14 stocks to own if we vote 'Remain'
21st June 2016 13:48
by Harriet Mann from interactive investor
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In just a couple a days, Britain will go to the polls to vote on its membership in the European Union. After 'Leave' took a commanding lead, there's been a dramatic swing back to 'Remain' which is inching ahead in the polls - even David Beckham is on board. The markets are certainly happier: billions were pumped into stocks on Monday and sterling enjoyed its biggest leap since 2008.
The reaction of the markets no matter the result is prescriptive. If we vote to remain, recent gains will continue - broker Panmure Gordon is betting on a 3-5% bounce in UK equities.
While the 'Remain' camp's return to the top is reassuring, this is still a close-run thing. Not only are we in unchartered territory - which gives analysts limited predictive power over voting behaviour, unlike during General Elections - but one cannot rule out an incident in the next 48 hours to swing sentiment back in favour of 'Leave'.
Still, Panmure thinks 'Remain' will win it: "The last few days of campaigning are set to see momentum stay with 'Remain' and we expect sterling and UK equities to continue to take back some of the ground lost during early June," said the broker's head of research Barrie Cornes.
As uncertainty has pulled down stock valuations across the City, the broker has put together a list of those it believes are poised to bounce if the UK votes Bremain.
Among them are the auto group , building supplies firm and the .
Retailer , explorer and media giant also make the list.
Below are the eight other companies with the potential to bounce most, according to Panmure.
AB Dynamics
421p -Target Price (TP): 500p
Providing the testing for research and development in the global motor industry, is in line for annual profit growth of 20% a year as and continue to muscle in on the industry with their vision for driverless cars.
"Economies are not driven by the majority, but a minority that play by different rules. It would appear that the key issue facing automakers today is whether to build cars in the UK or Poland. It is not," explains analyst Sanjay Jha.
"The elephant in the room is the advance towards the autonomous car, which is allowing new entrants to come and play in their backyard."
Recent weakness in the run up to Thursday's vote leaves AB down 16% from May's all-time high of over 500p, which is exactly what Jha thinks the group is worth - this gives them 19% upside.
The analyst has pencilled in sales of £20.5 million in the 2016 financial year, with profit of £4.8 million, giving earnings per share (EPS) of 22.5p. AB trades on 19 times forward earnings, but this looks justified with earnings growth of over 20% for the next two years.
Brewin Dolphin
251p - TP: 320p
Before the recent recovery in share price, uncertainty had knocked nearly a quarter off the asset manager's share price to 230p, a three-year low.
While earnings forecasts had been trimmed 4.4% from 17p to 16.3p for the 2016 financial year, the stock has de-rated by nearly 20% to 13.5 times and underperformed its sector, which is down just 13%.
"We maintain our belief in management's ability to manage the transition from a relationship led model to a scalable technology platform and that the current low expectations means there is the opportunity for both EPS estimate upgrades and multiple expansion," explains analyst Donald Trait. He reckons the shares are worth 27% more at 320p.
CareTech
230p - TP: 730p
Residential housing group should recover from its recent sell-off no matter Thursday's result, with accelerating growth, 3.5% yield and shrinking gearing underpinning Panmure Gordon's 380p target price. Down 10% from its 255p high in April, fears over property prices and staffing have put pressure on the shares.
Recent interims proved strong underlying cash profit growth and improvement in margins through improved staff retention. A stronger balance sheet also supported organic and acquisitive growth and now Panmure is expecting annual earnings growth of 8% compounded.
"Even in the event of Brexit, the company remains a strong defensive play," says analyst Julie Simmonds. "CareTech continues to trade at a significant discount to peers (7.3x earnings before interest, tax, depreciation and amortisation [EBITDA], 6.4 x price/earnings [PE] multiple vs 9.8x and 15.2x for the peer group) we see the potential for a rerating, whatever the outcome on Thursday."
Inspired Energy
12.6p - TP:19p
Dealing in energy procurement for commercial and industrial clients, showed growing momentum in March's prelims when it announced a surprise dividend hike three times larger than Panmure expected. Still, the company has underperformed over the last quarter and the shares now trade on just 10.6 times forward earnings.
Both of its divisions have performed well: a 40% jump in its corporate business is nearly all organic, given the timings of recent acquisitions, and its small and medium-sized enterprises (SMEs) arm achieved record sales.
Analyst Michael Donnelly reckons the shares are worth 50% more at 19p.
Marshalls
298p - TP:370p
Although sales have slowed at , it's still executing positive momentum alongside margin expansion. Derating 25% from its July 2015 peak, the shares have slipped 10% year-to-date.
With a robust order book, Panmure is forecasting 3.6% sales growth in 2016, which will reach 5% in 2017. Supported by operational efficiencies and gearing, higher margins should underpin pre-tax profit growth of 24% in 2016 and nearly 10% in 2017.
"The rating has fallen from 21.4x (Sep-15) to 15.1x today, we believe the rating has fallen far enough and the stock will enjoy a post-referendum bounce," said analyst Adrian Kearsey. He reckons the shares are worth 370p, which offers 24% upside.
Merlin Entertainment
427p - TP: 515p
Relying heavily on international tourism and with exposure to foreign exchange headwinds and large investment requirements, market nerves around are understandable. Even though the group has a three-year earnings profile of 13% compound annual growth rate (CAGR), the shares now trade on nearly 19 times forward earnings after slipping 10%, with an enterprise value (EV)/EBITDA multiple of 11x.
"Merlin offers low-risk structural growth in a global industry with high barriers to entry," explains analyst Anna Barnfather. "Its global footprint and strong multi segment brands give multiple levers to drive double digit earnings growth over the long term."
Offering 21% upside, she believes the shares are worth 515p.
Micro Focus
1571p - TP: 2,034p
is on the cusp of a double-headed rally, initially to be triggered by a vote to remain in Europe. With a global business, the removal of this uncertainty should push shares in the IT company to 1,650p.
But it's already said revenue will be in the top end of its guided range when it releases its results on 14 July. Panmure has pencilled in $1.2 billion (£815 million) revenue, underlying adjusted cash profit of at least $530 million and net debt of $1.1 billion.
This should push the shares closer to their 2,034p target.
"Ahead of this double header rally the shares enjoy strong valuation support namely; EV/EBITDA 12x, a sector discount, and free cash flow (FCF) yield 6.9%."
St James's Place
877p - TP: 1,146p
A 'Remain' vote will lift the lid on the price of most financial shares, but Panmure analyst Barrie Cornes is confident will lead any recovery.
"Whilst we could have chosen almost any of the insurers to bounce on a stay vote many of which have dividend yields north of 6%, we think that it is SJP that will rally fastest within the sector," said Cornes.
Granted, there was a slowdown in sales in the second quarter, but the broker reckons this is down to clients "sitting on their hands" ahead of the vote.
Trading at a small premium to its 810p embedded value, Cornes has a 1,146p target price on the stock, which offers 30% upside.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.