Thursday 14:00 BST
● Wm Morrison led the FTSE 100 gainers after proposing an unexpected 2p special dividend. Interim results from the grocer matched expectations, with second-quarter retail like-for-like sales down 2.4 per cent but operating margins improving slightly. Management left full-year guidance unchanged.
The margin improvement in “challenging industry conditions highlights the considerable self-help available,” said Jefferies. “Investor sentiment towards UK domestic names remains highly volatile. But the strength of delivery by Morrisons should help make the case for the group’s investment attractions.”
● Babcock gained after the UK’s Ministry of Defence named it as preferred bidder to build five frigates at its Rosyth dockyard in Scotland. The contract would run from 2020 to 2028 and had a total value of £1.25bn.
“On the positive side, today’s news is a helpful win; the shares look cheap on a historic dividend yield of 5.6 per cent and management committed at the Capital Markets Day to a sustainable and progressive dividend policy. However, our concern is that the pattern of earnings downgrades of recent years may be sustained, which could eventually place pressure on the dividend, and also that UK political uncertainty probably increases further over the next six months and therefore more decisions could be delayed or cancelled, which could impact the 55 per cent of [Babcock’s] revenues which are UK public-sector related.”Panmure Gordon
● Hurricane Energy rose after the oil explorer gave a promising update from its Lincoln Crestal appraisal well within the Greater Warwick Area west of Shetland, a 50-50 joint venture with Spirit Energy. The well achieved a maximum stable flow rate of 9,800 barrels a day, suggesting it could be commercially viable, Hurricane said.
Analysts saw the drill result as going some way to de-risking the 600m barrel Greater Warwick Area field. Berenberg said: “Pressure drop and water ingress are the two main risks for fractured basement developments, which require 6-12 months of continuous production before the operator can form a better understanding of the geology and well productivity. Encouragingly, production at Lancaster is now in its fourth month, with no water encountered so far.”
● Redburn Partners upgraded London Stock Exchange from “hold” to “buy”. The move was based on optimism about the LSE’s planned purchase of US data business Refinitiv rather than Wednesday’s takeover approach from Hong Kong Exchanges & Clearing, which the broker said was unlikely to overcome political and regulatory concerns.
“Our view is [that] substantially greater long-term value lies in the Refinitiv deal than in the proposed HKEX bid,” Redburn told clients.
“The combined entity offers strong gearing to two of the most powerful structural trends in capital markets — electronification of trading and demand for data. The headline [valuation] multiple of LSE looks elevated, but will fall rapidly as enormous EPS accretion materialises. HKEX’s approach underscores the value embedded within LSE Group; however, we see significant uncertainties attached to this bid.”Redburn
About three-quarters of Refinitiv revenue comes from the creation, aggregation and global distribution of financial information, a market that has been growing at twice the pace of the wider capital markets industry since 2010 at about 4.5 per cent a year, said Redburn. Strategic mis-steps and pressure on sellside budgets have held back Refinitiv’s recent performance and margins have plenty of room to expand under more focused, aggressive stewardship, it said.
● JPMorgan Cazenove put “underweight” ratings on InterContinental Hotels, Accor and Whitbread as part of a European lodging sector review. It had no previous rating on Whitbread and had rated InterContinental and Accor “neutral” and “overweight” respectively.
A lack of momentum in the first half raises the risk that second-half results and 2020 outlooks would disappoint against overly bullish market expectations, JPMorgan said. Share prices had been resilient in spite of a string of downgrades and valuations were rich at 20 times forward earnings, the broker said.
The uncertain macro outlook combined with high valuations, with no major positive company-specific catalysts on the horizon, would translate to weak investor appetite and short interest, JPMorgan said. Its data suggested hotel occupancy was already at peak levels and revenue per available room, the industry’s key metric, now relies entirely on price rises. “We believe that sooner rather than later, the market will incorporate end-of-cycle concerns into valuations and forecasts within the peer group,” it said.
During the last great recession of 2007 to 2010, earnings per share halved on average and investors started pricing in the end of the cycle about seven to 10 months in advance, JPMorgan said.
InterContinental fell the most during the last recession even though its margins proved relatively resilient and it was the only hotelier to maintain its dividend. “Hence we question the defensiveness attribute typically attached to this name, particularly at current valuation multiples,” said JPMorgan.
Post Whitbread’s Costa disposal the market would increasingly focus on a material deterioration in the UK outlook since the beginning of the year, JPMorgan added. “As a pure UK domestic business, Whitbread is also the most exposed hotelier to the current economic and political UK turmoil.”
● Goldman Sachs downgraded Lloyds Banking Group from “neutral” to “sell” with a 47p target as part of a UK bank sector review. It cited rising macro risks, and a flattening of the sterling yield curve, as well as intensifying competition for mortgage lending from HSBC and Royal Bank of Scotland.
“We see Lloyds as a well-run bank with management, in our view, pursing the right strategy . . . A key question for the group going forward, however, will be how long it can maintain the higher yield of its mortgage book. Ultimately, over the medium term, we believe that the yield of its mortgage book will fall toward an industry-average level, driving downward revisions to consensus forecasts.Goldman
The flattening of the yield curve may erode about half of Lloyds’ “structural hedge contribution” by 2022, said Goldman. Unlike most of its peers, Lloyds used an active loan-hedging strategy that provided 8 per cent of the bank’s annualised net interest income, down from 15 per cent in 2017, it said.
“With swap rates having fallen significantly and the yield curve now flat to slightly inverted, this has important ramifications for Lloyds. First, for the banks in general, as existing hedges from prior years with higher rates mature and are either rolled forward at spot rates or rolled off, the net contribution of the structural hedge to NII will diminish. Secondly, the flat yield curve means that simply increasing the notional or duration of the hedge would no longer result in an uplift of NII, all else equal.”Goldman
Goldman also turned negative on Bank of Ireland and added AIB Group, the Allied Irish Banks owner, to its “buy” list.
● In brief: 4 Imprint raised to “buy” at Berenberg; Ascential rated new “hold” at Liberum; Beiersdorf cut to “underperform” at Credit Suisse; Close Brothers cut to “hold” at Investec; DNB raised to “buy” at Goldman Sachs; Eurofins Scientific rated new “outperform” at Credit Suisse; Euromoney rated new “hold” at Berenberg; Evotec raised to “buy” at Berenberg; Future rated new “buy” at Berenberg; Genmab raised to “overweight” at JPMorgan; IQE cut to “speculative buy” at Canaccord; James Fisher raised to “hold” at Canaccord; Jungheinrich rated new “overweight” at Morgan Stanley; Norsk Hydro rated new “underweight” at Barclays; Zurich Insurance raised to “buy” at Société Générale.
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