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FTSE up nearly 2% with Merlin higher but travel shares down after Istanbul

Discussion in 'Market News' started by Lily, Jun 29, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Alton Towers owner boosted by upgrade, as investors hunt for bargains

    The post-Brexit bounce is continuing in stock markets as investors continue to snap up what they see as bargain-basement shares.

    With the UK unlikely to trigger Article 50 - which sets the clock ticking on the country’s departure from the European Union - in the immediate future, markets are taking stock of the situation. But despite a calmer tone at the moment, volatile moves are still likely for some while, even if they are upwards rather than falling. Rebecca O’Keeffe, head of investment at stockbroker Interactive Investor, said:

    Investors, who are still trying to work out whether current market levels pose and opportunity or a threat, are coming down firmly on the side of opportunity with equities across the UK and Europe up strongly for a second day. With global central banks all trying to reassure markets, prices are stabilising and volatility is falling. However, it is still very early in the process and significant political and market risks remain, so we may start to see some investors start to sell the rally, which could see markets pare back some of the gains.

    We forecast a full year 2015 to 2018 estimated earnings per share compound annual growth rate of 17.4% (but only 9.3% adjusting for the Alton Towers base effect). This is driven by4.3% like for like sales growth and 7 new Midway sites per year, as well as Legoland Japan and Legoland Korea (due to open by 2018) and accommodation rollout across the estate. Merlin’s 2017 estimated valuation has come down to 16 times/4.7% free cashflow yield, compared to European hotel stocks on 14.9 times/2.3% and Whitbread on 13 times / -1.5%.

    If Merlin were to accelerate the Midway rollout, open a new owned/leased Legoland or conduct further bolt-on M&A, there could be upside to our forecasts. But this looks unlikely, in our view, before our 2017 estimated “peak” capex forecast of £271m (17% of sales, 1.9 times depreciation)

    Following the UK referendum result and Datwyler’s acquisition of Premier Farnell we re-visit our estimates for organic growth and margin improvement. With Credit Suisse economists forecasting a shallow recession in the UK in the second half of 2016 and a Euro area slowdown we moderate our organic growth forecasts which now average 2.1% across 2017 to 2021 (from 2.9%). The foreign exchange movements which have followed the Brexit vote provide revenue benefits, however as a net buyer of dollar denominated COGS, Electrocomponents are exposed at the gross margin level by a weakening in the pound.

    Consolidation in the market place not involving Electrocomponents was highlighted as a risk to our recommendation in our April 2016 note and following Datwyler’s 165p cash offer for Premier Farnell we believe Electrocomponents is likely to experience incremental competitive pricing pressures, especially in Europe where operations overlap. We reduce our EBITA estimates by around 60 basis points per annum across the forecast period with the gross profit margin decreasing from prior estimated by 90 basis points to 2021. The company continues to execute well its business improvement strategy, increasing the growth of own label products and over-delivering against cost reduction targets. However, the stock currently trades at a 50% premium to its 2009 two year forward PE multiple and whilst we are not forecasting a global recession and recognise current management’s positive impact, in our view there is room for a pronounced de-rating.

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