Watching ITV and ordering a takeaway via and app could be part of a plan to make you rich in 2018. Well, buying stocks in the commercial broadcaster and Just Eat may be a wise move according to two wealth managers from the Channel Islands.
Marc Pullen, Senior Equity Analyst from Canaccord Genuity Wealth Management Jersey, and Matthew Atkinson, Head of Stockbroking from Canaccord Genuity Wealth Management Guernsey, have picked their lucky seven stocks which they think could be worth investing in this year.
They said: “The bull market kept on running in 2017, surprising given the political bombshells of Brexit and Trump the previous year. In 2018, probably in contrast to many bearish commentators out there spooked by high valuations, we remain cautiously bullish, basing our outlook on fundamental economic indicators. We think that increasing volatility and lower asset class correlation will provide some canny investment opportunities.”
FINANCE: Lloyds Banking Group
The UK’s biggest retail bank, Lloyds has done well under the steerage of Antόnio Horta Osόrio. The UK government has completely exited its shareholding and after a six-year hiatus, the bank resumed paying a dividend in 2015, with 7.55p per share returned to shareholders to date. Perhaps even more impressively, last year the company announced a special dividend of 0.5p per share despite agreeing to buy MBNA from Bank of America (BoA) for £1.9bn. After its massive restructuring, Lloyds has emerged as a low-risk bank with 95% of its assets domestically-based. With Brexit looming, we believe Lloyds can weather any short-term volatility. The acquisition of MBNA’s £7bn credit card book from BoA looks sensible – overnight this brings its market share in UK credit cards from 15% to 26%, just behind Barclaycard. PPI refuses to go away, but investors took comfort from its third quarter 2017 results when no additional provision was required. With the August 2019 PPI cut-off date now firmly in place, the market should soon start to value Lloyds on its ability to generate and return capital to shareholders.
FMCG: Reckitt Benckiser
It has a portfolio of 20 superbrands, spanning health (Nurofen, Strepsils), hygiene (Dettol, Harpic) and cleaning (Vanish, Calgon). The group has grown rapidly from organic and acquisitive activity. It acquired the Boots non-prescription drugs business in 2005 and pharma group, Adams in 2008. In 2017 it made its most ambitious deal to date, paying $17.9bn for Mead Johnson, the world’s leading franchise for children’s nutrition. We think children’s nutrition is mostly immune to the deterioration of pricing power we’ve seen in other consumer categories. Annual organic growth has slowed in recent years, but we think it will revert to 4-5%. Add in some margin improvement and EPS growth of c.10% should be achievable over the medium term. This is an opportunity to buy an extremely cash generative company at a 16% discount to its average price earnings ratio (P/E) of 23x (2015 and 2016).
AUTOMOTIVE: BCA Marketplace
It is the leading auto exchange in Europe, with operations in 10 countries. There are three elements to its business (vehicle remarketing; webuyanycar.com; automotive services). BCA published strong first half results in November, demonstrating how much more resilient its business model is than its peers. Outside the UK accounts for less than 10% of profits, but we believe there is opportunity to grow in Europe. We think their position as the market leader in the UK is sustainable for many reasons, including a critical mass of buyers and sellers. For a competitor to try and replicate their business model is nigh on impossible. The group is highly cash generative and trades on 17.9x 12-month forward earnings and a dividend yield of 4.1%. Considering that EPS is expected to grow 9% in the current financial year and by 12% the year after, we see good value in BCA at present.
Last May, CEO of seven years, Adam Crozier announced he was stepping down – under his tenure, profits grew 338% – but Carolyn McCall, CEO of easyJet will replace him this month (under her leadership, easyJet’s earnings more than doubled). ITV has weathered the storms in TV advertising pretty well and we are starting to see green shoots with a return to growth expected in the fourth quarter of 2017. TV still maintains 40% share of all UK advertising spend. If we see continued net advertising growth into 2018, ITV’s shares could re-rate sharply considering they currently trade on just 10.6x 2018 expected earnings.
LEISURE: Just Eat
It is a UK-based digital marketplace for takeaway food delivery. Having been founded in 2001, it has 19 million customers and 75,400 restaurant partners. Restaurants are charged commission on the total value of orders placed on the Just Eat platform. At present, the UK accounts for c.60% of group revenues. But there remains plenty of scope for UK growth given that 51% of UK takeaway food orders were made over the phone in 2016. The larger growth opportunity lies in its 11 overseas territories where the addressable market is 2.8x the size of the UK market. Importantly, Just Eat is the clear number one in all of these territories. It has also diversified, offering products and services to restaurant partners such as card processing, Wi-Fi and motorbike insurance, as well as helping with logistics and delivery planning. 2017 was a turbulent year for its management with its CEO leaving suddenly and the death of its chairman, but a period of stability is hoped for with new CEO Peter Plumb, who headed up Moneysupermarket for eight years. The shares don’t look cheap on a standalone basis, trading on 33.2x 2018 expected earnings. But with earnings expected to grow 46% in 2018, Just Eat remains one of our preferred picks.
OIL AND GAS: Petrofac
It is an oil and gas engineering and construction company, with most of its profits coming from its onshore projects in the Middle East, Africa and Caspian region. What makes it unique is its integrated service offering, which has accounted for about 10% of group revenue. It offers to take over operation of small, less profitable oilfields, in exchange for long-term performance-based contracts. Petrofac usually has a 20-30% cost advantage over its US and European peers driven by its low-cost base of overseas engineers. On 25 May 2017, the shares crashed by 30% after an ongoing investigation by the UK Serious Fraud Office (SFO) was reported, relating to alleged bribery and corruption in Kazakhstan from 2002-2009. Many investors are wary of investing in a company with a SFO investigation looming large. However, we struggle to reconcile the £1.5bn drop in market capitalisation since March with the likely cost of the penalty, which is estimated by analysts to be in the region of US$300m. With shares trading on just 9.2x 2018 earnings, compared to a range of 12x-14x from 2010 to 2016 (excluding 2015 when it was unprofitable) – and with a 2x covered 2018 dividend yield of 5.4% – Petrofac deserves its place as our sole energy pick in this list.
2017 got off to a bad start for BT as the shares plunged by 20% after an Italian accounting scandal meant a writedown four times larger than previously estimated. The shares continue to drift lower as investors are increasingly concerned about a possible dividend cut due to a pension top up issue. The pension issue is being tackled head on. There are a few other issues, such as Openreach’s roll out of fibre to the final 5% of the UK and a potential cut of 20-60% to Openreach’s 40 MB product, as directed by OFCOM. While we don’t expect each of these issues to play out perfectly for BT, we believe that the current share price is assuming the worst on all accounts. With the shares trading on less than 10x current year earnings – c.30% discount to its peers – and with a dividend yield of 6%, BT is too lowly rated not to make our top picks.
In summary, they said: “2018 won’t be stable for markets, but having a measured, informed approach to identify stocks that are undervalued at the moment, but will do well in volatile conditions, will provide investors with decent opportunities.”