closer to the bargain benchmark of 10 times for this year and next would be a fairer reflection of the risks facing Game. The Basingstoke business is facing an increasingly-bloody war with its High Street and online rivals, a scenario which is forcing it into heavy discounting to maintain market share. And with the company advising that “the video games market in the UK has started 2015 more slowly than we anticipated,” I reckon investors should be braced for more pain ahead.

Lamprell

With oil prices looking set to remain in the doldrums for some time to come, I believe that the revenues outlook at Lamprell (LSE: LAM) remains murky as fossil fuel extractors across the globe slash their capex budgets. Like Game, the oil and gas engineering play was rapidly backtracking in Thursday business and was last dealing almost 6% lower.

Souring market appetite comes as no surprise to me given that earnings are expected to rattle 42% lower in 2015, and an additional 2% slide is forecast for next year. These projections leave the rig builder changing hands on P/E multiples around the ultra-cheap watermark of 10 times, and the business sports a readout of 10.4 times through to the close of 2016.

But as a worsening supply/demand oil market balance looks set to keep orders from the industry under pressure, and Lamprell faces fierce competition from other Asia-based operators, I reckon that the company faces a prolonged period of earnings pressure.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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