The post-Brexit bounce is continuing in stock markets as investors continue to snap up what they see as bargain-basement shares.
With the UK unlikely to trigger Article 50 - which sets the clock ticking on the country’s departure from the European Union - in the immediate future, markets are taking stock of the situation. But despite a calmer tone at the moment, volatile moves are still likely for some while, even if they are upwards rather than falling. Rebecca O’Keeffe, head of investment at stockbroker Interactive Investor, said:
Investors, who are still trying to work out whether current market levels pose and opportunity or a threat, are coming down firmly on the side of opportunity with equities across the UK and Europe up strongly for a second day. With global central banks all trying to reassure markets, prices are stabilising and volatility is falling. However, it is still very early in the process and significant political and market risks remain, so we may start to see some investors start to sell the rally, which could see markets pare back some of the gains.
At the moment the FTSE 100 is up 104.37 points or 1.7% at 6244.76, within 100 points of where it stood before the referendum result unleashed chaos. The FTSE 250, which is more closely aligned with the UK domestic market, is up 1.52% after its near 14% decline immediately after the vote.
Financial shares, which have borne the brunt of recent selling, are among the main risers despite downgrades from Moody’s ratings agency. Barclays is 4.3p better at 135.8p while Prudential has put on 60.5p to £12.51.
Housebuilders are also in demand, with Taylor Wimpey up 4p at 126p.
Merlin Entertainments, operator of Alton Towers and Legoland, is 2.6% higher at 425.8p after analysts at JP Morgan moved from underweight to neutral and raised their price target to 464p. The bank said:
We forecast a full year 2015 to 2018 estimated earnings per share compound annual growth rate of 17.4% (but only 9.3% adjusting for the Alton Towers base effect). This is driven by4.3% like for like sales growth and 7 new Midway sites per year, as well as Legoland Japan and Legoland Korea (due to open by 2018) and accommodation rollout across the estate. Merlin’s 2017 estimated valuation has come down to 16 times/4.7% free cashflow yield, compared to European hotel stocks on 14.9 times/2.3% and Whitbread on 13 times / -1.5%.
If Merlin were to accelerate the Midway rollout, open a new owned/leased Legoland or conduct further bolt-on M&A, there could be upside to our forecasts. But this looks unlikely, in our view, before our 2017 estimated “peak” capex forecast of £271m (17% of sales, 1.9 times depreciation)
But tourism-related shares have fallen after the attacks at Istanbul airport, with Tui down 33p at 845p and British Airways owner International Airlines Group 10.9p lower at 346.3p.
Dixons Carphone is down 9.5p at 332.5p on uncertainty on the outlook post-Brexit despite a 17% rise in full year profits.
Among the mid-caps Electrocomponents has fallen 13.4p to 247.8p after Credit Suisse cut from neutral to underperform with a 220p target price, down from 265p. It said:
Following the UK referendum result and Datwyler’s acquisition of Premier Farnell we re-visit our estimates for organic growth and margin improvement. With Credit Suisse economists forecasting a shallow recession in the UK in the second half of 2016 and a Euro area slowdown we moderate our organic growth forecasts which now average 2.1% across 2017 to 2021 (from 2.9%). The foreign exchange movements which have followed the Brexit vote provide revenue benefits, however as a net buyer of dollar denominated COGS [cost of goods sold], Electrocomponents are exposed at the gross margin level by a weakening in the pound.
Consolidation in the market place not involving Electrocomponents was highlighted as a risk to our recommendation in our April 2016 note and following Datwyler’s 165p cash offer for Premier Farnell we believe Electrocomponents is likely to experience incremental competitive pricing pressures, especially in Europe where operations overlap. We reduce our EBITA estimates by around 60 basis points per annum across the forecast period with the gross profit margin decreasing from prior estimated by 90 basis points to 2021. The company continues to execute well its business improvement strategy, increasing the growth of own label products and over-delivering against cost reduction targets. However, the stock currently trades at a 50% premium to its 2009 two year forward PE multiple and whilst we are not forecasting a global recession and recognise current management’s positive impact, in our view there is room for a pronounced de-rating.
Elsewhere technology group Qinetiq is down 9.7p to 213.4p after a downgrade from JP Morgan and news that finance director David Mellors was stepping down at the end of December to join Cobham, up 6.3p at 156.7p.
Distribution group Brammer has slumped 54% to 65.75p after warning half year profits would be below expectations at around £5m and said it would be close to its net debt/earnings bank covenant at the end of the period.
