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FTSE edges higher after Chinese rout, with Royal Mail and Tesco in demand

Discussion in 'Market News' started by Lily, Jan 5, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Investors still nervous after manic Monday sent global markets tumbling

    After Monday’s rout, markets are attempting to stage a rebound, but it is hardly a convincing one.

    The FTSE 100, having fallen more than 2% on the first trading day of the year, is now up 9.58 points or just 0.16% at 6103.02 having earlier climbed to 6166. Worries about a slowdown in China sent global markets tumbling and despite intervention by the country’s central bank, those concerns remain.

    Royal Mail has made good progress cutting costs, lifting productivity and introducing new products. We believe that the strengths and value of the company’s established networks and brands, in the fast changing delivery world, are underappreciated. We also think that market concerns about wage negotiations, future pension costs and regulation are overstated. The stock is good value, trading on a calendar 2016 estimated PE of 10.5 times versus the wider sector on 15.1 times and other European postal companies on 13.1 times. Our forecast dividend has a yield of 5%.

    We think that the near-term risk of higher contributions to support the defined benefit [pension] scheme is limited but a broad-based settlement on future pension provision is needed. Ofcom, the UK regulator, is looking again at the regulation of Royal Mail but we do not expect a radical shift in policy as much of what Royal Mail does is already exposed to stiff competition. Royal Mail will shortly start a new round of wage negotiations. These could be tricky but we build-in higher costs. Regarding wages and pensions and the impact on future dividends, we note that employees own around 12% of the company.

    The Aberdeen share strongly underperformed in 2015, down 33% versus the average UK Asset Manager in our coverage universe up 16%. It is tempting to view the share as solely a macro call on emerging market sentiment. However, we highlight that significant other areas remain vulnerable to outflow risk... We forecast a slowing of group outflows to £20bn in 2016 (from £34bn in 2015) but believe that risks are to the downside. With a significantly lower asset base in 2016 yoy, revenue declines of 13% year on year are projected. Cost rationalization plans appear modest in response. The share is trading at 12.6 times calendar 2016 PE for a projected 25% decline in earnings per share year on year.

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