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FTSE edges higher despite Greek and China concerns but InterContinental drops

Discussion in 'Market News' started by Lily, Nov 10, 2015.

  1. Lily

    Lily Forum Member

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    Hotel group loses nearly 4% after dismissing talk of sale or merger

    Leading UK shares are heading higher despite more weak Chinese data and a dip in Europe as worries about Greece’s finances re-emerge.

    But InterContinental Hotels is a notable exception. It had been partly buoyed in recent weeks by takeover speculation, and a report late last week that it was looking at strategic options gave them another lift. But after the market closed on Friday, the company issued a formal denial that it was considering a sale or merger.

    It is not the first time that such speculation has arisen and then been denied, but with the firm trading around nineteen times earnings and possessing activist shareholders on its board, the story is likely to return in due course, providing further incentive for investors to book themselves in.

    We downgrade our rating from buy to hold as: i) the recent strong share price performance (up 14% relative to FTSE 100 since August) has driven the share price marginally above our 940p fair value; and ii) the strong share price performance has been at odds with the recent rise in real bond yields.

    As banks go through macro-economic slowdowns and credit cycles, there are three points of inflection to buy the stock. With the rights issues already announced by Standard Chartered, the first of these three points, dilution risk point, will soon be past us, assuming no further recapitalisations are required. We still have to get past the inflection points when Asian economies bottom (where China drives sentiment) and when the credit cycle turns (when non-performing loans start falling). With Nomura expecting China GDP of 5.8% in 2016, falling to 5.6% in 2017 (consensus is at 6.5% for 2016 and 6.2% for 2017), we appear to be some time away from the latter two inflection points.

    The main reason to buy Standard here would be an expectation of a shallower cycle and an imminent inflection point in macro-economic developments, which we don’t currently expect. Tactically, we see upside as the stock looks oversold in the near term.

    This is a big vote of confidence on the quality and materiality of these assets that have been plagued by uncertainty on capital gain tax and routing of the export pipeline.

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