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Beaufort Securities Breakfast Alert: Dignity, Legal & General, Redrow

Published: 03:00 29 Jun 2016 EDT

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 Markets

Europe
The FTSE-100 finished yesterday's session 2.64% higher at 6,140.39, whilst the FTSE AIM All-Share index closed 3.82% better-off at 688.83. In continental Europe, markets ended sharply higher, breaking a massive sell-off ignited by Brexit. Speculation that policymakers would introduce stimulus measures to stabilize the market lifted investor sentiment. France’s CAC 40 and Germany’s DAX rose 2.6% and 1.9%, respectively.
Wall Street
Wall Street ended in the green as investors bought cheap assets and recovered some of the losses due to negative impact of Brexit. In addition, an increase in oil prices and positive US economic data fuelled buying. The S&P 500 advanced 1.8%, led by the energy sector.
Asia
Equities are trading higher tracking the global markets as the immediate impact of Brexit begins to wane. The Nikkei 225 gained 1.6% as a weaker yen supported export-driven stocks. The Hang Seng was trading 0.6% up at 7:00 am.
Oil
Yesterday, WTI prices rose 3.3% to US$47.85 per barrel, while Brent oil prices increased 3.0% to US$48.58 per barrel.

Headlines
UK would have to increase taxes : Osborne
Chancellor George Osborne has said that Britain would have to increase taxes and cut spending this year to stabilize public finances in the wake of the country’s exit from the EU. Furthermore, he ruled out succeeding Prime Minister David Cameron.
UK retail sales balance dips in June: CBI
As per the Confederation of British Industry (CBI), the UK’s retail sales balance slipped to +5 in June from +7 in May. The decline in sales was primarily due to uncertainty surrounding Brexit.

Company news

Dignity (LON:DTY, 2,400.0p) - Buy
Dignity, the UK provider of funeral related services, yesterday announced that it has completed acquisition of three crematoria locations from Funeral Services Limited (trading as Co-op Funeralcare). Further to this, the Group also said its two sites are on track for completion, now pending consent of the relevant Local Authority and transfer of the trade and assets of the location to a new entity.

Our view: Acquisition of these five additional crematoria is a significant and encouraging move, extending the Group’s reach to areas and site locations not currently served. As such, the acquisition will improve the Group’s brand awareness while winning market share. Dignity’s Q1 performance, released on 9 May 2016, was in line with the Board’s expectations for the full year, while the number of mortalities in 2016 is expected to be broadly comparable with more normalised 2014. By comparison, the exceptional surge seen during 2015, in which in accrued numbers were driven higher by a vicious bout of influenza and associated respiratory conditions among older people together with an unusual spike in dementia and Alzheimer-related deaths, is not expected to be seen again. Contrasting Q1 2016 figures with the more comparable period of Q1 2014, the revenue and underlying profit has expanded by +18% and +21% respectively, at a time when the death count increased by just +6%. We expect Dignity to deliver earnings per share of around +10% per year, in line with its medium-term target. The Company is due to announce its interim results for the 26 week period to the 24 June 2016 on 27 July 2016. Beaufort retains its Buy recommendation on the stock.

Legal & General (LON:LGEN, 178.0p) - Buy
Yesterday, Legal & General announced a balance sheet update in the wake of ongoing market volatility after Brexit. Legal & General runs an A minus-rated credit portfolio of £44.8bn. Based on the closing on 27th June 2016, Legal & General’s solvency II coverage ratio stood at 156%, with £13.7bn in eligible owned funds, £8.8bn in SCR and £4.9bn in surplus. In H1 2016, the company paid a dividend of £592m and reduced coverage ratio by 7%. Legal & General acquired a £2.9bn UK annuity portfolio from Aegon, reducing its surplus by £50m and coverage ratio by about around 3%. As at 31st May 2016, bank holdings represented about 4.9% of the Legal & General Retirement (LGR) bond portfolio, with limited exposure to either Tier 1 or sub-investment grade. Legal & General expects net cash to increase 15% to £720m and operational cash generation to rise 5% to £655m at the end of H1 2016. Separately, Legal & General appointed Sir John Kingman as chairman. He succeeds Rudy Markham, who was appointed interim chairman after John Stewart's retirement from the board on 1st June. The appointment has been approved by financial regulators, the Prudential Regulation Authority and the Financial Conduct Authority, and is subject to the advice of the Cabinet Office Advisory Committee on Business Appointments.

Our view: The update underpins Legal & General’s strong position to face the consequences of Brexit. Its solvency II coverage ratio, a key metric in the insurance sector, remains healthy. Legal & General has a diversified portfolio. Moreover, its global credit team is continuously monitoring the portfolio and de-risking the credit portion of eligible owned funds. The company has a solid balance sheet, with cash and cash equivalents within eligible owned funds standing at £3.3bn. It is executing its strategy structured around five long-term drivers: ageing population, globalisation of asset markets, creation of new real assets, welfare reform and digital. Furthermore, Legal & General would benefit from the appointment of Sir John Kingman, who has impressive track record and in-depth knowledge of the financial market. We believe the company is comfortably placed with adequate funds and portfolios to mitigate economic downturn after Brexit. Therefore, we maintain a Buy rating on the stock.

Redrow (LON:RDW, 300.50p) - Buy
Yesterday, Redrow issued a trading statement, ahead of the release of its annual results on 6th September 2016. Redrow registered a 20% rise in turnover to £1.38bn for FY 2016. It reported a 17% increase in the number of homes legally completed to 4,716 for FY 2016, with private completions expanding 12% to 3,882. The average selling price of a private home rose to £328,500 in FY 2016 from £297,300 in FY 2015. Its pre-tax profit remains above the top end of analyst expectations at £240m. Private reservations increased in value by 46% y-o-y to £1.56bn during the period. At the end of June 2016, Redrow’s private order book stood at £807m, 50% higher than on June 2015. In FY 2016, the sales rate stood at 0.68 per week (in line with that in the previous year). The number of active outlets increased to 128 from 117 in 2015. Meanwhile, net debt declined to £139m from £154m in 2015.

Our view: Redrow expects to deliver a strong performance in FY 2016 on account of favourable housing market conditions. Its sales remain solid, supported by an increase in completions and a rise in the average selling price of a private home. The value of private reservations remained strong, largely due to strong regional growth. Redrow has made good progress on the operational front, given it completed developments at Commercial Street and Amberley Waterfront. Its London developments, including the Croydon joint venture, have either sold in line with or beat management expectations. Redrow’s debt declined owing to higher turnover and better payment terms on land purchases. The initial impact of Brexit on the company has been minimal, with underlying demand for its homes appearing at this time capable of delivering long-term growth. Therefore, we maintain a Buy rating on the stock.


Economic news
US GDP
The US Commerce Department revised GDP growth in Q1 2016 to 1.1% from the earlier estimate of 0.8%. The markets expected a 1.0% growth in the economy.
US consumer confidence index
As per the Conference Board, US consumer confidence index jumped to 98.0 in June from a downwardly revised 92.4 in May. The reading was better than the market estimates of a reading of 93.3.
 

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