FTSE falters after record close but Worldpay and Lloyds lead risers

Discussion in 'Market News' started by Lily, Jan 6, 2017.

  1. Lily

    Lily Forum Member

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    Investors remain cautious ahead of latest US jobs numbers

    Ahead of the US jobs data later, leading UK shares are struggling to hit another record high.

    Two more days of closing highs would beat the eight-day record set in 1997, but so far the FTSE 100 is down 5.10 points at 7190.21.

    We remain cautious on Worldpay’s eCom margins and capex but factor in faster sales growth. Also, we up EBITDA forecasts for Worldpay US: we believe the division now has the right assets to compete in the SMB [small to medium size business] space. In all, we revise our group EBITDA forecasts by 4% for 2017 and 7% for 2018.

    UK economic prospects remain challenging and uncertain but less severe than we had previously anticipated. On revised economic assumptions, our detailed credit quality analysis suggests that provisions will peak below 35bp and we expect the net interest margin to rise helped by the interest rate environment and the planned MBNA credit card acquisition. Together these drive around 15% upgrades to our underlying earnings estimates in 2017 and 2018, suggesting that Lloyds can make a near 13% return on total equity over the next three years and return close to a quarter of its market cap to shareholders. We expect this to drive share price outperformance and upgrade Lloyds to overweight with a 75p price target (from equal weight, 55p).

    Capita was the worst performer in Support Services in 2016 (-57%). Disposals, restructuring, and reinvestment are all required to return Capita to a path of long-term earnings growth but we do not think these New Year’s resolutions will be ticked off quickly. Around 10 times EV/EBITA, around 11 times PE (pro-forma for disposals) suggests the market is pricing in no long-term growth – but deflationary trends are only accelerating and we expect the UK environment to remain pressurised. We cut numbers a further 4-9% (with 2016 estimated margins falling to around 12%), lower our price target to 540p, and remain neutral.

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