The vote to leave the EU has played havoc with many areas of the UK market – but with sentiment overtaking fundamental analysis, this has created numerous opportunities for long-term investors. This is evident from this week’s share-tip roundup from the national newspapers, which focuses heavily on the sectors that have taken a tumble since 23 June and features five “buy” recommendations and not a single suggestion to sell.
Tuesday
Centrica – Hold
Questor kicked off this week’s roundup of share-tips by recommending investors hang on to Centrica. With a competition authority investigation behind it and commodity prices starting to tick higher, the backdrop may be improving for the country’s biggest energy supplier. The investigation’s findings were largely missed as the report was released the same morning as the referendum results were announced – and it provided the lightest of touches. There’s still political risk here and the company could need to raise further capital, which explains the column’s caution, but it does seem as if a brighter future could lie ahead.
Kier – Buy
Buy Kier, was the message from Tempus. The construction group has been hit hard in line with others in the sector following the EU referendum, and with investors wading in to snap up discounted stock, this suggests the discounting may be overdone. Yes, the vote brings uncertainty to the table and with 95 per cent of the company’s work coming from the UK, there’s a lack of geographical diversification, but much of this covers core services – fixing roads and maintaining social housing – that will need to go on regardless. With the shares trading on less than 10 times earnings, the sell-off looks overdone, regardless of what happens next for the UK economy.
Wednesday
Persimmon – Buy/hold
There were mixed messages on Persimmon on Wednesday. Tempus tipped it as a “buy”, pointing out that the promise of a 40 per cent dividend return over the next five years looks attractive – especially when the company is sitting on £462m of free cash, generates a further £400m a year and is sitting on a landbank that will last well into the next decade. There has been no sign of markets slowing in the wake of the referendum, and action by the Bank of England should mean mortgages are both more readily available and cheaper, too. The column believes it would take a cataclysmic disaster to knock the trajectory here.
Questor was more restrained in its outlook, although it acknowledged the strength of the balance sheet and the fact that the company will continue to benefit from government stimulus measures until at least 2021. The real concern surrounds the contagion risk coming from the suspension of the commercial property funds seen this week and the accompanying risk that this could weigh further in the medium term.
Performance of stock over 1yr
Source: FE Analytics
Thursday
Secure Trust Bank – Buy
Questor tipped Secure Trust Bank on Thursday. Lenders have been hit hard by the Brexit vote for a number of reasons, ranging from low interest rates squashing margins through to the risk of bad loans increasing as the economy slows. However, the sell-off may have been overdone – banks with large overseas operations such as HSBC and Standard Chartered have fared better, but the column thinks that Secure Trust Bank may have been unduly marked down. It has virtually no exposure to commercial property and mortgage debt is seen to be of high quality. The business is hugely profitable and is well placed to pick up cut-price challenger banks.
Melrose Industries – Buy
Buy Melrose Industries, said Tempus. The company is primed to make its latest acquisition in the shape of Nortek, a US manufacturing business that has been struggling with a distribution network that went wrong, but the market reacted enthusiastically to the news on Wednesday – despite the fact it came with a rights issue. Melrose has good form in reshaping businesses like this and clearly there’s a degree of confidence that the model can be deployed successfully once again.
Friday
Associated British Foods – Buy
Yet another positive recommendation from Tempus – this time on Primark’s owner Associated British Foods. The shares posted a phenomenal day of gains during Thursday’s session in the wake of a positive market update, pushing them almost back to pre-referendum levels. The low pound offers the business some considerable benefits, on the basis that half of all profits come from outside the UK. Yes, there will be margin erosion at Primark where goods are bought overseas and sold in the UK. Consumer confidence could also act as a brake here, but the brand continues to grow its footprint in Europe, which should mitigate the issue. The valuation is punchy, sitting in the mid-20s, but still looks good in the long term.
