Monitoring our 'Winners' performance in March 2016

Friday, 1st April 2016 10:35 - by David Harbage

It has been another difficult month for the UK equity market but, as Albert Einstein pontificated, “everything is relative” with our selection of industry leaders outperforming the wider FTSE100 index.

Investors have chosen to ‘sit on their hands’ as concerns surrounding a potential ‘Brexit’ from the EU have been debated, against a backdrop of slowing economic activity in almost every other part of the world.

Turning to our list of ‘blue chips’, there has been a plethora of broker notes for investors to digest post the results season; these are naturally inclined towards adopting a positive or supportive corporate bias –‘courting favour’ in anticipation of participating in any fee-generating exercises, such as an equity or bond placing.

On 10 March life assurer Aviva announced very respectable final results for calendar year 2015. Featuring a faster than expected integration of the £6bn acquisition of Friends Life, a 33% jump in fund management profits, the best results in UK general insurance (combined ratio of 94.6%) since 2006 and a 15% increase in the final dividend. With double-digit earnings progress anticipated in 2016 and 2017, this high beta stock appears unfairly neglected. Self-select ISA investors are likely to be attracted to the attractive dividend which, representing just 50% of earnings, is set to rise by circa 12.5% this year and next.

An interim management statement, covering the four months to the end of February 2016, from Berkeley Group indicated that profits for the full year to 30 April 2016 would be at the top end of market expectations. The upmarket home builder flagged a 4% reduction in reservations, but put this down to a change in the product mix. As recently highlighted by peers, finding new development sites has not been difficult – notably acquiring a 23 acre site in Ascot, a 12 acre site in Cookham, 11.2 acres in Hornsey, along with three new parcels of consented land in Kingston, Sevenoaks and Winchester. The balance sheet remains robust (featuring £100m of net cash), which management suggested would be applied to building the land bank further, as well as facilitating the £1 per share half yearly dividend payments (which costs £137m). However, the fear that overseas investors could lose their appetite for London’s residential property market (as well as £ assets in general) - should the UK vote to leave the European Union - is likely to depress sentiment in the short term.  

Elsewhere, BT Group announced that ex-BG Group’s CFO Simon Lowth will become the incumbent telecommunications group’s Finance Director In June. Simon offers critical experience in strategy and M&A (at Scottish Power and AstraZeneca) as well as in finance. The shares have slipped back for no apparent reason in March – from 496p on the first day of the month to 440p on the last – despite the industry regulator Ofcom’s decision not to separate BT and its Openreach division. In similar personnel vein, HSBC is searching for an external candidate to succeed chairman Douglas Flint in 2017 and CEO Stuart Gulliver is unlikely to hold the key reins for much longer either – as the board is, necessarily in the eyes of many, refreshed after a torrid few years for the equity valuation of one of the world’s biggest banks. Trading north of £7 three years ago, the stock’s reputation and worth has been beaten up by regulators; earnings expectations remain downbeat, but a 1.3 times covered dividend (35.4 pence is the consensus forecast in the current year) provides compensation to investors awaiting a pickup in global GDP.

 
The shares of pub operator Greene King slipped back 7% in the first ten days of the month, perhaps nervously awaiting the Budget, but failed to recover despite the Chancellor freezing beer duties and increasing business rate relief. A number of its peers (most notably JD Wetherspoon) have been making noises about the higher national living wage; but such understandable concerns appear to be ‘in the price’ already. By contrast, and despite the Chancellor applying higher tobacco duties, the shares of Imperial Brands rose 4% in March. Explained by the UK not being particularly important for this international tobacco manufacturer, but also as the industry is perceived as relatively resilient and a ‘safe haven’ for investors - by contrast with uncertainties impacting other business sectors (such as natural resources).       

The recently announced final results from Next for the year ending 31 January were in-line with the company’s guidance – profits up 5% and earnings per share 5.4% - but the board’s comments surrounding the immediate outlook for trading cast a pall over the stock. In addition to saying that the outlook for consumer spending did not look as benign as it was at this time last year, management also suggested that a cyclical move away from spending on clothes was likely. Guidance for the forthcoming year has been lowered to sales growth being between -1% and +4%, and pre-tax profit growth ranging between -4.5% and +4.5%. Not surprisingly, shares in the clothing retailer have fallen sharply over the past ten days from £66.60p to £54 at the close of business yesterday. Analysts have scrambled to recalibrate their valuation of the shares and, with the exception of Deutsche Bank (reiterating their £68.50p assessment of fair value), seven leading houses have downgraded – albeit with Hold, rather than Sell, recommendations to their clients.

Full year results from payment solutions business Paysafe, announced in mid-March, were impressive – reflecting accelerated synergy savings following the integration of recent acquisition Skrill - and broadly in-line with broker forecasts. Indicating that last year’s positive trading momentum has continued into the first quarter of 2016, the appointment of Deutsche Bank to be joint corporate broker and the commencement of trading as a constituent of the FTSE250 index combined to maintain investors’ appetite for the stock. Notwithstanding its heady valuation (featuring a price to earnings ratio of 24.6 times the forecast earnings in 2016), the equity of Reckitt Benckiser has also remained in demand – in part supported by the company’s own purchases. In the first week of March the multinational domestic goods firm announced its intention to buy-back up to 6m of its own shares (equivalent to 0.85% of the company’s issued capital) over the coming two months.                  

There was no company news of consequence, or particularly significant share price developments to report, as regards the remaining industry leaders featured within our List: Sky, Smith & Nephew, Unilever, Unite Group or Workspace in the past month, with the 11 March blog discussing the relative merits of Whitbread and WPP’s trading statements.

Written by David Harbage for lse.co.uk on the 31st March 2016