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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

Impairment Shock At Lloyds Banking Group #LLOY Despite Balance Sheet Strength
by John Woolfitt, Atlantic Capital Markets
Fundamentals and Statement Summary
Eponymous banking giant Lloyds (LLOY) this morning reported half year results to June 30. The bank plunged into the red after recording a £3.8 billion provision for bad loans arising from the coronavirus crisis – almost £1.8 billion higher than financial analysts had expected. The results revealed a pre-tax loss of £602 million compared to profits of £2.9 billion for the same period in 2019, on net income of £7.4 billion, also 16% lower. Lloyds said it had set aside £2.4bn for possible loan losses in the three months to June alone as the UK economy became mired in the coronavirus lockdown.
The bank also pointed to a strong balance sheet, well positioned to absorb coronavirus impacts. This was in part due to a £29 billion increase in customer deposits during the period as a result of reduced consumer spending and “inflows to the Group’s trusted brands in an uncertain environment.”

The group loan to deposit ratio now sits at 100 percent, “providing significant potential to lend into recovery, with a strong liquidity position.” Lloyds said a CET1 ratio of 14.6 percent “provides significant headroom above lower regulatory requirements of c.11 per cent as a cushion against potential credit impairment.”
There have been early signs of recovery in the Group’s core markets, mainly in consumer spending and the housing market, but the outlook remains highly uncertain and the impact of lower rates and economic fragility will continue for at least the rest of the year. Looking forward, group operating costs are expected to be below £7.6 billion, with impairments expected to be between £4.5 billion and £5.5 billion.
CEO António Horta-Osório said that the impact of the coronavirus pandemic in the first half of 2020 “has been profound on the way we live our lives and on the global economy. We remain fully focused on helping our customers and the UK economy recover, in collaboration with Government and our regulators.”
“Although the outlook is uncertain, the Group’s financial strength and business model allow us to help Britain recover and play our part in returning our country to prosperity. Our customer focused strategic plan remains fully aligned with the Group’s long term strategic objectives, the position of our franchise and the interests of shareholders.”

Chart and Technicals
Source Factset & Hargreaves Lansdown

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: Hold
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 – Streamlining and Resilience Have Laid The Foundations For Recovery at Shell #RDSB

Streamlining and Resilience Have Laid The Foundations For Recovery at Shell #RDSB
by John Woolfitt, Atlantic Capital Markets
Fundamentals and Statement Summary
Anglo Dutch oil giant Royal Dutch Shell (RDSB) today announced results for Q2 2020, which include impairments of $16.8 billion post-tax (6.1% of average capital employed), reflecting revised price and margin assumptions. Shell reported ‘very strong crude and oil products trading and optimisation results’ and a resilient marketing performance, and said it was on track to deliver cost reduction targets, with a $1.1 billion reduction in underlying opex compared with Q1 2020, delivering a reduction target of $3 – $4 billion. 

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
Source Factset & Hargreaves Lansdown

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.
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 – Has StageCoach (SGC) turned the Corner?

by John Woolfitt, Atlantic Capital Markets

Has StageCoach turned the Corner?

Fundamentals & Statement Summary

Britain’s biggest bus and coach operator Stagecoach (LON: SGC) employs around 25,000 people and operates more than 8,300 buses, coaches and trams across operations in England, Scotland and Wales, plus the Supertram light rail network in Sheffield.

In its preliminary results statement today, SGC reported adjusted pre-tax profits to May 2nd 2020 had fallen to GBP90.9m from GBP132.9m previously, on revenues of £1.41bn, down from £1.87bn previously. SGC highlighted an adjusted EPS of 13.5p (2019: 22.1p), while the statutory EPS of 6.4p (2019: 3.8p) reflected non-recurrence of prior year charges relating to the impairment and disposal of the discontinued North America business. On the COVID crisis, SGC said that management actions and the continuing support of government should ensure the group remains EBITDA positive and poised to benefit from any new opportunities. 

Significantly, SGC pointed out a substantial warchest of available liquidity, with over £800m of undrawn, committed bank facilities and available cash/deposits. Added to this, regional bus revenue trends were improving pre-COVID, plus SGC has embarked on growth initiatives and diversification to balance the portfolio and open up new markets. As a result, the group has been shortlisted to bid for two Dubai bus contracts, plus one rail and four bus opportunities in Sweden. SGC also are at the forefront of sustainability and green initiatives, and are nearing completion of a new sustainability strategy with a roadmap to a zero carbon business.

CEO Matthew Griffiths said SGC had “achieved a creditable set of financial results in what has been one of the most challenging and sobering periods for citizens, communities and economies across the globe in living memory.”

“Prior to the COVID-19 pandemic, the business was on track to meet its expectations for the full year. We made good progress in delivering on our three key strategic objectives: to maximise our core business potential, manage change through our people and technology, and grow by diversifying, while maintaining our relentless focus on safety and customer service. In responding to the more recent global challenges, we have taken decisive action so that the business remains in as strong a position as possible and well placed to secure the significant long-term opportunities we see for public transport.

Griffiths also pointed to the supportive short-term actions by government and local authority partners, which “have helped protect public transport networks, which are critical to the country. We have also been encouraged by the good momentum created by the positive direction of government bus policy and investment.”

Chart and Technicals

Source: FactSet and Hargreaves Lansdown

As with all stocks during Q1 2020, SGC suffered the inevitable ‘Covid cliff fall’, with group shares falling 2/3rds in value from January to February 2020. A series of ‘false dawns’ since that point resulted in SGC shares briefly regaining the 50-day moving average, currently at 61p, before dropping back again. If the stock can regain the 50-day moving average on an end of week close basis, in a recovering market we would expect SGC shares to regain the benchmark 200-day moving average (purple indicator), currently at 111p, by the end of Q3 2020.

Summary and Atlantic View

Many may take the view that a public transport company offers few if any prospects as an investment. While this may have been true in the past for some of transport operators, our view is that despite the COVID-19 impact on travel, the Government continues to press ahead with initiatives to encourage the general public to reduce carbon emissions by using ‘green’  buses and trains. Stagecoach, and its fleet of green buses and trains are very much at the forefront of this push to zero emissions, and as such we believe the group will continue to receive strong support from Government at National and Local level. With shares now trading at 10 year + lows, new contract shortlists, and with a strong financial position and warchest, Atlantic are backing the shares to ‘turn the corner’ and recover to £1 by the end of Q3 2020 with a ‘Speculative Buy’ rating. An extra incentive is also on offer from this investment ‘vehicle’. Stagecoach also stated in today’s results that “it is our ambition to resume dividend payments in due course.” Atlantic rating: Speculative 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 – July 2020

Alan Green talks to John Woolfitt, Director at multi award winning broking and investment firm Atlantic Capital Markets. John looks forward to the coming month, and discusses US job numbers, Boris and Build Build Build, and the raft of UK job cuts. He then discusses ‘Covid’ stocks, including Novacyt #NCYT, upcoming key corporate announcements for July, including Royal Dutch Shell #RDSB and Hutchison China Meditech #HCM and trading ideas from the Atlantic dealing floor. John finishes with a recap on key points and trading ideas to help traders and investors in July.

Atlantic View – Time To Go Back To The Beach In Spite of Covid-19?

by John Woolfitt, Atlantic Capital Markets

Time To Go Back To The Beach In Spite of Covid-19?

Fundamentals & Statement Summary

With over 20% share of online sales in the short haul beach holiday market, On The Beach (LON: OTB) are one of the UK’s largest online beach holiday retailers. The group’s long-term mission to become Europe’s leading online retailer of beach holidays is fuelled by significant opportunities for growth on the back of innovative technology, low-cost base and a strong customer-value proposition.

On Tuesday June 30th, OTB announced interim results for the 6 months to March 31st, and said that prior to the escalation of COVID-19 in Europe, it had been trading well. In the first four months of FY20 and following the collapse of the Thomas Cook Group, OTB priced its offerings competitively, and saw total holiday sales grew by 29% for Summer 2020 departures. H1 revenue of £21.4m was down 66% on prior year due to COVID-19 related cancellations, with adjusted PBT down £13.4m to £2.3m due to a significant reduction in demand from mid-February when COVID-19 began to spread to Europe. Net debt of £13m excludes £68.8m of customer monies held in a ring-fenced trust account, and following a successful share placing on 22 May 2020, the group cash position was £50.5m, plus a £75m RCF facility which, at 31 May 2020, remained undrawn.

CEO Simon Cooper commented on the excellent progress in the first four months of the financial year, with the Thomas Cook collapse “driving record levels of brand awareness and achieving sales growth of almost 30% for holidays departing in Summer 2020.“

He added “The onset of the COVID-19 pandemic led to a rapid slowdown in demand for foreign travel followed by the total closure of airspace across Europe by mid-March. Our staff responded brilliantly to ensure that the Group delivered the highest possible customer service standards in the most difficult of circumstances”….”The flexibility and asset light nature of our business model together with our recently strengthened balance sheet and the actions we have taken since the middle of March means we are well placed to capitalise on the inevitable structural changes in the market post COVID-19. As a result, the Board continues to look to the future with confidence.”

Chart and Technicals

Source: FactSet and Hargreaves Lansdown

The inevitable ‘Covid cliff fall’ that characterises the charts of many stocks at present started at the end of February 2020, with the group losing 66% of its value during the following 25 or so days. A strong recovery during March saw OTB shares regain the 50-day moving average, currently at 290p, which it has held onto since April 16th. Provided the stock continues to hold the 50-day moving average, there is every reason to expect OTB shares to regain the benchmark 200-day moving average (purple indicator), currently at 358p, by the end of July 2020.

Summary and Atlantic View
While some may view OTB as a contrarian trade, our dealing team are attracted to OTB’s resilient performance before and during the COVID-19 crisis. The group responded strongly and took full advantage of the Thomas Cook collapse, leading to 30% growth in summer holiday sales pre-Covid, largely due to its innovative business model and low cost base. Added to this OTB have a strong cash position, boosted by strong shareholder support for the May 2020 placing.  In summary, Atlantic Capital Markets are backing a long trade position on OTB, governed very much by the technical picture (358p initial target), and while the uncertain backdrop warrants running a tight stop loss, we are of the view that OTB is better placed than its peers to grow market share as the world starts to move again. In this case, it is time to go back to the beach!

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

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