Reliable dividends make the UK housebuilders look cheap, says Merrill Lynch
What’s happening
● Activision Blizzard dropped in US pre-market trading after announcing that Bungie, its privately owned partner, would assume full publishing rights and responsibilities for the Destiny video game franchise. Activision, which had flagged in a recent earnings call that management was unhappy with the franchise, said to expect no material revenue or operating income from the games in the future.
Merrill Lynch estimated that losing the Destiny titles would be a $400m headwind for Activision revenues this year, reducing earnings per share to $2.48 from $2.73. With the loss, 2019 is “looking more like an earnings reset year”, it said.
But Macquarie argued that investors should be looking at 2020 for the benefits of Activision’s strategy to concentrate on owned intellectual property. While Destiny was never particularly meaningful to Activision because Bungie was taking a reported 20-35 per cent of operating profits plus bonuses, its loss leaves the group with Call of Duty as its one meaningful franchise and raises the possibility for a significant acquisition, the broker said.
● Stobart Group was the FTSE 250’s biggest gainer after the operator of Southend Airport agreed to rescue Flybe, its main customer. Stobart and Virgin Atlantic said they had reached an agreement with Flybe management to buy the regional airline at just 1p per share, a 93 per cent discount to Thursday’s closing price.
● AB InBev gained on reports that the brewer was considering floating its Asia-Pacific operations to cut debt by about $5bn.
Bernstein argued that the spin-off would warrant a higher valuation multiple to peers, given that about a third of its $3bn in operating profits came from China and other emerging markets last year. Though a mooted valuation of $70bn looks optimistic, any partial float would be likely to make the rest of InBev look even more attractively valued, it said. The broker also argued that InBev would benefit from having a new avenue to raise cash and shore up its balance sheet in case of another Latin American currency crisis.
Sellside stories
● Merrill Lynch upgraded Taylor Wimpey and Persimmon to “buy” from “underperform”, as well as moving to a “neutral” stance on the UK housebuilding sector.
Valuations are low, having already priced in a 10 per cent fall in house prices, and dividends look robust, Merrill said. It estimated that allowing for underlying assets and land banks, the sector was trading about equal to its true net asset value, a 20 per cent to 25 per cent discount to historical levels.
Merrill forecast that Persimmon and Taylor Wimpey can continue to pay dividends at current levels even in the event of a sharp downturn. The broker also upgraded Barratt Developments and Bellway to “neutral”.
● UBS downgraded accountancy software maker Sage to “sell” from “neutral”, with a 520p target price. It cited competitive pressures and the need to invest in research and development beyond the £40m one-off cost Sage announced with 2018 full-year results.
The broker also questioned Sage’s decision to classify around a fifth of its sales as legacy business as it sought to move customers to cloud-based services.
“While the entry-level market generates a small proportion of sales, it makes up the majority of customers. As Sage Accounting slows . . . Sage is potentially storing up trouble in terms of future new customer acquisition as the entry-level historically has been the source of many mid-market migrations”
UBS
● Jefferies downgraded UDG Healthcare, the services group for the drugs industry, to “hold” from “buy”.
Second-half problems at Ashfield, UDG’s contract sales outsourcing division, and the poor performance of acquisitions have overshadowed a recovery at its Sharp packaging business, said Jefferies. “Two-thirds of the business now seems to be facing pressures with the only immediate relief likely from potential M&A,” the broker added.
Jefferies estimated that UDG has $400m-$500m to spend on acquisitions. But a cost-cutting programme will probably hold back organic profit growth this year, and a decision by management to release deferred considerations for three recent purchases suggest the market should put a higher discount on acquisition spending than in the past, said the broker. “With a potential rate-rise environment we believe investors are less bullish on roll ups,” added Jefferies.
● In brief: Aker BP upgraded to “buy” at Stifel; Antofagasta cut to “add” at Peel Hunt; Cairn Energy upgraded to “outperform” at BMO; Carclo cut to “hold” at Peel Hunt; Coloplast upgraded to “hold” at Jefferies; Eco Atlantic rated “buy” at Berenberg; Ferrovial upgraded to “buy” at Merrill Lynch; Georgia Healthcare cut to “hold” at Jefferies; Hermes International raised to “outperform” at Credit Suisse; Hunting upgraded to “overweight” at JPMorgan; Ion Beam cut to “hold” at Jefferies; LafargeHolcim upgraded to “buy” at Merrill Lynch; Orion downgraded to “underperform” at Jefferies; Raiffeisen downgraded to “neutral” at JPMorgan; Pirelli raised to “buy” at UBS; Saipem upgraded to “overweight” at JPMorgan; Salvatore Ferragamo cut to “underperform” at Credit Suisse; Soco downgraded to “underperform” at BMO; Straumann upgraded to “buy” at Jefferies; Suez cut to “sell” at Société Générale; Suedzucker upgraded to “neutral” at Goldman Sachs; Telia downgraded to “sell” at Société Générale; Valeo cut to “reduce” at Kepler Cheuvreux; Veolia cut to “hold” at Société Générale; Virbac upgraded to “hold” at Jefferies; William Demant upgraded to “hold” at Jefferies
