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In for a penny in for a PoundlandApril 18 2015, 7:00am
A glance at the above chart of the FTSE 100 illustrates equities appear to be consolidating around all-time highs, as investors digest mixed data and an array of corporate news from the US.
Retail sales in the world’s biggest economy expanded at 0.9%, the fastest rate in a year, but below consensus forecasts for a 1.0% increase. The revival in sales indicates the US economy is accelerating, heightening the chance of an imminent hike in interest rates, although the revival is far from convincing. The dollar index moved back towards 12-year highs on expectations that economic data will continue improving after a harsh winter depressed indicators in the first quarter.
The New York Federal Reserve’s index of manufacturing conditions, often seen as an early forecast of the national institute for supply management factory survey, contracted unexpectedly in April. The business conditions index decreased to -1.2 this month from a reading of 6.9 in March, considerably below consensus forecasts for a rise to 7.0. New orders were negative for a second consecutive month, suggesting growing uncertainty in the US economy.
Forthcoming US economic data remains the focus as the Fed’s focus on data dependence will make markets more sensitive to any improvement in the US economy, although first-quarter US earnings are highly anticipated. Analysts have cut profit forecasts because of a stronger dollar, a weak start to the year and a struggling energy sector, allowing room for companies to exceed expectations.
China grew at its slowest pace in six years at the start of 2015 as data released this week indicated the world’s second-largest economy was still losing momentum. Gross domestic product grew an annual 7.0% in the first quarter, down from 7.3% in the fourth quarter of 2014. Meanwhile, monthly industrial output, trade statistics and retail sales all missed expectations as stimulus fails to find traction.
Yet investors in China continued to adopt the “bad news is good news” mantra, sending equities in Shanghai to fresh seven year highs, as hope of additional monetary and fiscal stimulus buoyed sentiment. The People’s Bank of China has cut interest rates twice since November, with analysts forecasting another cut combined with lower reserve requirements for banks.
Eurozone data indicates ECB stimulus measures are already bearing fruit, aiding industrial production by weakening the Euro. Industrial production smashed expectations in February, rising 1.1% from January alone, and 1.6% from February last year, twice as strong as was expected. The data add to evidence that the Eurozone economy is starting to turn the corner after years of recession and weak growth.
Greece, however, remains a concern as time is running out on the country’s debt talks. Many feel Greece is not moving fast enough to draw up structural reforms and some believe the country is already preparing for a default. It has until 24th April to make headway or the country will soon be forced to default on its debt. The first key date to come up following the Eurozone talks is 6th May, when about one billion euros is due for repayment to the IMF.
On the domestic front, British retail spending grew at its fastest annual rate in almost a year in March, boosted by Easter falling a month earlier than in 2014. The British Retail Consortium said sales rose 4.7% compared to a year earlier, up from 1.7% in February, while the BRC also reported prices are falling at their fastest rate since 2006. Other surveys have reported rising consumer morale, as inflation has fallen to a record low and wages are starting to improve after years of stagnation.
Technical analysis of the FTSE 100 shows the blue-chips have moved sideways this week after a strong fortnight for equities. The oscillators appear to have rolled over in acutely overbought territory, indicating a drop in momentum and implying a period of profit taking may follow, although the bullish divergence is hard to ignore. Support is seen at 7040, 6875 and 6750, while there is little resistance at these levels.
In conclusion, equities continue to benefit from accommodative central banks. Headwinds, however, are likely to be felt from Greece’s nearing deadline on its debt negotiations and the UK general election, the most uncertain in decades. Technical analysis depicts a period of profit taking, which makes sense ahead of these two events.
Poundland (Epic: PLND) has fallen aggressively this month after news that the general merchandise discounter’s proposed £55 million takeover of rival 99p Stores is likely to be investigated by the Competition and Markets Authority (CMA).
Established in 1990 on a market stall in Lincolnshire, Poundland IPO’d on the stock market in March last year at 300p, valuing the group at £750 million. Poundland restricted its float to big City institutions, yet demand for Poundland shares was speculated to have been fifteen times oversubscribed by its bookrunners, JP Morgan and Credit Suisse, causing the shares to rally over 20% to 370p on its first day of trading.
On 6th February, Poundland’s shares spiked 15% towards 420p after announcing its intention to buy rival high-street discounter 99p Stores for £47.5 million in cash and £7.5 million in shares. Brokers cited significant and sustainable cost savings and growth opportunities both in the UK and internationally. On 9th April, however, Poundland shares slipped after the CMA announced the merger is to be referred for an in-depth investigation unless acceptable concessions are offered by the two groups.
Poundland has a number of options; agreeing to sell off the stores in question, contesting the decision or asking for a three-week extension. Yet I believe the share price correction, to back below the level it was prior to the takeover being announced, has already priced in the possibility that a deal won’t happen, leaving limited downside risk.
A favourable outcome could send the shares back over 400p, however, even if the deal is called off Poundland is one of the few companies that gives investors access to the rapid growth of discount retailers, which along with Aldi and Lidl, are eroding market share from the major supermarkets.
Results on 14th April revealed revenue for the 2015 financial year of £1.11 billion from £998 million in 2014 and £881 million in 2013. The number of stores increased by 60 in the last financial year, bringing the total to 547 in the UK and 41 in Ireland, while it plans to open a minimum of 60 new stores in the year ahead. Meanwhile, the company has continued to develop its trial in Spain and is “pleased with the initial progress”, with the possibility of rolling out stores across Europe later this year.
Chief executive Jim McCarthy said “Poundland continues to perform well and we expect to deliver our growth strategy in the new financial year, notwithstanding some headwinds from the weaker Euro and a tough comparable in the first half.”
Poundland trades on 21.5x earnings, but with growth forecast of over 20% and a strong balance sheet, its premium to the retail sector is warranted. The group reported net cash of £13.9 million at the end of March, which combined with minimal gearing, leaves plenty of room for expansion. Analysts expect Poundland to pay a dividend of 1.3% this year and forecast the pay-out to increase by about 20% a year. Full-year results are expected on 18th June.
The chart of Poundland illustrates the recent newsflow with the shares gaining traction from historical support at 340p. Meanwhile, the oscillators appear to have bottomed and are rising out of acutely oversold territory, indicating improved momentum.
Poundland offers a compelling European discount growth story, with a number of important announcements in coming weeks. At the time of writing the share price is 341p and despite the outcome from the CMA, I believe the risk/reward is skewed in favour of renewed upside. Targets are seen at 360.4p, 378.7p and 403p, while traders might consider a stop-loss below support at 326.4p to limit risk.
This report was written by Mark Allen – Head of Derivatives at SI Capital Stockbrokers. The writer does not hold a position in Poundland, but client accounts may. The material in this report has come from SI Capital internal data sources, Simply Charts and Poundland’s corporate website.