The UK Equity Market Is Too Cheap And ‘Under-Owned’

British investors have to wake up to the bargains now on offer in the UK equity market, if they don’t then it is certain that they will miss out on the values that overseas corporates are now finding so attractive.

With the US and other markets trading into new High ground, we are lagging behind in a total wallowing of investor lethargy, meaning that our values are way behind others internationally.

Our UK equity market is trading on a price to earnings ratio of 14-16 times, whereas multiples elsewhere in Europe are well over 20 times, while the US market is averaging at over 30.

The bids for our domestic-based companies are beginning to come thick and fast.

Global Private Equity players continue to delve into the potential of possibly all sections of the market, building up small initial positions while they bide their time and investigate more fully their prey.

Whilst the ‘trade’ bidders for our companies are predominantly US and European, as can be seen by last week’s bids for Direct Line, Currys and Wincanton – but the Chinese are interested too, as shown by the JD.com expression of interest in Currys.

There is also a build-up of interest by the PE boys for various leading subsidiaries of UK quoted businesses, looking to take them out, shake them about, refund them, then withdraw large dividends in the process, before organising trade sales or even floating them off again.

It is now becoming very evident that the dilatory action by The Bank of England in countering rapid inflation, coupled with the devaluation of sterling, has made itself being felt in the UK corporate sector – leaving our British enterprises wide open to foreign predatory behaviour.

The NatWest Share Sale

Look out for some very big enticements to buy the Government’s share stake, or even part of it, in NatWest.

Perhaps we will get some more detail in this week’s Budget.

Big discounts are anticipated, together with a real ‘wind-up’ of the Government’s advertising programme to tickle private investors into taking out all or part of their 33% holding.

Is it right for Government’s to hold equity in any one particular UK banking concern, as opposed to stakes in all of them, or in fact in none at all.

My feeling is that the State should not be such an investor.

But should Joe Public be the one to take the State out of its position?

I don’t think so – but I do remember the euphoria established around the ‘sell-off’ of British Gas and the Government’s very effective ‘Tell Sid’ advertising campaign.

That was handled by the Saatchi’s when they were in their ascendency – they are not involved this time.

The big question will be – will private investors ‘de-bank’ NatWest?

The British ISA And Abolishing Stamp Duty On Share Trades

I really like the idea of a British ISA.

Could this be one of Jeremy Hunt’s new measures this week?

The UK equity market has been something of a ‘dog’ over the last couple of years and private investors need to be signposted the way to participate in supporting British quoted companies, as well as building up their own portfolios.

An ISA limited to purely UK-based and operating companies could well appeal to Joe Public, especially in the hope of increasing values, aided by tax ‘come-ons’ – just think of that coupled with the possible abolition of UK Stamp Duty on share transactions.

I also have to say that I really approve of the suggestion that pension and other investment funds should be asked to note just how much of their portfolios is UK-based as opposed to the predominance of US, Australasian and European positions.

We need to back Britain, so pointing out just how much of a portfolio is UK-slanted is a sensible step.

However, I am more cautious of a suggested strong push to invest in UK start-ups, too much demand would push up perceived future valuations – we have been there before and it nearly always costs investors’ money.

Will Hunt’s Budget Add Up And Will The OBR Agree

I will make a bet that the Office for Budget Responsibility will gripe over Jeremy Hunt’s various measures that he will propose in this week’s Budget.

They always seem to try to kick in their comments against whoever may be Chancellor.

But should we pay attention?

They are not too accurate in their own prognostications.

Why Do We Need Tax Cuts

With a threatened cut back on Defence Spending, especially at a time of such international conflict, what sense does that make.

It appears that we have aircraft carriers unfit for task, a fleet of attack planes being pulled out of service, as well as missiles that go off like a damp squib on Firework Night.

We need to display strength in our defences – currently they are a laughing-stock, shouting out our inability to look after our country, let alone help to defend those of others.

As a matter of interest, in research that I saw over the weekend – £45.4bn was spent on Defence in 1978/79, that figure was up to just £55.5bn in the 2022/23 period.

£100 spent in 1978 would today be worth £718.99 based upon 4.38% pa inflation.

Surely, we should not be considering major Tax Cuts when as a country we need more to be spent on defence, roads, the NHS, policing, etc etc etc.

In my view we should be showing a realistic determination to manage our economy by holding back on any tax cuts (not a popular theory, I am sure) and making sure that funds are diverted into the much-needed departmental spends.

Hunt has already declared to the unbiased BBC that this week’s Budget will show a ‘sensible, sustainable path to lower taxation in the longer term’ – however he has proclaimed that its will be ‘prudent and responsible’ – we shall just have to wait and see.

Now For Some Good News

It is a fact that for the last year and a half the UK housing market has been suffering from an overall decline.

But then prices had risen considerably in the run-up to and during the early Covid crisis, so perhaps it was only to be expected that some ‘topping-out’ was needed.

So, it is good news that last month saw the price of a typical UK home increase by 1.2%.

Couple that with the news that mortgage approvals have recently hit new highs, due mostly to a slight lowering of loan rates.

However, I am not bullish on the general market hope of lower interest rates in the next month or two.

Stamps Up 60% In Two Years

In 2022 the cost of a first-class stamp was just 85p.

For those lucky enough to get first-class deliveries, something that has been doubted by Ofcom, it may not be too much of a boosted cost to know that Royal Mail has shoved the cost up by some 60% in the last two years.

From the first of next month the cost will be up to 135p per stamp.

I have to say that apart from Christmas and Birthday cards my expenditure on postage is minimal – thank goodness for the internet and my e-mails.

Now on to other matters ….

STV Group (LON:STVG) – Waiting To View 2024

Tuesday morning will see the announcement of the end-December 2023 results from this media operator.

After a somewhat challenging year, I will not be too worried to see a fall in adjusted pre-tax profits from the £24.1m made in 2022, expected to be around £17.8m for last year.

It will be good to note that group revenues rose from £137.8m to an anticipated £165.5m for the year.

Earnings will have taken a big knock from 40.0p to some 26.4p in 2023, despite that the dividend will have been maintained at 11.3p (11.3p) per share.

Now estimates from analyst Roddy Davidson, at the group’s House Broker, Shore Capital, look for the current year to see an improvement in sales to £173.7m, with profits of £19.0m, earnings of 27.8p and a useful 12.0p per share dividend.

The current year Outlook statement from the Glasgow-based group, which is valued at around £93.5m, will be well-studied.

Even so I continue to believe that this company is being unduly lowly rated, especially with its shares at just 200p each, they were over 315p this time last year.

(Profile 10.12.21 @ 345p set a Target Price of 425p)

(Profile 05.02.24 @ 188.5p set a Target Price of 235p)

Gulf Marine Services (LON:GMS) – Propelled And Elevating

The good news keeps on coming from this Abu Dhabi-based provider of advanced self-propelled, self-elevating support vessels.

The group’s fleet of 13 vessels is the youngest in the sector, which is obviously very appealing to its customers within the oil, gas and renewable energy industries.

From its offices in the UAE, Saudi Arabia and Qatar, it services global client companies in the Middle East, South-East Asia, West Africa, North America, the Gulf of Mexico and Europe.

Last Wednesday the group announced a contract extension for one of its vessels now operating in the Middle East, while gaining a Letter of Award for another similarly operating vessel.

The two contracts span a combined 5.2 years and help to boost the group’s total backlog to a very healthy $373m, bringing about an upward guidance for the market.

There is a continuous demand for the group’s vessels, whilst it is evident that there is an ongoing improvement in day rates and backlog for the company. 

Analyst Daniel Slater at Zeus Capital is now expecting current year sales, to end 2024 of $167.7m (2023 est $151.7m), helping to generate $52.0m (est $27.3m) adjusted pre-tax profits, lifting earnings to 4.1c (2.0c est) per share.

I really like the massive potential for this £175m group and consider that its shares at just 17.25p offer strong upside prospects.

Zeus Capital has a value out on the shares of 25p each.

(Profile 30.11.23 @ 13p set a Target Price of 16p*)

(Profile 22.01.24 @ 15.95p set a Target Price of 19.50p)

Strix Group (LON:KETL) – Come On Polly!

This company is the global leader in the design, manufacture and supply of kettle safety controls as well as other complementary water temperature management components, appliances and water filtration products.

Globally its products are used over 1bn times a day, while as a group it has a 56% value share of the kettle controls market.

In 2023 it went off the boil.

Analysts who follow the company have recently reassessed their estimates for last year to end December and for this year too.

Demand in the kettle controls market in 2023 showed signs of cooling down quite a bit.

The group’s results are due to be published in three weeks (27^th), which is when we will see just how it fared last year boosted by recent acquisitions and how it is expecting its business to be in the current year.

Analyst David O’Brien at Equity Development now has estimates out for the 2023 year to report revenues of around £147.1m (£106.9m) upon which the group could have made £21.2m of adjusted pre-tax profits, generating 9.1p earnings, enabling a 2.7p per share dividend.

For the current year he goes for £158.0m sales, £25.4m profits. 10.0p earnings and a dividend of 3.0p per share.

Equity Development has a valuation on the group’s shares at 149p.

Over at Zeus Capital their analyst Andy Hanson is looking for £151.0m sales for last year, £22.0m profits, 9.0p earnings and a 3.0p dividend per share.

This year he has estimated for £162.5m revenues, £26.6m profits, 10.3p earnings and a 3.1p dividend.

He sees another uplift next year to £173.5m, £30.1m, 11.4p and 3.5p respectively.

The shares, which hit 114p in May last year, closed on Friday night at just 67.60p, capitalising the whole group at only £153.1m.

Based on the above analysts’ estimates, prior to the imminent results declaration, I am now setting a new Target Price of 82p.

(Profile 31.12.19 @ 196p set a Target Price of 250p*)

(Profile 04.03.24 @ 67.60p set a new Target Price of 82p)

(Asterisks * denote that Target Prices have been achieved since Profile publication)