Now it’s for real

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Today’s edition features:

  • Watkin Jones (WJG.L)

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Now it’s for real

"With just a week to go to Polling Day, another YouGov poll has indicated a further erosion of the Conservatives’ lead over Labour to just 3 points. Just for good measure, other polls are giving the Tory Party a moderately comfortable win. Where does the truth lie and can the polls, misleading in the past, be expected to be any more accurate this time ? The bookmakers’ betting odds still point to a Conservative win but the much lower odds being offered on the Conservatives compared to the Labour Party has, unsurprisingly, made a hedge bet for Labour a much more active option.

According to the Parliament website, at the end of the last parliament on the 3rd May 2017, the number of seats held by each party out of the total of 650 was as follows :-

Conservative Party – 330
Labour – 229
Scottish Nationalists – 54
Liberal Democrat – 9
Other parties – 28
Total number of seats – 650

In fact, after adjustments, the Conservatives had a working majority of 17 for passing legislation before this General Election was called although ‘rogue’ back benchers have tended to reduce this margin in reality. Hence, the reason for Mrs May wishing to call this Election to try improve her ‘wriggle’ room. Whatever the final election figures, the actual outcome will still depend on the ability of parties to form workable coalitions in order to carry votes through the House of Commons.

This background to the election is important because, if the result proves to be closer than expected, it will carry important implications for the stock market. The options are starkly polar.

An effective win for the Labour Party (through some form of cooperation with the SNP and other parties) will usher in radical new spending measures and a sharp increase in national borrowing. This can be expected to weaken Sterling. For those expecting this outcome, the attractive investments – as was the case after the Brexit vote – will be companies with foreign (non-Sterling) earnings such as the miners, the oil & gas groups and, possibly, subject to President Trump’s intentions towards the sector, some pharmaceutical groups. Investment in gold may look attractive too. Given the Labour Party manifesto pledge to nationalise some utility groups (initially water), share price volatility here should be expected although the eventual take-out price would have yet to be determined.

Given the prospect of yet higher inflation from Sterling weakness and a pick-up in the rate of Government Bond (Gilt) sales to fund Labour’s proposals, downward pressure on bonds should be expected. That is, unless concerns about a sharp slowdown in economic activity means that the Bank of England feels moved to reduce interest rates further.

It is generally expected that City will welcome any result that enables the Conservative Party to head up the Brexit negotiations in which case a general relief rally would be likely. However, given a corresponding rally in Sterling, the non-Sterling earners referred to above should be expected to underperform.

Despite the uncertainty about how accurate the polls will prove to be, the market is likely to be very volatile in line with each latest poll in the remaining few days."
– Mike Franklin, Chief Investment Strategist



Markets

Europe
The FTSE-100 finished last night’s session 0.32% higher at 7,543.77 whilst the FTSE AIM All-Share index was down 0.18% at 990.77. In continental Europe, the CAC-40 finished up 0.66% at 5,318.67 whilst the DAX was 0.40% higher at 12,664.92.

Wall Street
In New York last night, the Dow Jones rose 0.65% to 21,144.18, the S&P-500 firmed 0.76% to 2,430.06 and the Nasdaq gained 0.78% to 6,246.83.

Asia
In Asian markets this morning, the Nikkei 225 had improved 1.81% to 20,218.64, while the Hang Seng firmed 0.41% to 25,914.81.

Oil
In early trade today, WTI crude was down 0.68% to $48.03/bbl and Brent was down 0.55% to $50.35.


Headlines

Fresh bid to oust Unite union boss Len McCluskey
A bid to oust Len McCluskey as the leader of the Unite union is to be launched later. The trade union regulator will be asked to rule that Unite’s recent general secretary election – which Mr McCluskey won by 5,500 votes – was invalid. The defeated candidate in the contest, Gerard Coyne, says his supporters suffered bullying and intimidation. A spokeswoman for Unite said its members would be deeply disappointed by the timing of the announcement.

Source: BBC News



Company news

Watkin Jones (WJG.L, 184.00p) – Speculative Buy
Watkin Jones, a leading UK developer and constructor of multi occupancy property assets, with a focus on the student accommodation sector, yesterday announced its interim results for the 6 months ended 31 March 2017 (‘H1 FY2017’). During the period, revenue fell by -8.4% to £133.7m against the comparative period (H1 FY2016). This was in line with management’s expectation due to the timing of forward development sales and non-repeating inventory sales of completed residential apartments (£11.7m) seen last year. Location and quality of student accommodation schemes in development led to +5.7% improvement in gross margin, resulting gross profit of £29.1m, up +23.8%. On an adjusted basis, both EBITDA and pre-tax profit grew by +26.6% to £21.9m and £21.1m, respectively, leading to basic earnings per share of 6.7p, up +28.8%. On a statutory basis, pre-tax profit was £21.1m (H1 FY2016: loss of £9.9m). Net cash at the period-end fell to £11.7m (H1 FY2016: £15.4m) reflecting timing of forward development sales. On the operational front, the Group sold 7 student accommodation developments (2,580 beds), including one operational asset (590 beds) together worth £216m in development value. The Group is currently in legal negotiations for forward sale of 9 student accommodation developments (3,649 beds) which has development value of £292m. Fresh Student Living (a provider of student letting and management services, ‘Fresh’) now have 12,117 beds (FY2016: 8,310 beds) under management across 43 schemes, while Five Nine Living (provider of letting and management services to the Build to Rent sector) currently contracted to manage 535 Build to Rent units. Watkin Jones’ CEO, Mark Watkin, commented “On behalf of the Board I would like to thank all our staff for helping the Group deliver a very good first half year performance, and we look forward to the second half with much confidence”. The Group declared an interim dividend of 2.2p per share, up +10% on the full year equivalent interim dividend paid last year, to be paid on 30 June 2017.

Our view: Watkin Jones delivered strong interim results, supported by improvement in gross margin which led to a higher profit and consequently enabled a +10% hike in interim dividend, in line with the Group’s progressive dividend policy. Although revenue has declined during the period, this was very much in line with management’s expectation and, in turn, it expects stronger revenue growth in H2. Looking ahead, the Group has strong student accommodation development pipeline with an appraised development value in excess of £920m, comprised of over 11,200 student beds across 31 sites, where 15 are forward sold and 9 are in legal negotiations, through to FY2020. Of these, all 10 student developments (3,314 beds) for FY2017 deliveries has been sold and are on track for completion in prior to the 2017/2018 academic year. For FY2018, 10 student developments (3,415 beds) are scheduled for delivery, of which, 5 are sold and remaining 5 are in legal negotiations for sale. The Group’s forward sale model and strong pipeline of student accommodation provides excellent visibility on future earnings and cash flow. Its Build to Rent sector made an “encouraging progress” with growing development pipeline, while Fresh is set to make an “increased contribution” to the Group’s results. Having increased the interim dividend, the Group said it expects a “similar increase” in the full year dividend, which reflects the managements’ continued confidence in the Group. The fundamentals of the student accommodation market continue to be attractive where the Group observed increased institutional demand for high quality purpose built assets, with a number of new international funds recently entering the market. This has led to a positive impact on development values as competition has increased and yields have improved. With respect to the Brexit, investors have become increasingly confident that the negotiation outcome will not change the currently advantageous conditions offered to EU students, while Sterling devaluation against major basket of currencies has made the UK a more attractive destination for education. This means that Watkin Jones continues to find very keen demand for its developments. The Shares has performed excellently since January 2017 with year-to-date growth of c.+61%. Watkin Jones is now valued at FY2017E and FY2018E P/E multiple of 13.8x and 12.5x, along with dividend yield of 3.6% and 4.0%, respectively. Given positive progress and the Board’s confident outlook, Beaufort reiterate its Speculative Buy rating with a target price of 195p.

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Compiled by:
Barry Gibb, Kazunaga Senga, Sheldon Modeland, Charles Long & Ben Maitland
(t) +44 (0) 207 382 8384
(e) info@beaufortsecurities.com


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Recommendations
During the three months to end-May 2017, the number of stocks on which Beaufort Securities published recommendations was 196, and the recommendations were as follows: Buy – 77; Speculative Buy – 100; Hold – 17; Sell – 2.

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