Goldman Sachs boss: City ‘will stall’ over Brexit risk

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Today’s edition features:

  • Morrison (WM) Supermarkets (MRW.L)
  • Morses Club (MCL.L)
  • RSA Insurance (RSA.L)

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"A mixed bag of macro releases from the US yesterday left its three principal indices largely directionless. All closed with just fractional moves after Facebook shares seemingly became unnerved by the warning its advertising revenue growth is likely to slow this year. While Consumer and Healthcare stocks found good support, pressure was evident in the Steel, Telecom, and Real Estate, while the S&P energy sector put in the worst overall performance, falling by 1.9%, as the price of crude for June delivery is tumbled US$1.17 to US$46.65 a barrel. Of the various statistics, an unexpected drop in productivity in the first quarter along with a bigger than expected jump in unit labor costs rather disappointed, while the Commerce Department reported factory orders creeping up by only 0.2% in March, albeit after surging to a revised 1.2% in February. Such a confused picture means that market watchers will be carefully scrutinising April’s key and closely followed Nonfarm Payrolls data which is due for release this afternoon, with consensus looking for 180,000 jobs in April after rising by 98,000 jobs in March; unemployment is expected to tick up to 4.6% from 4.5%. Having fallen back as this was contemplated along with the continuing slide in commodity prices, the US$ rose slightly in Asia following the House of Representatives vote to approve a bill to replace the Affordable Care Act. Republican leaders had expressed confidence the Bill had gained enough support to pass, but the final outcome was still remarkably close, which suggests Trump still cannot expect an easy ride going forward as he attempts to get other, even more contentious major campaign pledges through Congress. The yield on the benchmark 10-year Treasury note settled at 2.354% on this news, compared with 2.309% Wednesday, marking the highest yielding close since April 10. During this morning’s Asian session, Japan’s Nikkei remained on holiday, but other Asian bourses were led quite sharply down by the Shanghai Composite as China’s crackdown on speculation and borrowing left investors fearing the affect this could have on underlying demand for base metals. The most actively-traded iron ore futures, for example, opened down 6.8% on the Dalian Commodity Exchange, adding to its 8% limit-down on Thursday, unnerving the Hang Seng and ASX in the process. The STOXX Europe 600, meanwhile put in a good performance yesterday, led by the CAC 40 which closed at a new weekly high ahead of Sunday’s final election round with Macron seemingly home and dry given fairly consistent pollings of around 60% of the national vote. The UK is not due to release any new macro data today, while the EC is only expected to publish its Economic Growth Forecasts report. The US will provide its April Nonfarm Payrolls, Average Hourly Earnings, Labor Force Participation Rate and Unemployment, while a number of speeches are due, including from the Fed Chair, Janet Yellen, the FOMC’s John Williams and the Fed’s Charles Evans. UK corporates due to release earnings or trading updates include the Intercontinental Hotel Group (IHG.L), International Consolidated Airlines (IAG.L), Smurfit Kappa (SKG.L), Smith & Nephew (SN..L) and BBA Aviation (BBA.L). Given the absence of any trend set by the US overnight, London is expected to reflect Far Eastern sentiment this morning with a cautious opening, albeit on modest volume; the FTSE-100 is seen down 15 to 20 points in early trade."
– Barry Gibb, Research Analyst


Markets

Europe
The FTSE-100 finished yesterday’s session 0.19% higher at 7,248.10 whilst the FTSE AIM All-Share index was 0.14% better-off at 965.36. In continental Europe, the CAC-40 finished up 1.35% at 5,372.42 whilst the DAX was 0.96% higher at 12,647.78.

Wall Street
In New York last night, the Dow Jones fell 0.03% to 20,951.47, the S&P-500 added 0.06% to stand at 2,389.52 and the Nasdaq gained 0.05% to 6,075.34.

Asia
In Asian markets this morning, the Nikkei 225 had risen 0.7% to 19,445.7, while the Hang Seng lost 1.16% to stand at 24,396.85.

Oil
In early trade today, WTI crude was down 3.1% to $44.11/bbl and Brent was down 2.81% to $47.02/bbl.


Headlines

Goldman Sachs boss: City ‘will stall’ over Brexit risk
The chief executive of the world’s second largest investment bank has warned that London “will stall” because of the risks from the Brexit process. Lloyd Blankfein said that his firm, Goldman Sachs, which employs 6,500 people in the UK, had “contingency plans” to move people depending on the outcome of the negotiations. Mr Blankfein said he hoped the bank would not have to trigger the plans. He wants to keep as much of its activities in the UK as possible.

Source: BBC News



Company news

Morrison (WM) Supermarkets (MRW.L, 234.40p) – Buy
WM Morrison Supermarkets (‘Morrison’), one of the UK’s largest Supermarket operator, yesterday provided its trading statement for the 13 weeks ended 30 April 2017 (‘Q1 FY2018’). During the period, total turnover advanced by +2.8% (+5.8% including fuel), while like-for-like (‘LFL’) sales grew by +3.4% (+6.3% including fuel), against the comparative period (Q1 FY2017). LFL sales were comprised of +3% growth in Retail and +0.4% rise in Wholesale. On the operational front, the Group said it remains focussed to become more competitive on price while also improving customer satisfaction through shorter queues and new ordering system. In terms of its offerings, Morrison has expanded its ‘Best’ premium range and introduced a ‘Eat Smart’ healthy eating range. New Nutmeg clothing Womenswear offer was introduced into over 50 stores with extended range into baby and child accessories. New website, flowerworld.co.uk, was also launched during the period, which offers a range of fresh bouquets, while new online and in-store ‘Food to Order’ offer for pre-ordering is now also live. The Group confirmed that its wholesale partnership with Amazon, ‘Morrisons at Amazon’ continues to expand, with the same-day and one-hour delivery service recently extended into more London postcodes. Morrison’s CEO, David Potts, commented “We are improving the shopping trip in many different ways, which is making Morrisons more popular and accessible for customers. These new initiatives in-store, online, in wholesale and services are beginning to build a broader, stronger Morrisons”.

Our view: Morrison starts FY2018 with a good performance! LFL sales marked their 6th consecutive quarter of positive growth, rising +3.4% (+3.0% excluding wholesale) while accelerating from the +2.9% (+2.5% excluding wholesale) achieved in Q4 FY2017 and strongly outperforming its peers. Sales growth of +2.8% was also encouraging as Morrison had closed 8 stores (while opening 1 new store, and extending 5 others) last year, leaving net space to decline by 48,000 square feet. Online sales also contributed toward Morrison’s LFL performance where Morrison.com (strategic partnership with Ocado) contributed +0.5%, while ‘Morrisons at Amazon’ delivered +0.4% growth. Operationally, Morrison’s introduction and expansion of its ‘Best’ premium range also turn out to be successful, while the Group also initiated various new services and offerings for its customers. According to Kantar Worldpanel report published on Wednesday, Morrison was the “best performer among the big four supermarkets” for the 4th consecutive period, with sales for the past 12 weeks increasing by +2.2% (Tesco: +1.9%, Sainsbury: +1.7%, ASDA: +0.8%). Looking down Q1’s Key Performance Indicators (‘KPIs’), the Group saw LFL number of transactions increased by +4.6%, while items per basket fell -6.9%. This is very much in line with the current trend, with shoppers continuing their shift towards ‘top-up shopping’ and away from weekly ‘main shopping’. Looking ahead, the Group reiterated its FY2018 guidance of net debt ending at less than £1bn. The Group’s medium-term targets includes; 1) £50m-£100m incremental underlying pre-tax profit (from wholesale, services, interest and online), 2) £1bn improvement in working capital, and 3) a minimum of £1.1bn disposal proceeds, remain unchanged. Morrison is presently valued at FY2018E and FY2019E P/E multiple of 19.4x and 17.9x along with dividend yield of 2.5% and 2.7%. Given the continuing positive momentum and the quality of the underlying business, Beaufort reiterates its Buy rating on the shares with a target price of 260p.

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Morses Club (MCL.L, 132.38p) – Buy
The UK’s second largest home collected credit lender, yesterday announced that it has received full FCA authorisation following a period of operating under interim permission. Paul Smith, Chief Executive Officer of Morses Club, commented: “We are delighted to have received full FCA authorisation, marking a significant step in the development of the business. We will continue to focus on delivering good customer outcomes, using technology to maximise the customer experience. We strongly believe that listening to our customers and developing products to match their needs will help to continue to consolidate our strong position within the home collected credit market.”

Our view: Not a surprise, but still important, positive news. This authorisation is key to the Group negotiating rates it pays its banks as well as securing expanded facilities. With opportunities for this long-established still abounding, it will ensure management is positioned to capitalise on the continuing evolution of new technology and capabilities to enhance customer and agent experience, increasing efficiency and improving service while embedding regulatory compliance remains key to its progress. Technological efficiencies are capable of delivering a 28% capacity increase in customer/manager ratio, while new products developed and introduced, including Morses Club Card (cashless lending) in April 2016 and Dot Dot Loans (online lending) in March 2017, enhances the increasing connected user experience and convenience. Meanwhile, regulatory burdens continue to force the consolidation of this highly fragmented industry; Morses took advantage by completing seven acquisitions with total gross receivables of £6.8m last year, while the strategic take-over of Shelby Finance Limited in January 2017 provided it with a FCA-approved platform for launch of Dot Dot Loans at significantly lower cost than through a bespoke IT build. The CEO has already confirmed his Group has made a strong start to the current year in terms of both credit issued and customer numbers. Morses also has a significant pipeline of territory builds bringing high quality growth along with further attractive acquisition opportunities in the wider non-standard finance market. Such moves could potentially create a step improvement in the Group growth rate over the next two years, even if the bolting on of a significant batch of additional agents could impact short-term cost. Any squeeze in current year margins would, however, be more than compensated in the P&L just one further year out. Despite recent outperformance, the underlying quality of Group operations, together with the visibility they bring plus scenario for a period of accelerated operational expansion, are still not fully priced in. A 2018E pre-tax forecast of £19.5m followed by £23.0m the year after, places the shares on earnings multiples of 11.1x and 9.3x, together with an attractive 2018/18 yield of 5.3%, suggest the shares will continue to outperform. Beaufort retains a price target for Morses Club of 155p/share along with its Buy rating.

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RSA Insurance (RSA.L, 619.00p) – Buy
RSA Insurance (‘RSA’), a leading global general insurance provider, yesterday provided trading update for the 3 months ended 31 March 2017 (‘Q1 FY2017’). During the period, the Group said insurance and financial market conditions are broadly unchanged and net written premiums increased by +14% to £1,710m (+4% at constant exchange rate ‘CE’ basis), supported by +2% growth in volumes and +2% rise in rate, against the comparative period (Q1 FY2016). Geographically, Scandinavian premiums increased by +14% (CE: +2%) to £664m, premiums in Canada increased +28% (CE: +6%) to £267m, UK premiums rose +10% (CE: +7%) to £629m, Middle East premiums grew +23% (CE: +7%) to £59m, while premiums in Ireland remained flat at £62m (CE: -10%). The Group noted that Q1 operating profit was “strong and ahead” of its plans. Weather event costs and large losses stood at 2.0% and 9.8%, respectively, of net earned premiums. Underwriting performance was also strong with attritional loss ratio, expenses and expense ratios all improved year-on-year, in line with target. On the operational front, the Group completed the disposal of its UK Legacy liabilities with issuance of c.£300m of restricted tier 1 notes in Scandinavia and retirement of £592m of existing high coupon debt. Tangible shareholders equity at period end was £2,875m (end-Q1 FY2016: £2,862m) and tangible net asset value per share stood at 282p. Solvency II coverage ratio was 166% with tier 1 and 2 capital providing 151% coverage.

Our view: RSA reported good start of the FY2017 with a +4% increase in premium income at constant exchange rates, half from volume growth and half from rate increases. The successful completion of disposal of UK Legacy liabilities along with related capital restructuring was also a positive progress for the Group as it reduces risk, improve capital resilience and boost profits. Following the disposal, the Group now expects reduced interest costs of c.£54m for FY2017 and around £40m in FY2018 (FY2016: £99m). Solvency II coverage ratio has also improved as a result of disposal, partly offset by the net reduction in debt. At its FY2016 full year result announced at end-February, the Group has raised its target return on tangible net assets to 13-17%, while stating it seek to moving towards ‘best in class’ combined ratio performance in its markets. The shares are valued at FY2017E and FY2018E P/E multiples of 14.4x and 12.4x along with a P/NTAV of 2.1x and dividend yields of 3.3% and 4.6%, respectively. With the good progress made in the first three months of the year, together with confident management stated “key proof points for further progress coming through positively”, Beaufort reiterates its Buy rating on the Shares.

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To read Beaufort’s full research archive click here

Compiled by:
Barry Gibb, Kazunaga Senga, Sheldon Modeland, Charles Long & Ben Maitland
(t) +44 (0) 207 382 8384
(e) [email protected]


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