UK stocks have rallied this month and companies of all sizes have issued updates. Analyst Edmond Jackson shares his findings and publishes ratings for half a dozen of them.
A spate of moderate re-ratings is happening across London-listed equities in varied industries – as if mean-reverting upwards after an unjustified spate of market pessimism.
This affirms a sense of how a low was established last October after the Kwarteng “car crash” budget, while sentiment suffered from concerns about a recession materialising in 2023.
This was partly brushed aside by Christmas trading statements from retailers, which showed UK consumers in far better spirit than suggested by the late autumn consumer confidence data.
February and March then saw – broadly – another dip in UK domestic equities, with confidence picking up again so far this April, historically one of the best months of the year for stocks.
The challenge therefore is first to discern whether stock re-ratings are down to companies having guided cautiously - so as to deliver “in line” result rather than disappoint - or the economy genuinely being more resilient than expected.
And second, whether such resilience is liable to falter given interest rate rises have failed to tame UK inflation in particular. Further rate rises would increase the odds of a mild recession at least.
BT as a proxy for market sentiment
As an introductory example: one aspect I notice of BT Group (LSE:BT.A) is a propensity to accentuate market trends, as if traders use it as a bull/bear proxy to exploit sentiment shifts.
From end-March to mid-April for example, the shares have risen 15% from 139p to 160p (currently 156p), versus a 5.6% rise in the FTSE 100.
Yet BT has added no new information on the business since a 2 February “in line” trading update covering its nine months to 31 December.
It is hardly unique; several times in recent years I have felt BT traded too high or low relative to the market. Currently, however, investors perceive a robust 5% dividend yield twice covered by expected earnings, helped by contractual terms of annual price rises of retail price inflation plus 4%. I continue to rate the shares a Hold.
Tuesday’s trend-setters: Volex and MITIE
Volex (LSE:VLX), a small-cap maker of power/data transmission products, declared a minimum 16% increase in revenue for its year to 2 April, with underlying operating profit at least 17% up – both ahead of market expectations.
It does appear to affirm strengthening markets – Volex serving customers worldwide – but mind, both figures benefit from acquisitions too. Management is confident going forward.
The stock jumped nearly 20% to over 252p, settling back at 244p – on a forward price/earnings (PE) ratio of around 10 times, you might say was cheap, hence it being sensitive to any reasonably robust update. Medium-term prospects still hinge, I think, on whether a US slowdown later this year hurts wider economies. Hold.
Mid-cap UK facilities management group MITIE Group (LSE:MTO) revealed a slight revenue rise for its 31 March year, albeit operating profit ahead of expectations. A 13% share price rise to over 92p (currently 91p) perhaps also reflected intent to pursue a £50 million share buyback programme. While small in context of a £1.2 billion market cap, it adds an aspect of technical support.
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Against fears of rising costs in an inflationary environment, MITIE was able to cite “momentum from margin enhancement initiatives expected to continue in the March 2024 year”.
Encouragingly, in the first three months of this year, like-for-like revenue has risen around 10%, reflecting contract wins and re-pricing rather than merely acquisitions. This does – so far – counter claims that the UK businesses would struggle against stagflation as 2023 got going.
I applied a “hold” rating at 82p last November and note a new non-executive director bought £20k worth of shares near 79p on 6 April. The chart looks in a steady uptrend since November 2020, and this could continue if MITIE’s narrative remains positive.
Wednesday’s warmers: Cake Box and Redde Northgate
Cream cakes retailer Cake Box (LSE:CBOX) cited a 5% revenue rise for its year to 31 March. While in line with market expectations I still see it as a macro positive – versus claims that once Christmas was over, consumers would tighten spending in the new year. This is good news given cream cakes are a classic discretionary spending item, and despite January’s seasonal media splash for healthy living and weight loss.
Yet Cake Box’s revenues improved chiefly in its second-half-year and its margins benefited from lower freight rates. Customer retention has been aided by keeping price rises selective.
Perhaps the market had been steeled for worse as, despite an essentially “in-line” update, the stock rose 7% to 126p (currently 125p) on a forward PE around 11 times. Hold.
Mid-cap Redde Northgate (LSE:REDD) provides vehicles and related services and has cited better visibility of supply, as has already been seen for vans and cars in its Spanish business. Traffic volumes have recovered near normal levels, post-lockdowns. “As a result of this strong performance, the board believes profit for the year to 30 April will be ahead of market consensus at the top end of the range...the group is performing at record levels.”
The stock rose over 4% to 380p, settling at 375p on a 7 times forward PE and notably a 6.5% prospective yield covered over twice by consensus earning. It appears a modest rating to reflect uncertainty as to recession risks for this £860 million company.
I applied a “buy” stance at 258p in January 2021 and it rallied to 430p by mid-year, though I tempered to “hold” last September given concern the 2009 annual report showed recession causing a 70% hit to underlying profit and EPS.
High costs of buying vans helps hiring, although together with services, it remains relatively cyclical, hence the market pricing for a 6.5% yield.
The stock has risen 10% this month, so may consolidate especially if interest rate concerns weigh.
Thursday’s thrust from British American Tobacco
The chair re-iterated February’s guidance for 3-5% annual organic revenue growth, at constant currency (excluding Russia and Belarus). This to support mid-single-digit earnings per share (EPS) growth, although he said “we expect our performance, on an organic basis, to be second-half-weighted”. Those of a nervous disposition could regard that as liable to end up as a profit warning.
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Despite risks to its nascent vaping business, from US regulators, this could be offset by market share becoming focused on just a few operators.
BAT has traded sideways over the last four years and is currently around the same level as 2014 after a trip over 5,500p in 2017.
It is a classic inflation beneficiary, able to rely on smoking addicts absorbing price increases, while inflation reduces its £35 billion debt.
Ethics of holding a smoking stock are your call, and the debt is exposed to higher interest rates. A near 9% yield with projected earnings cover of 1.6 times tilts towards a perception of value, hence the price rise. Buy.
Can UK economy take three more interest rate rises?
I broadly agree with Andrew Sentence, a former member of the Bank of England monetary policy committee, who has critiqued its failure to normalise rates before inflation took off.
He stepped down in 2011 after failing to convince the committee it should raise rates from 0.5%. Last August, he predicted 4% versus 1.75% at the time, and currently says nearer 6% may be required to stem 10% inflation.
Consensus appears to be settling on three further 0.25% rises, although it’s unclear quite how that would affect business and consumer activity over the next year or so.
Similarly, investors who came into the game over the last 40 years have no experience of a high-inflation environment.
I would therefore treat April’s stock market rally warily, given we have yet to see the consequences of rate rises yet to happen.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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