With markets winding down for the Christmas and New Year break, International equities remain very much the favoured investment. The continuing rout across global bond markets appeared to gather pace yesterday from the fallout of the supposed terrorist attacks in Germany and Turkey, as investor concern for a potentially wider series of IS-directed extremist assaults across Europe’s capitals to unnerve its populations, the backlash of which could result in further sharp swings toward more populist governments during the various presidential and general elections expected in the New Year. Right now the threat may not seem very real, but with the possibility of an early vote to replace Italy’s recently-installed caretaker government and France’s presidential election scheduled for May, well-prepared opposition parties in the shape of Beppe Grillo’s Five Star Movement and Marine le Pen’s National Front etc. are positioned to challenge the very existence of the Eurozone. During these quite exceptional times, with authorities still apparently totally out of touch with their electorate, such a threat simply cannot be discounted, the ultimate cost of which could even be for independent nations to choose reversion to their legacy currencies with the potential to create widespread default. Such lingering fears will likely hinder Europe’s opening this morning, despite the Dow Jones chalking up yet another all-time high overnight, closing just shy of the psychologically important 20,000 mark, with all the principal US markets also making reasonable gains as optimism that Trump-inspired reflation and proposed investment will provide a significant medium-term boost to earnings. Asia was also in a good mood, with broad gains seen in just about all regional markets most notably with even China playing catch-up following a couple of days of weaker trading as economists speculated on the potential for a PBOC-directed tightening of liquidity during Q1’2017. Other than release of Public Sector Net Borrowing figures this morning, the UK is not due to release any significant macro data, while the US is scheduled only to provide MBA Mortgage Applications and Existing Home sales data ahead of a larger swath of figures tomorrow and Friday. Very little is also happening on the corporate front this morning, with earning or trading updates due from just a few second-liners including CH Bailey (LON:BLEY), Premaithia Health (NIPT.L) and Water Intelligence (WATR.L). Investors will, however, be keen for any further media comment following the Prime Minister, Theresa May’s reported backing for the UK to be permitted to enter a ‘transitional period’ in order to adjust to the new economic order prospectively resulting from Brexit. Accepting the need for a soft, rather than hard, landing could provide significant relief for those fearful that a clear post-Article 50 plan is still not in place. The FTSE100 is seen around 10 points weaker during this morning’s opening trade.
Europe
The FTSE-100 finished yesterday's session 0.38% higher at 7,043.96, whilst the FTSE AIM All-Share index closed 0.02% worse-off at 826.52. In continental Europe, the CAC-40 finished 0.56% higher at 4,849.89 whilst the DAX was 0.33% higher at 11,464.74.
Wall Street
In New York overnight, the Dow Jones gained 0.46% to 19,974.62, the S&P-500 firmed 0.36% to 2,270.76 and the Nasdaq added 0.49% to finish on 5,483.94.
Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.26% to 19,440.55, while the Hang Seng had firmed 0.56% to 21,583.40.
Oil
In early trade today, WTI crude was up 0.22% to $53.52/bbl and Brent was up 0.17% to $55.52/bbl.
Headlines
CBI calls for barrier-free trade with EU after Brexit
UK firms need to continue to have "barrier-free" access to European Union markets after Brexit, the CBI business lobby group has warned. It said UK companies should not be subjected to trade tariffs, with only "minimal" other barriers in place. In a report, it also called for a migration system that allowed firms to obtain the skills and labour they need. The government said it was committed to delivering the best possible access to European markets for UK businesses. The CBI reiterated its call for a "smooth exit" from the EU, avoiding a "cliff edge" break.
Company news
Kier Group (LON:KIE, 1,374.11p) – Buy
Kier Group, a leading property, residential, construction and services group, yesterday announced that it has been awarded a c.£140m contract from Highways England for repair and maintenance services on Area 13. The contract is for 15-year, commences on 1 April 2017, and Kier will provide routine and cyclic maintenance, defect repairs, emergency incident response, traffic management and severe weather services. Kier's CEO, Haydn Mursell, commented “We are pleased to have secured the Area 13 contract and look forward to the completion of the negotiations around Areas 6 and 8. These awards reflect Kier's ability to tailor its services to Highways England's evolving delivery model, as well as maintain the Group's leadership in the growing UK highways management and maintenance market. We look forward to working with the Highways England team.”
Our view: The awarding of a new Highways England contract is a positive news, demonstrating the strong corporate relationship Kier has built with Highways England. The Group already operates in Network Areas 1, 3, 7 and 9, as well as Area 13 which covers Cumbria and north Lancashire. Yesterday’s new contract in Area 13 follows its excellent track record and reputation in the region, which included repairs to the flood damaged A591 in December 2015. In addition to these, final negotiations for 2-year contract to provide maintenance services on Areas 6 and 8 (covering East Anglia and the East of England) are also underway, which is expected to commence on 1 April 2017. The trading update Kier released last month covering period since 1 July 2016 to 17 November 2016, confirmed the Group remains on course to meet full year expectations, despite heightened economic uncertainty in the UK following Brexit. Most believe, however, concerns brought by the Referendum still appears some way off, which explains the strong share price recovery post 24 June 2016 with the UK Government reaffirming its ongoing commitment on both Hinkley Point C nuclear power plant and 3rd runway at Heathrow Airport. The Chancellor’s Autumn Statement, released on 23 November 2016, also reassured investors regarding domestic infrastructural budgeting, particularly in sectors such as highways, digital and railways. The shares are valued at FY2017E and FY2018E P/E multiple of 12.9x and 11.8x along with dividend yields of 4.7% and 5.0% respectively, Beaufort continue to rate Kier Group as a Buy.
Lloyds Banking Group (LON:LLOY, 64.15p) – Buy
Lloyds Banking Group, a leading UK based financial services group, yesterday announced that it has agreed to acquire MBNA Limited (‘MBNA’), a UK consumer credit card business (from FIA Jersey Holdings Limited, a wholly owned subsidiary of Bank of America), for a cash consideration of £1.9bn. This will be funded through organic capital generation and is currently expected to utilise c.0.8% of Common Equity Tier 1 (‘CET1’) capital, which through this acquisition will further enhance future earnings and capital generation. The purchase price includes c.£800m of acquired equity and £240m liability cap for future PPI claims exposure to the Group. According to the Group, MBNA business, which comprises gross assets of c.£7bn, delivered profit after tax of £123m in H1 FY2016, and is expected to deliver an underlying Return on Investment in excess of Cost of Equity in the first full year and increases to c.17% in the second full year, while c.3% and c.5% statutory EPS accretion in the first and second full years is also expected following the acquisition. The Group said the transaction will deliver a £650m per annum (c.4%) increase to Group revenues and will improve Group net interest margin by c.10bps per annum. Cost synergies are currently expected at c.£100m run rate per annum within 2 years, representing c.30% of the 2015 MBNA cost base. Lloyds will maintain the MBNA brand as a challenger brand which further enhances its customer offering. The transaction is expected to complete by the end-H1 FY2017, subject to competition and regulatory approval.
Our view: The announcement was taken positively by the market yesterday. The acquisition of MBNA is in line with the Group's strategy to grow its Consumer Finance operations. Upon completion, the Group's market share in credit cards will increase from c.15% to c.26%, enhancing its position and offerings. Lloyds sees MBNA's diversified distribution model, data analytics capability, digital strength and well-recognised brand, as being complementary to the Group's existing capabilities while providing new opportunities for growth and delivering premium customer service. The expected cost synergies, along with Return on Investment of c.17% and c.5% statutory EPS accretion during the second full year is attractive. The acquisition is not expected to have any impact on the Group’s dividend outlook. Management confirmed that it continues to deliver a strong underlying and statutory performance plus good capital generation. It is also confident of delivering a “progressive and sustainable” ordinary dividend in FY2016, reaffirming a target payout ratio of at least 50% of sustainable earnings over the medium-term. While estimating the Lloyds Banking Group trades on FY2016E and FY2017E P/E multiples of 8.9x and 9.9x, together with dividend yields of 4.9% and 5.7%, Beaufort retains its Buy rating on the shares.
McColl’s Retail Group (LON:MCLS, 185.00p) – Sell
McColl’s Retail Group (‘McColl’s’), the UK’s second largest multiple convenience retailers operating the convenience and newsagent sectors, yesterday announced that it has given final and unconditional approval to its acquisition of 298 convenience stores from the Co-operative Group Limited (‘Co-op’) from the Competition & Markets Authority (‘CMA’). McColl's said it will commence integration of the stores from late January 2017 and expects all conversions to be completed by the end of August 2017. Following the completion, the total number of convenience stores will comprise over 75% of McColl's total estate. McColl's CEO, Jonathan Miller, commented “We are delighted that the CMA has approved our acquisition of these 298 quality convenience stores. This is a transformational deal, which substantially accelerates our growth strategy and expands our neighbourhood presence for the benefit of our customers. We have a long history and proven track record of successfully integrating convenience stores into our estate, and we expect these newly acquired stores to make a significant contribution to our future strategic plans.”
Our view: The Group finally received its ‘go-ahead’ from the CMA for the £117m “transformational” acquisition of 298 Co-op stores. According to the management, this acquisition will provide 5-years of programmed acquisition/expansion that McColl’s otherwise would have undertaken piecemeal. The management appear satisfied with the potential benefits it brings to the Group, including economies of scale, store locations, gross margin and market share (including new opportunity to expand into Northern Ireland region). The stores are presently profitable and an overall positive effect on the Group’s performance should be evident post the completion of integration in August 2017. In its trading update for the Q4 FY2016, announced on 2 December, McColl’s achieved its 6th consecutive year of sales growth, surpassed the target of 1,000 convenient stores slightly ahead of the end-December schedule, while also noted that it is on track to meet full year expectations. In an effort to turnaround its struggling newsagents and standard convenience stores, which are heavily impacted by continuing fall in sales of ‘traditional categories’ such as tobaccos and newspapers, the Group’s conversion of these outlets for food and wine continues. At the same time, it also increased number of Subway franchises, food-to-go units, Amazon lockers, and Post Offices, in line with its strategy. This news, of course, is exactly what has powered a remarkable turnaround in the equity’s fortunes since 13th July, resulting in an over +30% outperformance relative to the FTSE All-Share since that date. Not that the long-term problems faced by convenience sector have gone away; indeed, the highly-experienced Co-operative Group would never have been willing to sell its outlets to McColl’s if it had considered their long-term viability remained intact. The ongoing contraction in like-for-like sales will continue, while competition from the ongoing expansion by more competitively-priced supermarket-owned convenience stores intensifies and the long-term migration to online shopping goes on unabated. Meanwhile, in order to fund this opportunity, McColl’s has reduced its dividend payout ratio and hiked debt, which is expected to approach £130m in end-FY2017 (quite a lump for a Group presently capitalised at just £212m). Having received the CMA go-ahead management will now embark on an extended programme of conversion to the McColl’s brand. Its experienced management can be expected to oversee this transition with few hiccups, but should it trip badly in the process or should the scale opportunities fail to be realised expected benefits, investors will again find themselves reflecting on the problems faced by management trying to sustain operations that ultimately appear to have a limited remaining lifespan. Given such risks, current forward FY2016E and FY2017E P/E multiples of 12.0x and 10.9x together with substantial gains shareholders have captured over the past 6 months, Beaufort has decided to play ‘safety first’ by moving its recommendation from Hold to Sell with price target of 150p/share.