A couple of positive updates from domestic Companies exposed to what are seen as the vulnerable sectors of Housing and Car sales. Firstly there was Bellway (BWY) the national house builder which has been one of my favourite plays in the sector over the last few years. They continue to look cheap given the on going strong trading and the price fall since the BREXIT vote. The current strong trading is however largely backward looking as they are updating to their year end which was 31st July 2016. Like many others on current trading they say it too early to tell the impact of the vote but they do observe that recent weeks have been encouraging, visitor numbers are still strong and the cancellation rate remains at a historic low. In addition to this they flag a strong forward order book which seems to account for around half of the turnover they did this year and having invested in land they say they are well placed to continue their sizeable contribution to meeting the UK’s requirement for new homes in the year ahead.
Thus they seem reasonably confident of continued strong trading in the year ahead, although I note that analysts have unsurprisingly down graded next years numbers heavily recently to the extent that they now see a near 10% fall for next year. Now as we know analysts are not that good at forecasting so it will remain to be seen if they have been too pessimistic or to optimistic in this regard. Personally I would tend to still be more favourably disposed towards the house builders given all the monetary and probably fiscal support to come and the on going housing shortage which should all help to underpin demand and allow them to keep pumping up the volume and paying out generous dividends. As ever though I guess you pay your money and take your choice and those that believe that the economy and housing market are about to crash on the back of BREXIT will obviously not be going near house builders or may be even shorting them.
Another of my favourite stocks S&U (SUS) the car loan finance company also reported a strong update today. If any thing the Chairman, Anthony Coombs was almost too cocky for my liking when he said: "In contrast to the recent gyrations and doom saying in the stock and currency markets following June's Brexit vote, trading in the real world at our Advantage motor finance business continues as strong and consistent as ever. Customer applications are at a record high with live customer numbers up 39% on last year at over 38,000 whilst margins are being maintained." Again this is largely backwards looking and they did suggest that credit quality was not quite at last years record levels but still within the range of expectations. He then went onto say: "A sound and consistent strategy, substantial investment and a dynamic and committed team both at Advantage and the Group, form the bedrock of S&U's progress. That is why, whatever the current economic uncertainties, we continue to regard the future with great confidence."
Now while I like to see a confident statement from management I do just get a bit worried about hubris kicking in when they start to sound so bullish when things are going well, which as we know in the stock market is not normally a good thing. Despite that caveat it does still look reasonable value on around 13-14x earnings with a near 4% yield. In addition looking at the numbers they are talking about I wouldn't be surprised to see some upgrades on the back of this so on that basis I'll stick with it.
There was a full year trading update from Matchtec (MTEC) the international staffing company which specialises in Engineering, Telecoms & IT staff globally. This was of the in line variety which I have to say was a pleasant surprise as given the price action (see chart above) and the general consensus that staffing companies would be the first to be hit by any downturn post the BREXIT vote I assumed we would see a profits warning. On the EU referendum they said that "demand for skilled engineers remains strong in the UK and, notably, we have yet to see any impact on vacancy flow in the six weeks since the EU Referendum."
So that is encouraging in the short term and suggests that forecasts for the current year which has just finished and will be reported in November should as they suggest be around current forecasts of around 46p of earnings with a 22.8p dividend. At this mornings price of 352p (+4.3%) this would put them on 7.7x with a 6.5% yield which seems like good value as they continue to integrate last years acquisition of Networkers and see strong demand for engineers. I note however that demand for IT personnel was weaker and they are having to restructure this area, but at least the deal last year has brought them more overseas exposure which they are also building on which should help to offset some of the likely domestic downturn when the expected domestic slowdown hits.
Thus the most important thing will be the outlook for next year which we should get an update on from them when they report in November. At this stage forecasts are still for a rise in earnings and dividend to around 47p and 24p respectively as further benefits from the deal accrue. Thus it will be worth watching earnings forecast ahead of November as I suspect it is quite likely that next years outcome could well end up being lower if the forecast economic slow down comes to pass. So if you were to conservatively (?) slice say 20 to 30% off the earnings this would put them on more like 10 to 11x with a 6 to 7% yield with a lowish level of cover. I also note that they have paid down some of the debt taken on when they made the acquisition as net debt at 31 July 2016 was £27.5 million, down £6.1 million on 31 July 2015, which compares to a market cap. of just £105m - so worth bearing in mind too as there are not many tangible assets here.
In conclusion a pleasantly surprising update but I suspect it will not fly away from here as concerns will now probably switch to worrying about next year, but it does leave them looking cheap if you are prepared to give them the benefit of the doubt. Mind you they have looked cheap when I have covered them in the past and that has not stopped them sliding all the way down here so apologies if you have bought them and are sharing my pain too. Finally note that subject to shareholder approval they will be changing their name to Gattaca plc.
July saw a further improvement in the UK Equity Market with Mid and Small Cap indices leading the recovery as investors got over the shock of the BREXIT result towards the end of June. This reflected the fact that some of the knee jerk heavy mark downs of domestic cyclical companies got reversed to a certain extent as investors presumably felt these had been over done and because early indications were that the world had not ended as suggested by project fear.
In terms of the Monthly Timing Indicators, (which regular readers will know I have been tracking since January 2014), given the positive returns this month, these have all turned bullish again including the small and Mid Cap indices which were still below or flat against their 10 month moving averages last month. The FTSE 100 continues to look stronger trading some 8% or so above its moving average which incredibly, is the largest bullish divergence we have seen since I started tracking these indicators (see chart above). The Mid 250 & Small Cap indices unsurprisingly look less bullish but nevertheless still trade some 3% and 6% or so above their moving averages respectively, although this is not as extended as they were back in May 2105 when they reached levels 11.2% and 7.7% above their 10 month moving averages.
With that in mind and although this may be a bull market Jim, but not as we know it, thanks to the Central Banks monetary policy support boldly going where no man or woman has gone before, I'm not sure I entirely trust this rally given the otherwise risky looking macro background. Then again the old sayings like "the market climbs a wall of worry" and "the market can remain irrational for longer than you can remain solvent" spring to mind. So I'll continue to ride the bull for now as the other indicator that I have started looking at (US Unemployment) to help avoid whipsaws in these indicators remains supportive, although it is getting closer to breaking up through its moving average which would be bearish in this case. (See Chart at the end).
In conclusion the UK Equity market seems back into bull market territory despite the BREXIT vote and fears of a looming recession in the UK and possibly elsewhere and we have some more US employment data to watch out for soon. As it is however August and the silly season and as I said earlier I'm not sure I would chase this FOMO (fear of missing out) rally given how extended FTSE now looks and with the often tricky autumn period still to come not to mention the heavy overhead resistance around the 7000 level. So enjoy the rest of the summer whatever you are up to and don't forget to keep calm and carry on compounding!