Hello the global earnings season. This is a quarterly reality which makes my life periodically very busy...but what could be more interesting than zoning into the latest thoughts of a bunch of corporations around the world? Three in the UK market capture my attention… and the first is Barclays (BARC), where I had a 'chill pill' message for the activist investor on the shareholder register earlier in the month. I guess after these first quarter numbers Edward Bramson (who has invested via his Sherborne Investors vehicle) is still royally hacked off with the incumbent management team, as the source of much of his activist ire was the investment banking unit. And guess what the numbers showed?
Well the core UK business showed 'strong return on tangible equity of 16.4% with broadly stable income despite margin pressure', which seems workable (if not very exciting). The 'international' business with a bunch of card/payments exposure also generated a 10% return on tangible equity. However, the aforementioned investment bank numbers - described by the company as a 'resilient performance reflecting franchise strength despite the challenging income environment' - saw a slip back to a single digit return on tangible equity as 'equities decreased 21%, driven by a reduction in derivatives due to reduced levels of volatility and client activity compared to Q118'. Oops. Still, reading through the comments from the group, overall there is overt value here trading on around x0.6 tangible book and reiterating - aided by cost suppression initiatives - a confirmation of a move to all-in (including any residual bad bank elements) 10% return on equity next year. To me, that still means the share should be trading nicely above 200p – that would represent a still 25% discount to book value, reflecting the utility nature of core banking not to mention current suppressed UK growth levels, Brexit uncertainty and all that. If I was the activist I would still be chilling. Either the debate goes his way or (more likely) UK financials have a bit of a run as the politicians very mildly get their act together to cap 'cliff edge' Brexit uncertainties and some investors chase the current (and fundable) 4%+ yield.
A company that is certainly not chilling at the moment is Sainsbury (SBRY), which just got the formal pushback from the Competition and Markets Authority over its deal with Asda. As I noted last month, until this clarity was aired there was no point in buying the shares – which on the cancellation of the deal are now skulking at/around a big five year support level. Technical analysts are no doubt frothing about all this but given the fast moving nature of the food retail market I would still be on the sidelines here as the company - which went fully in on the Asda deal - works out a new strategy or deal. My default sector position remains Tesco (TSCO), where I have observed previously good recent progress and the options around an upcoming capital markets day in June.
Finally, I see Taylor Wimpey (TW.) - which I have already chastised this week - admitted rising input cost pressures in its pre-AGM statement. Cue a sector-wide fall in share prices. No surprises on this and the company and the sector remain an avoid/sell. At least Taylor Wimpey's management realised that the extra discount for the CEO's proposed flat purchase was a very wrong move and rescinded this. One good step does not make a strategy though.
Filed under: Barclays, Sainsbury, TaylorWimpey, Bidstack, Audioboom, Ferrexpro, Minoan, WPP, RBS, HotStockRockets
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