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FTSE recovers 2% after Brexit shock but traders still cautious

Discussion in 'Market News' started by Lily, Jun 28, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Retailers and banks head higher but precious metal miners suffer profit taking

    It may well be a dead cat bounce rather than a convincing recovery from the recent rout, but leading shares have moved sharply higher for the first time since the shock Brexit vote.

    The FTSE 100 has added 132.41 points or 2.22% to 6114.61 while the mid-cap FTSE 250 index - far more exposed to the domestic UK economy - is up 2.74%. Ipek Ozkardeskaya, senior market analyst at London Capital Group, said:

    Although the FTSE opened upbeat in London this morning, investors should keep in mind that Moody’s, S&P and Fitch have downgraded the UK’s credit rating. And even if the UK banks are better bid at the early hours of trading in London, the market is now pricing in the possibility of a rate cut from the Bank of England (BoE) in an effort to temper potential economic damages as the UK prepares to quit the European Union.

    We warn that the credit rating downgrades and a lower rate outlook are important red flags that investors should consider before blindly jumping on the back of a bull. We restate that the volatility is a sign of stress on both sides. Rapid gains are as dangerous as wild sell-offs.

    All in all, Ocado delivered good sales growth of nearly 14% in a tough market, growth similar to Aldi and Lidl it should be said. However, despite its pure-play online model, it is not immune from market conditions. Amazon Fresh steps up the competitive intensity a good deal in a core market to our minds. Those tough conditions can be expected to weigh upon the group’s margins, as will the P&L catching up with capital expenditure and software amortisation.

    In its present form Ocado stock appears still to be overvalued to us. Key near-term developments are what happens with Morrisons [warehouse discussions], which may yet lead us to be more neutral on the stock if a mutually beneficial outcome ensues, and the materiality of any international expansion.

    1) G4S is a significant beneficiary of sterling weakness, which we assume falls 10% across the board from its pre-referendum levels. 2) G4S has had more than its share of issues in recent years but the vast majority of its underlying business is stable and defensive. 3) We expect asset sales over the next 18 months, which combined with improved working capital management should lead to de-leveraging and free cash flow coverage of the dividend. 4) At 9.6 times 2017 estimated PE with a (covered) 5.4% dividend yield we view the valuation as attractive.

    We lower our recommendation to neutral (from outperform) and target price to 900p (from 1250p) to reflect the impact we believe Brexit will have on big ticket contract and ‘transactional’ driven revenue growth in the foreseeable future. Our earnings per share estimates fall by 3% for 2016 but a much more significant 10%-11% for 2017 and 2018.

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