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Atlantic View – Keep Buying Kingfisher #KGF, DIY Retailer Flying High Thanks To COVID Lockdown Sales Boom
by John Woolfitt, Atlantic Capital Markets
Fundamentals & Statement Summary
Kingfisher (KGF), the owner of B&Q in the UK and Castorama and Brico-Depot in France, today announced a resilient first-half sales performance after the impact of the COVID lockdown during Q1 was offset by strong sales recovery in Q2. The group said that the crisis had ‘reinforced’ its approach, ‘pushing’ the retailer to be ‘bolder.’ Sales fell 1.3% to £5.9bn, while adjusted pre-tax profit grew by 23.1% to £415m as a huge 164% increase in online sales and a strong recovery in reopened stores offset the temporary closure of all outlets in the UK and France early in the Covid-19 pandemic.
The results comfortably exceeded adjusted profit forecasts of £361m, and as a result Kingfisher said it would repay the £23m it received in furlough payments from the UK government. Free cash flow of £1.04bn, up £838m, reflected higher operating profit, working capital inflow of £656m and lower capex.
Kingfisher said it had benefited from a surge in spending on homes and gardens as people adapted their houses for working from home, using money they would have spent on holidays or entertainment.
Kingfisher CEO Thierry Garnier said the crisis “has prompted more people to rediscover their homes and find pleasure in making them better. It is creating new home improvement needs, as people seek new ways to use space or adjust to working from home. It’s also clear that customers are becoming more comfortable with ordering online. And delivering value to consumers is imperative against a challenging economic backdrop.”
Looking forward, Kingfisher said the momentum had continued into Q3, with UK sales up 18.9%. since the end of July and those in France climbing 16.7%. The group also intends to experiment with new store formats including a pilot with Asda to introduce B&Q mini-stores in supermarkets.
Garnier added that while the near term outlook was uncertain, “the longer term opportunity for Kingfisher is significant. There is a lot more to do, but the new team and new plan is now established in the business and we are committed to returning Kingfisher to growth.”
Chart and Technicals
Source: FactSet and Hargreaves Lansdown
In the run up to the March COVID fall, Kingfisher shares traded steadily, before plunging to a 10 year low of 124p on March 18th. By the end of April however, the shares had not only recovered the 50-day MA, they blew through it, and recovered the benchmark 200-day moving average at 190p less than 1 month later. Since that time KGF has traded above both averages, leading to a bullish golden cross formation on July 10th as the 50-day MA passed through the 200-day MA. The stock drifted back to the 50-day MA in the run up to the results, and having successfully tested that level, opened higher on September 22nd. While above this level, our expectations are that the stock will retest July 2018 highs of 317p by early November 2020.
Summary and Atlantic View
Although the strong trading performance had by and large been flagged up by Kingfisher to the markets, the pace of online growth and resulting profit number caught out even the most bullish pundits. As CEO Thierry Garnier says, people have used the cash they would have spent on holidays and entertainment on home improvements. This factor, also evident in Travis Perkins results earlier this month, led to strong free cashflow and the return of furlough payments to HM Govt. Now, with lockdown and movement restrictions set to return at home and in France, Atlantic Capital Markets believes Kingfisher websites and outlets will be faced with a huge opportunity to cash in on another surge in home improvement spending during the latter part of the year. Backed by this sort of momentum, we expect the shares to push higher and retest the technical target of 317p in the next 4-6 weeks. Keep Buying.
To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here
Atlantic View – Sell Tullow Oil #TLW, group still facing an existential crisis
by John Woolfitt, Atlantic Capital Markets
Fundamentals & Statement Summary
Oil and gas exploration and production company Tullow Oil (TLW.L) has interests in over 70 exploration and production licences across 14 countries. The group today announced half year results for the six months ended 30 June 2020, and reported a working interest production average of 77,700 bopd, in line with expectations, generating revenues of $731m ($872m); gross profit of $164m and a loss after tax of $1.3bn (profit of $103m). A $418m impairment charge on property, plant and equipment and recorded exploration write-off costs of $941m were mainly driven by a write-down of the value of its Ugandan assets.
As of June 30, Tullow reported net debt of $3.0bn; gearing of 3.0x net debt / EBITDAX and liquidity headroom and free cash of $0.5bn.
Production guidance improved to between 73,000 and 77,000 barrels of oil equivalent per day from between 71,000 and 78,000 to reflect recent strong performance in Ghana, although offset to some extent by production curtailments in Gabon.
Group organisational restructuring is well advanced and forecast to deliver cash savings of over $350m over three years, significantly in excess of the previous target of $200m. This will deliver annual sustainable cash savings of over $125m from 2021. Evaluation of various refinancing alternatives with respect to the Group’s capital structure is also ongoing.
Alongside a newly restructured board, including non-Executive Chair Dorothy Thompson and senior oil and gas executive Mitchell Ingram in as a non-executive director, newly appointed CEO Rahul Dhir commented:
“Despite the very tough conditions in the first half of this year, we have successfully delivered reliable production and major, sustainable reductions to our cost base. We are also close to completing the important sale of our interests in Uganda. The quality of Tullow’s assets remains robust.
Since my arrival as CEO, we have been developing new plans for our business, with the support of our Joint Venture Partners and expert advisors. These plans will deliver enhanced value from our assets to benefit all our stakeholders including our host countries and investors. We will host a Capital Markets Day towards the end of 2020 at which we will update the market on these plans to deliver on Tullow’s true potential.”
Chart and Technicals
Source: FactSet and Hargreaves Lansdown
Tullow’s well documented problems are clearly reflected in the charting price action, and while a precipitous pre-COVID fall in Q4 2019 occurred well before the crisis kicked in, an all time low just over 7p serves as a reminder that the oil industry can turn industry bellwethers into penny stocks at the drop of a hat. Since that time, Tullow shares have recovered and from mid April onwards have held or deviated either side of the 50-day MA line, dropping below the MA envelope in late July. If shares can recover the 50-day MA at 24p by mid October, then the falling 200-day MA currently at 39p is a distant prospect, however current divergence indicates a retest of 7p all time lows.
Summary and Atlantic View
The former oil industry bellwether has today put a brave face on what is otherwise an existential crisis. Earlier this year Tullow had highlighted the risk to its own survival, citing a material uncertainty that it would be able to operate as a going concern. The solid production and forward guidance from Ghana are a standout amidst horrendous debt levels, ($3bn) and write-downs from the sale of Ugandan assets. Despite forward guidance on cost savings, there is little sign at present that Tullow can realistically get on top of the debt pile – something the newly appointed management team will need to get to grips with as an absolute priority. Until / when the board can demonstrate clear progress in this regard, Atlantic rates Tullow shares as a sell into any strength, down to the all time lows of 7p. Sell.
To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here
Atlantic View – Robust housing and maintenance market to support Travis Perkins shares
by John Woolfitt, Atlantic Capital Markets
Travis Perkins.
Fundamentals & Statement Summary
UK based building, construction & home improvement supply giant Travis Perkins (TPK.L) today announced half year results for the 6 months to June 30th, stating it had ‘successfully adapted to unprecedented markets.” Revenues for the period fell 19.3% to £2.78bn, leading to a loss per share of (45.7)p (4.2p HY19). Adjusted operating profit of £42m reflected the shortfall from lower volumes, partially offset by actions taken by the group to reduce and control operating costs.
Travis stated that a restructuring programme was underway to reduce overheads in line with the anticipated volume outlook, which will deliver cost savings of £120m on an annualised basis. In line with this, a strong focus on cash and working capital management resulted in a reduction of covenant net debt of £322m from 31 December 2019 to £22m.
The group said that significant improvements in digital platforms across all segments drove customer fulfilment, process simplification and improvements in branch network, underpinning market outperformance and supporting future growth. The demerger of Wickes is now paused until markets become more stable and predictable.
Travis said the long term fundamentals of the Group’s end markets remain robust, with ongoing demand for new housing and underinvestment in the repair, maintenance and improvement of the existing UK housing stock, although significant uncertainty remains in the UK economy in the near term. Technical guidance provided for 2020 included an effective tax rate of 22%, finance charges similar to 2019, capital expenditure in 2020 of around £70m to £80m and property profits of around £10m.
CEO Nick Roberts said Travis had made..“significant strategic and operational progress against the four strategic priorities we outlined at our full year results in March 2020.
“Although considerable uncertainty around the impact of the COVID-19 pandemic remains, the actions we have taken to adapt and innovate in our businesses mean that the Group is well placed to continue to service our customers, support our colleagues, outperform our markets and generate value for our shareholders.”
Chart and Technicals
Source: FactSet and Hargreaves Lansdown
Travis shares have delivered a strong recovery since falling off the ‘COVID cliff’ in early March, dipping briefly to 573p on March 18th before recovering the 50-day MA envelope at the start of May. The stock performed well, trading above the MA envelope through to the end of July, when it briefly dipped below the level. Since that time support has come from the 50-day line, and with the gradual convergence of the 50 day average with the benchmark 200-day average, there is the prospect that the stock could develop a bullish golden cross configuration (the golden cross appears on a chart when a stock’s short-term moving average crosses above its long-term moving average) in the coming weeks. Provided this signal is confirmed, in line with the rising MA envelope and clear forward fundamental guidance provided by the company, our initial target is 1400p, followed by a return to the late February 50-day MA high at 1600p.
Summary and Atlantic View
Travis shares have delivered an impressive and solid recovery since March 18th. Despite the inevitable fall in revenues, delivering an adjusted operating profit during one of the most challenging trading periods faced by any company in history…ever, is a major achievement, and a solid endorsement of management strategy and the prompt response by the board to restructure and cut costs. As the UK starts to return to work, despite the attendant COVID uncertainties, Travis is selling into a robust market, supported by an ever-increasing demand for new homes and burgeoning maintenance market. Supported by a reasonably bullish charting configuration, and clear forward guidance from the company, Atlantic are confident that Travis shares will continue the current recovery and push on to an initial target of 1400p by mid November. Buy.
To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here
Atlantic Capital Markets Month Ahead – Keep Your Shorts On In September
Alan Green and John Woolfitt, Director at Atlantic Capital Markets discuss the month ahead.
We discuss the US Fed August meeting, and indications from Fed boss Jerome Powell that the administration was prepared to ride with higher inflation around 2%. The markets seems to translate as low interest rates for years to come…John gives his view.
John discusses the resilience of mining and commodity stocks in the face of the economic turmoil and Coronavirus threat, along with some of the trading calls from Atlantic over the past month.
Finally we look at some trading ideas and upcoming corporate news in September from Halfords #HFD, Meggitt #MGGT, JD Sports #JD, Travis Perkins #TPK, Tullow Oil #TLW and Costain #COST. Given the volatility in the markets, John advises using the Atlantic Alerts system – moving after the results not before. “If the tide goes out, make sure you’ve got some shorts on”.
Atlantic View – Rolls Royce has the tools to engineer a recovery
by John Woolfitt, Atlantic Capital Markets
Rolls Royce has the tools to engineer a recovery.
Fundamentals & Statement Summary
Aero engineering giant Rolls-Royce (RR.) this morning unveiled interim results for H1 2020, and reported a significant H1 impact from COVID-19, adding that the timing and shape of industry recovery remains uncertain. The group reported a 24% fall in underlying revenues of £5.6bn, down 24%, and an operating loss of £1.7bn including one-off charges of £1.2bn in Civil Aerospace, largely related to COVID-19. The reported loss before tax of £5.4bn included a £2.6bn non-cash loss from the revaluation of the FX hedge book, reflecting lower forecast US$ receipts.
Rolls also reported good liquidity of £6.1bn comprising £4.2bn of cash at 30 June, and a £1.9bn undrawn revolving credit facility (RCF). A further £2bn undrawn term loan was also announced in July and finalised in August. The group ended H1 with net debt of £1.7bn excluding lease liabilities (FY 2019 net cash of £1.4bn).
The group reported successful actions to reduce costs, with £350m delivered in H1 towards a 2020 target of £1bn. These actions included a fundamental restructuring of Civil Aerospace, with a 4,000 group headcount reduction by 27 August, with further potential disposals expected to raise at least £2bn, including ITP Aero and other assets.
The Board decided that given the uncertain macro outlook they would no longer be recommending a final shareholder payment of 7.1 pence per share in respect of 2019, resulting in cash savings equivalent to £137m. For the same reasons, the Board has not approved an interim shareholder payment for 2020. A range of options to further strengthen the balance sheet are currently under review.
CEO Warren East commented: “We ended 2019 with good operational and financial momentum. However, the COVID-19 pandemic has significantly affected our 2020 performance, with an unprecedented impact on the civil aviation sector with flights grounded across the world. We have responded rapidly to increase our liquidity, with £6.1bn at the end of H1 and a further £2.0bn term loan agreed in H2, to help weather the continued uncertainty around the timing and shape of the recovery in the civil aviation sector. We have made significant progress with our restructuring, which includes the largest reorganisation of our Civil Aerospace business in our history. This restructuring has caused us to take difficult decisions resulting in an unfortunate but necessary reduction in roles. These actions will significantly reduce our cost base, which combined with recovery in Power Systems and continued resilience in Defence, will help us to deliver significantly improved returns as the world recovers from the pandemic.
While our actions have helped to secure the Group’s immediate future, we recognise the material uncertainties resulting from COVID-19 and the need to rebuild our balance sheet for the longer term. We have identified a number of potential disposals that are expected to generate proceeds of more than £2bn, including ITP Aero and a number of other assets. Furthermore, in light of ongoing uncertainty in the civil aviation sector, we are continuing to assess additional options to strengthen our balance sheet to enable us to emerge from the pandemic well placed to capitalise on the long-term opportunities in all our markets.”
Chart and Technicals
Source: FactSet and Hargreaves Lansdown
In line with aerospace industry stocks and the majority of FTSE100 constituents, RR shares fell sharply through February and into March, twice bouncing off a 250p then multi-year low. Despite recovering and punching back above the 50-day moving average in May, the stock succumbed again at the start of July, trading below the yellow MA envelope, even briefly dipping below 250p to set a new multi-year low at 212p before recovering in the run up to the results. The NVI (negative volume index (traded volume to determine trend strength or confirm a price movement) has improved since the end of June, and if RR can ‘climb back’ into the price range envelope after the results today, and in the process regain the 50-day moving average, then recovery of the falling 200-day MA is possible, although expect a retest of 212p multi-year lows before any sustained recovery.
Summary and Atlantic View
While it’s aerospace counterparts face something akin to a perfect storm, as a corporate entity Rolls Royce has many more strings to its proverbial bow. It is this multi-sector offering that will ultimately be the saviour of this iconic company, and while the group are rightly hailed as the world’s leading aero engine manufacturer, a solid cash / liquidity position has enabled Rolls Royce to pivot rapidly to meet the COVID challenge. A resilient ongoing defence business performance and a recovery in Power Systems provide Rolls with the time to decide on the best course of action to restructure and streamline the aerospace business, and with actions / disposals already underway in this regard, the catalysts will soon be in place to drive a recovery. The decision to suspend the dividend will no doubt see some investors look elsewhere, but despite COVID uncertainties, Atlantic believes Rolls Royce has the tools at its disposal to engineer a decent recovery in the share price by December 2020. We recommend buying the shares on the current weakness.
To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here
Atlantic View – More growth to come at Admiral as insurer shrugs off COVID
by John Woolfitt, Atlantic Capital Markets
More growth to come at Admiral as insurer shrugs off COVID
Fundamentals & Statement Summary
Insurance giant Admiral (ADM), who’s brands include Confused.com, Elephant.co.uk, Bell and Diamond, delivered a solid set of first half results on Wednesday morning. Although the results were impacted by the COVID crisis, which saw group turnover slip 4% to £1.69 billion largely as a result of the impact Admiral’s own Stay at Home premium refund, excluding this turnover actually increased by 2%. Customer numbers were 6% higher at 7.17 million, with the group share of pre-tax profits of £286.7 million & statutory PBT of £286.1 million, growing by 30% and 31% respectively, primarily as a result of strong prior year reserve releases in the UK and internationally and also some non-recurrence of negative items in 2019 including the £33 million Ogden discount rate impact (the rate used to calculate returns on investments for accident claimants who accept lump sum compensation. The amount claimants receive is adjusted according to the interest they can expect to earn by investing it).
UK Insurance recorded a 7% reduction in turnover to £1.25 billion due to the impact of the Stay at Home premium refund, with customer numbers growing to 5.58 million (30 June 2019: 5.32 million). Significant profit growth of £59.1 million in UK Insurance was recorded, primarily attributable to favourable development in prior year loss ratios for UK Motor, and higher investment income. Profit growth excluding the impact of the Ogden discount rate impact in H1 2019 (£33.3 million) was £25.8 million. UK Household profit improved in H1 2020 to £5.5 million (H1 2019: £4.2 million) despite bad weather which impacted the current period by around £5.3 million.
International Insurance businesses made a combined profit of £6.5 million (£2.7 million loss in H1 2019), with continued profit in the European operations and lower losses in the US. The combined International insurance turnover grew by 3% to £329.5 million (H1 2019: £319.5 million) and customer numbers by 10% to 1.49 million (30 June 2019: 1.36 million), both figures negatively impacted by the reduced demand in the early Covid lockdown period.
The Comparison result increased to £13.1 million from £7.4 million in H1 2019, mainly driven by a very strong first half from confused.com in the UK.
The Admiral Board declared an interim dividend of 70.5 pence, made up of a normal dividend of 55.0 pence per share and a special dividend of 15.5 pence per share, 12% higher than the 2019 interim dividend of 63.0 pence per share. The payment represents 85% of first half earnings.
CEO David Stevens commented: “A year ago I described our results as ‘frankly a bit dull’. With the benefit of hindsight there’s a lot to be said for ‘dull’ if the alternative is a global pandemic.”
“Our response to that pandemic highlighted two of Admiral’s key strengths – competent execution in the short term and sustainable values for the long term. We adapted quickly to the new circumstances, pirouetting from one working model to another and compressing years of learning and development into a matter of weeks through a phenomenal collective effort across the company at all levels. Alongside this adaptability, we also stayed true to our long-term commitment to balanced outcomes for all our stakeholders, notably through our £25 a vehicle ‘Stay at Home’ rebate.”
“This year’s interims benefit again from our consistently competent underwriting and conservative reserving on past years, feeding into another strong set of results in the core business and beyond. Thank you to all our staff, shareholders and customers who have made this possible.”
Chart and Technicals
Source: FactSet and Hargreaves Lansdown
The 2020 COVID19 crisis amounted to little more than a brief blip on the Admiral chart. Shareholders picking up the stock on the brief intraday low of 1,887p on March 12th will now be sitting on substantial gains, as ADM went on to recover the rising benchmark 200-day moving average just 5 days later. Since then the stock has continued to trade at the ‘top’ of the envelope, breaking out in early May and again at the start of April in the run up to the results statement. A peek at the 3 and 5 year charts shows a clear, upwardly mobile trading pattern, and despite the fact that ADM now trades at all time highs, the strong underlying performance and solid fundamentals provide solid support for continued growth and progress, particularly given the manner in which the stock shrugged off COVID. Our next target is based on the 3 year envelope projection, which points to an upper envelope target of 2,788p by October 2020.
Summary and Atlantic View
The manner in which Admiral literally shrugged the COVID crisis aside has clearly impressed the markets, with gains showing across the wider insurance sector as we publish this note. A gain in revenues and the general comparison result show an exceptionally strong performance across the board, despite the ‘stay at home’ premium rebate. The Atlantic team have long admired the stock: we view Admiral as a well run company with a ton of growth potential still waiting in the wings. Our view is clearly shared and underwritten by the Board, given the dividend hike declared with the results. Despite the fact that the shares now trade at all time highs, with Admiral, the trend is still very much your friend and we believe our target of 2,788p will be hit by October 2020. Atlantic rating: Buy.
To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here
Atlantic View – The Reinvention Of BP – Is It Too Early To Buy In?
by John Woolfitt, Atlantic Capital Markets
The Reinvention Of BP – Is It Too Early To Buy In?
Fundamentals & Statement Summary
Oil giant BP (BP.L) today (Tuesday August 4th) announced a record $6.7 billion loss for Q2 2020 as the COVID crisis hit the group hard across its energy businesses and at the pumps. As result BP cut its dividend for the first time in a decade, and outlined plans to sharply reduce its oil and gas output and boost renewable power generation. The net loss was in line with analysts’ expectations and came about after the BP took the decision to wipe $6.5 billion off the value of oil and gas exploration assets and revised oil and gas price forecasts.
Net debt at the end of the quarter fell $10.5 billion to $40.9 billion, with gearing also down to 33.1% vs. 36.2% at the end of the previous quarter. A dividend of 5.25 cents per share was announced for the quarter (10.5 cents previously), aligned with BP’s new distribution policy.
The group said Global GDP is expected to contract by 4-5% this year, and consequently global oil demand is expected to be around 8-9 million barrels of oil per day lower than 2019 and gas markets are likely to remain materially oversupplied.
BP CEO Bernard Looney outlined a strategy to “reinvent” BP in line with a global transition to low-carbon energy.
“These headline results have been driven by another very challenging quarter, but also by the deliberate steps we have taken as we continue to re-imagine energy and reinvent BP.”
“In particular, our reset of long-term price assumptions and the related impairment and exploration write-off charges had a major impact.”
Within 10 years, BP aims to have increased its annual low carbon investment 10-fold to around $5 billion a year, building out an integrated portfolio of low carbon technologies, including renewables, bioenergy and early positions in hydrogen and CCUS. By 2030, bp aims to have developed around 50GW of net renewable generating capacity – a 20-fold increase from 2019 – and to have doubled its consumer interactions to 20 million a day while at the same time shrinking its oil and gas production by 40% compared with 2019.
“We believe our new strategy provides a comprehensive and coherent approach to turn our net zero ambition into action. This coming decade is critical for the world in the fight against climate change, and to drive the necessary change in global energy systems will require action from everyone.” Looney said in a statement.
“So, in the years ahead, bp is going to significantly scale-up our low-carbon energy business and transform our mobility and convenience offers. We will focus, and reduce, our oil, gas and refining portfolio. And, as we drive down emissions on our route to net zero, we are committed to continuing to deliver long-term value for our stakeholders.”
BP said in its strategy update it aimed to “reset a resilient dividend” of 5.25 cents per share per quarter and return at least 60% of future surplus cash as share buybacks.
Chart and Technicals
Source: FactSet and Hargreaves Lansdown
BP’s 233.7p multi year low hit on March 18th, on the face of it provided investors with a once in a lifetime entry point in the midst of the COVID19 crisis. The stock went on and recovered the 50-day moving average intra-day late April, holding the level before falling away in June. The yellow envelope marks the upper and lower price 44 day price ranges: while the stock trades below this level a retest of the multi-year low is likely to occur if the market falls. If BP can ‘climb back’ into the price range envelope after the results today, and in the process regain the 50-day moving average, then our next target is the ‘falling’ benchmark 200-day moving average, currently at 395p, by the end of Q3 2020.
Summary and Atlantic View
In the current climate, it might seem somewhat risky to back an oil company as a buy. However, as I have outlined in our Atlantic Month Ahead Atlantic presentation here, we are market neutral and seeking long term growth opportunities that minimise risk. The losses announced by BP today, although substantial, were in line with analyst expectations, while the strategy shift completely repositions the group’s forward investment proposition by consistently reducing the reliance on oil and increasing revenues from an integrated portfolio of low carbon technologies, including renewables, bioenergy, hydrogen and CCUS. These moves tick most of the boxes in regard to the Atlantic investment strategy, and while near term COVID risks remain, we expect any early evidence of revenue growth from BP’s low carbon portfolio to act as a catalyst for the share price. Added to this, there is still a dividend on offer: this quarterly dividend can be collected before the ex-dividend date of August 13th. Atlantic rating: Buy.
To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here
No Points For Bravery In These Markets – John Woolfitt, Atlantic Capital Markets Month Ahead
Alan Green and John Woolfitt, Director at Atlantic Capital Markets discuss the month ahead.
John says the markets are currently ‘punch drunk’ and says investors and traders need vision to look through the chatter. Atlantic are taking a ‘market neutral’ approach at present, and clients are seeing success with pairs trades and with larger mining stocks.
Looking ahead, John is looking for news on how much we’ve been drinking from Diageo #DGO, oil consumption and fuel pump activity from #BP and clues on the property market from Rightmove #RMV.
In summary, John touches on the upcoming launch of Atlantic Alpha, a market neutral hedged trading strategy that removes volatility, and provides some key points and trading ideas to help traders and investors in August.
- Keep your discipline, there are no points for bravery in these markets
- Watch the data…’Look Before You Leap’.
Atlantic View – Impairment Shock At Lloyds Banking Group #LLOY Despite Balance Sheet Strength
Chart and Technicals
Shares of Lloyds have been trading in a tight range since the March “COVID sell-off” and, despite recovering the 50-day moving average in April, they dipped below this line in June and are now approaching the bottom of the range. The trend here is certainly weak, and if the stock continues to trade below this benchmark, we will expect a retest of 23.42p, a level last hit on November 21 2011. Shares are currently trading at 26.20p, and an end of week close above 28.4p will be required if the stock is to recover the 50-day moving average at 32.32p.
Summary and Atlantic View
Albeit Lloyds is long standing favourite of investors, fund managers and traders, it seems that the higher than expected impairment charge will mean that opportunities for share price improvement in the short term are going to be few and far between. That said, Lloyds is blessed with a strong balance sheet and a decent CET1 ratio to provide headroom above the regulatory requirements to protect against potential credit impairment. Unlike Barclays, Lloyds doesn’t have an investment banking arm to boost profits, so it is wholly reliant on making traditional banking and money lending as profitable as possible. For now the stock is mired in a trading range between 32p and 26p. Given this backdrop and uncertain outlook, for now Atlantic Capital Markets remain holders of the shares, although at either end of this trading range, they are a buy on weakness, particularly if the stock dips to the 10 year low of 23.42p, or conversely a sell into strength around 32p. Atlantic Rating: HoldAtlantic View – Streamlining and Resilience Have Laid The Foundations For Recovery at Shell #RDSB
Adjusted earnings came in at $638 million, with $6.5 billion in cash flow from operations and $243 million of free cash-flow. Return on Average Capital Employed (ROACE) came in at 5.3%, while gearing is now at 32.7%. Total dividends distributed to Royal Dutch Shell plc shareholders in the quarter were $1.2 billion. An interim Q2 dividend of US$ 0.16 per A ordinary share and B ordinary share was declared.
Royal Dutch Shell Chief Executive Officer, Ben van Beurden said that Shell “has delivered resilient cash flow in a remarkably challenging environment.”“We continue to focus on safe and reliable operations and our decisive cash preservation measures will underpin the strengthening of our balance sheet.”
He added that a number of new working practices had “accelerated digitalisation across the company”..while the oil giant’s high-quality integrated portfolio, disciplined execution and forward-looking strategy “enable sustained competitive free cash flow generation.”
Chart and Technicals
RDSB shares suffered a precipitous COVID driven fall in February / March 2020, briefly touching below £9 per share – a 30+ year low. The stock recovered the 50-day moving average at the start of April, and intermittently held that level until late June. Given the stock is trading at these historic lows, if Shell recovers and holds the 50-day moving average, currently at 1264p, our next target will be the gently falling benchmark 200-day moving average, currently at 1,725p.
Summary and Atlantic View
A darling of the FTSE100, and up to recently, a cornerstone investment among leading fund managers, the COVID crisis has seen Shell battling a seemingly existential crisis on a par with the challenges face by the venerable oil giant during WWII. However, the company has delivered a remarkably resilient performance during the depths of the crisis, and as CEO Ben van Beurden said in his Q2 results statement video clip, cash preservation (£1.1bn reduction in opex), streamlining and digitalisation have all been prioritised during the quarter, and these will in turn enable sustained competitive free cash flow generation going forward. As travel and movement starts to pick up on the back of expectations of vaccines and effective testing measures for COVID, it is reasonable to expect that energy and resource companies will start to return to some semblance of normality. Historically Q3 has been a strong earnings quarter for Shell, and with the measures management have already taken to streamline the company, Atlantic Capital Markets are backing Shell as a recovery play, firstly to regain the moving 50-day level at 1264p, and shooting for the 200-day benchmark by the end of the year. There is the added dividend bonus to boot, and although the payout was cut from 47 cents to 16 cents in Q1, (same for Q2), investors can still pick up the stock and collect the Q2 payout before the August 13 ex-dividend deadline. Atlantic Rating: Buy.