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The Weak Pound Is Making British Assets Attractive

August 21
23:04 2019

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There’s something striking about the timing of Victor Li’s bid for Greene King, as the pound trades against the Hong Kong dollar near levels last seen in the mid-1980s. With about two months to go before the Brexit deadline, and further potential currency weakness, it fuels the debate about opportunities to scoop up U.K. assets that look cheap on paper.

Maybe it’s little wonder that there’s interest, as U.K. domestic shares (with at least 70% of sales within their home market) have depreciated since 2018 and have just hit a 10-year low in U.S. dollar terms. The case for those stocks has been made before, but is gaining ground — particularly in the leisure space.

Morgan Stanley analysts have noted particular interest from private-equity funds for U.K. companies in the industry. In June, Merlin Entertainments recommended a cash offer at a 37% premium, while Flutter is the subject of takeover speculation in the market. In the brewing space, Ei Group has supported a bid from TDR’s Stonegate Pub Co., at a 39% premium, while Fuller sold its brewing business to Asahi at high valuation multiples (23.6x EV/Ebitda). Looking at average price targets below, analysts aren’t so upbeat about the stocks, however.

Still, buyers don’t see it that way. Richard Marwood, senior fund manager at Royal London Asset Management says the bid for Greene King shows that British assets “are not a no-go zone” for foreign companies. “This is another example of an overseas buyer showing an interest in a U.K. company, which is a positive signal during what remains an unprecedented time in the U.K.’s economy,” he adds. (NOTE: RLAM holds about 2.8% of Greene King, according to data compiled by Bloomberg).

According to Barclays analysts, private equity funds could leverage the freehold structure of several leisure companies, including Whitbread, which has been the laggard of the sector this year. Brewer and pub company Marston’s has the greatest business similarity to Greene King, they said.

Greene King Deal May Spell More U.K. Pub Closures, Say Analysts

Even if there aren’t many companies with Greene King’s characteristics, as Bloomberg columnist Chris Hughes highlighted, the flurry of deals, combined with the weakness of the currency, may start to offset some Brexit risk. The relative outperformance of the FTSE 250 in August vs. the FTSE 100 — it’s down 3.4% vs 6.1% for the big-cap index — may signal that investors are more optimistic about the U.K. consumer, as confidence shows signs of improvement.

In the meantime, Euro Stoxx 50 futures are rising 0.1% ahead of the open, while S&P 500 contracts are up 0.3%.

SECTORS IN FOCUS TODAY:

Watch Italian stocks and bonds on the aftermath of Prime Minister Conte’s resignation. Stocks didn’t take the news so well, falling yet again as analysts branded the situation a “total mess.” More uncertainty is on the menu.Watch the pound and U.K. stocks as U.K. Prime Minister Boris Johnson is set to visit Angela Merkel and Emmanuel Macron this week as he attempts to garner support for his plans to renegotiate the current Brexit deal. Those overtures fell on deaf ears with the EU. Beyond that, the U.K. may wait until after Brexit to name a successor to Mark Carney heading the Bank of England.Watch for central banks’ comments, starting with Fed’s minutes on Wednesday. Traders are starting to prepare for the possibility that even if Fed Chairman Jerome Powell does signal further easing at his speech on Friday, the overall tone may disappoint. Traders also continue to find ways to play the inverted yield curve, though a Japanese mega fund thinks markets are now so synchronized that managers risk losing on every front.Watch the Lira and Turkey-exposed stocks as the currency took a hit with the dollar strength catching up with favored yield play among currency investors. Traders seem to anticipate the central bank is taking an easier monetary policy path than anticipated, raising the risk things could overheat again.

COMMENT:

“Widening sovereign spreads between Italy and Spain, Portugal over the last few months are an indication of market concerns about the M5S-Lega government,” commented Matteo Ramenghi, Chief Investment Officer for Italy at UBS GWM. “A M5S-PD coalition would likely introduce more fiscal discipline, but its lifespan would probably be short. Conversely, should elections take place, a win by the center-right might prove more market friendly than the current government, but the prospect of a populist win would lead to a bumpy ride for Italian assets.”

NOTES FROM THE SELL SIDE:

Tullow’s “world class” Guyana assets can move the company to the next level, Peel Hunt says, initiating at buy with PT 250p.Berenberg double-downgrades Nostrum to sell and slashes price target almost 88% to a Street-low, as the broker struggles to see any value in the equity.Citi initiates SEB with a buy rating, saying the French household appliances maker has a cheap valuation. PT of EU163 offers 20% upside to Tuesday’s closing price.

COMPANY NEWS AND M&A:

Stadler Wins CHF270m Train Order From Poland’s PKP IntercityFerguson Sounds Out Top Investors on Moving Listing to U.S.: FTUniCredit Starts Sale of EU1b Unlikely-to-Pay Loans, MF SaysCommerzbank May Close 100-200 Retail Branches: HandelsblattEDF Venture in Talks for Part of Rolls-Royce Nuclear Unit: SkyAtos Wins $ 198m Contract With State of CaliforniaDanish FSA to Report Danske to Police for Investment Product: JPLeroy Second Quarter Adjusted Ebit 3.5% Below EstimatesSports Direct Approaches Mid-Tier Auditors on Possible Tender:FT

TECHNICAL OUTLOOK for Stoxx 600 index:

Resistance at 374.5 (61.8% Fibo); ~386 (uptrend); 395.1 (July high)Support at 371 (200-DMA); 365.5 (50% Fibo, May low)RSI: 42.6

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

Resistance at ~3,400 (uptrend) 3,403 (61.8% Fibo); 3,442 (50-DMA)Support at 3,249 (June/August low); 3,302 (200-DMA)RSI: 44.8

MAIN RESEARCH AND RATING CHANGES:UPGRADES:

2020 Bulkers upgraded to buy at BTIG; PT Set to 100 KronerBakkafrost upgraded to buy at Kepler Cheuvreux; PT 610 KronerCapita upgraded to buy at Goldman; PT 2 PoundsGEA Group upgraded to buy at Goldman; PT 30 EurosGreene King upgraded to hold at BerenbergJyske upgraded to hold at ABG; PT 205 KronerLeoni upgraded to buy at HSBC; PT 11.75 EurosNext upgraded to add at AlphaValueRaysearch Upgraded to Buy at Pareto Securities; PT 180 KronorScatec Solar upgraded to buy at SpareBank; PT 120 KronerTokmanni Group upgraded to buy at Goldman; PT 11.50 Euros

DOWNGRADES:

Bakkafrost downgraded to hold at SEB Equities; PT 558 KronerGreene King downgraded to sector perform at RBC; PT 8.50 PoundsLegal & General downgraded to hold at HSBC; PT 2.60 PoundsNostrum Oil & Gas downgraded to sell at BerenbergTalanx downgraded to hold at Nord/LB; Price Target 40 Euros

INITIATIONS:

AIB Group rated new equal-weight at Barclays; PT 3.30 EurosSEB rated new buy at Citi; PT 163 EurosTullow rated new buy at Peel Hunt; PT 2.50 Pounds

MARKETS:

MSCI Asia Pacific up 0.5%, Nikkei 225 down 0.3% S&P 500 down 0.8%, Dow down 0.7%, Nasdaq down 0.7%Euro down 0.05% at $ 1.1095Dollar Index up 0.06% at 98.25Yen down 0.24% at 106.49Brent up 0.5% at $ 60.4/bbl, WTI up 0.4% to $ 56.4/bblLME 3m Copper up 0.3% at $ 5730/MTGold spot down 0.3% at $ 1503.1/ozUS 10Yr yield up 2bps at 1.58%

ECONOMIC DATA (All times CET):

10am: (SP) June Trade Balance, prior -2.11b10:30am: (UK) July Public Finances (PSNCR), prior 15.2b10:30am: (UK) July Central Government NCR, prior 13.5b10:30am: (UK) July Public Sector Net Borrowing, est. -3.4b, prior 6.5b10:30am: (UK) July PSNB ex Banking Groups, est. -2.9b, prior 7.2b

–With assistance from Lisa Pham and Jan-Patrick Barnert.

To contact the reporter on this story: Michael Msika in London at [email protected]

To contact the editors responsible for this story: Blaise Robinson at [email protected], Jon Menon

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.

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