Post Brexit Trade Ideas

27th Jun '16 by Mark Simpson

7 comments 14750 reads

Markets have been turbulent following the unexpected vote to leave the EU. And rightfully so - economic growth is based on the confidence to invest in property, plant, equipment or research and development now in order to generate profits in the future. If those investments are deferred or not made then that growth does not materialise. Spending will also be deferred by consumers uncertain about the future. So we are pretty much guaranteed a recession. Its length will be determined on how quickly this is resolved. The severity will determined by the level of deferment of spending. So it is quite easy to perceive that this recession will be both lengthy & severe and position accordingly.

And essentially that is what the market has priced quite rightly to some extent – a severe consumer-led recession. This is why we have seen retailers, banks & housebuilders bear the bulk of the sell-off. But the sell-off has not been uniform as the rapidity of the response to the unexpected result has been varied due to different shareholder registers & liquidity profiles. This yields opportunity. Here are some trade ideas based on the differential movements of stocks or valuations in the same sector. Each takes the form of a short idea which I don’t think has fallen enough to take into account of the current situation (although prices are moving fast so there is no guarantee these prices will still be available) plus a potential hedge if you prefer to be market/sector neutral.

Housebuilding

Short: McCarthy & Stone (LON:MCS) @187p
1m RS = c.-20%
EV/EBITDA = 12

Just a housebuilder – see good analysis by ‘fizzlebiz’ here http://www.stockopedia.com/content/mccarthy-amp-st...

Hedge: Bovis Homes (LON:BVS), Bellway (LON:BWY), Crest Nicholson Holdings (LON:CRST)

1m RS = c.-30%

EV/EBITDA all = 6

Clothes Retail

Short: ASOS (LON:ASC) at 3600p
1m RS = c.+5%
EV/EBITDA = 39

Hedge: Debenhams (LON:DEB)
1m RS = c.-20%
EV/EBITDA = 4

If the recession causes retail spending to plummet there is no reason to think that ASOS (LON:ASC) ‘ s internet retail business will be exempt. Debenhams (LON:DEB) is a good hedge…

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VegPatch

28th Jun '16

Some interesting ideas thanks.
I think UK house builders all track back towards Tangible Net Asset Value or below.
Bovis is now at a c15% discount, so I added some yesterday. The rest are still too highly valued. I haven't read Fizzlebuzzs analysis on McCarthy & Stone, but unless it has changed its business model then it is always amongst the most geared into rising or falling housing and land markets. It's trading on 1.2x TNAV. I agree with your relative value trade

Mark Simpson

VegPatch,

Thanks for the feedback on housebuilders. Picking the right metric for these trades is always key and you are right TNAV is probably better than EV/EBITDA for housebuilders.

Another idea in the finance space:

Short: Worldpay (LON:WPG)

Hedge: Sage (LON:SGE)

Worldpay (LON:WPG) should make a good recession short. Payment processing should be linked to economic activity and it is expensive on most metrics hence the Stockopedia ValueRank of just 20. It's large and liquid enough to get the borrow.

Sage (LON:SGE) through Sage Pay has exposure to the same markets but is better on most metrics a more diversified business and has less debt. The ValueRank is still only 18 here though so I'd be tempted to skip the hedge and just short Worldpay (LON:WPG).

Whitbyview

Did you consider SafeCharge International (LON:SCH) as an alternative payments company? In some respects (that can be highlighted using a Stockopedia share comparison for instance) it appears better placed than the two companies you have highlighted. Just a thought ...

dustyie

29th Jun '16

Re ; Post Brexit Trade Ideas
BUY
hibernia reit plc
irish residential properties reit plc
green reit plc

all 3 above reits invested in dublin market ( i bought the top two reits , last friday )

Reason even if Dublin only get a small portion of london finanicial business , these companies assets will be commanding higher rents

I am not sure i think Worldpay is a great short.
It is a merchant acquiror, meaning it acts as a toll bridge for cashless transactions, typically charging a small percentage fee for the interface between the merchant's physical terminal or online business and the acquiring bank eg Lloyds. Therefore the structural move from cash to debit / credit cards and online payments benefits them. I think this trend may slow in a recession but is commerce on mobiles and the internet likely to go negative ?
Historically the value of transactions has grown around 12% pa from 2011-15 and revenue margins have eked up from 23bps to 24.4bps per transaction, as higher margin e-com sales has grown faster than other divisions. Worldpay is aiming to grow (the dreaded) EBITDA by 12-15% pa out to 2020.

Brexit impact : UK is only c40% of Group profits, so WPG has just had an implicit upgrade to numbers given the devaluation of Sterling vs USD and EUR.
I agree the valuation is high but from what I have seen in this space it has a winning business in its "Global e-com" international division which accounts for 40% of Group profits. As an example it transacts all of Google's business outside of the US. Other clients include UBER, China Southern, Thai Airways, Microsoft (ex US I think), Airbnb. it has a really strong roster of e-commerce clients.

All that aside there have been marginal downgrades post FY15 numbers which isnt great immediately post IPO
If you did want to short it it would only be a small one for me. Personally I am looking for an opportunity to buy it as has
1. Scale in the global marketplace, but with room to grow further eg WPG is #1 in global retail enablement online but only has a 3% market share.
2. A strong management team who are focused on growing the business profitably
3. a huge number of small transactions on a daily basis, rather than a few lumpy ones.

Risks
the main risk is new forms of payment architecture render the 4 party system of payments redundant. Some retailers in the US have tried but so far failed. When tech isnt your main job why are you likely to build a completely new industry architecture ?
Margin erosion - no sign of this yet
Valuation is high - agreed

I dont have a position in WPG

Whitbyview,

Yes SafeCharge International (LON:SCH) does look better value, although a much smaller company.

dustyie,

Thanks for the ideas, those are a bit convoluted for me - rises based on rent increases from move of UK companies to Dublin. It's easy to make a counter-argument of a Europe-wide recession reducing rental rates. Given that they haven't dropped that much compared to other companies I'll probably pass but re-examine if they do get a big sell off.

VegPatch,

Thanks for the further insight on Worldpay (LON:WPG). I'm not saying the eCommerce won't keep growing just that if the market is correctly pricing in a consumer led recession for the likes of Debenhams (LON:DEB) & Halfords (LON:HFD) then growth for internet retailers like ASOS (LON:ASC) & payment gateways like Worldpay (LON:WPG) will be slower than is currently priced. So if one set of companies has dropped so should the other.

I agree that scale is important but when your competitors are Sage (LON:SGE), £PYPL & £AMZN then that is a competitive market IMO and any market share will be taken at the expense of margins.

Right to be cautious shorting purely on valuation tho so will keep any short small.

Rusty2

ASOS (LON:ASC) has about 60% of sales from overseas so it may not be affected as much as say Debenhams (LON:DEB). Also with the fall in £ their revenues may rise and products will be cheaper to overseas buyers.

Post Brexit Trade Ideas

Housebuilding

Clothes Retail

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Mark Simpson

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