On Bank of England’s Shopping List: Apple, Daimler Bonds
Central bank includes bonds of many corporations based overseas among those it may buy in stimulus program
LONDON—U.S. tech giant Apple Inc. and German auto maker Daimler AG are among a host of non-British companies whose debt is eligible for the Bank of England’s corporate-bond-buying program, the central bank said Monday.
The BOE published a list of around 300 securities it can buy in a £10 billion ($13.3 billion)program scheduled to begin Sept. 27 and run for 18 months. The list is made up of bonds issued by more than 100 companies, many of which have significant operations in the U.K. but are headquartered overseas.
Other non-British names on the BOE’s shopping list include U.S. biotechnology firm Amgen Inc., French utility Électricité de France SA and Danish energy firm Dong Energy AS.
The inclusion of non-British names underscores the unusual lengths some central banks are going to in an effort to stimulate sluggish economies. The U.K. has long been a magnet for foreign investment, and the BOE said the principle criterion for inclusion is that the issuer makes “a material contribution to the U.K. economy.” The issuer’s debt must also be high-quality investment grade and denominated in sterling.
Plenty of British firms make the cut, including newspaper publisher Daily Mail & General Trust PLC, whose flagship title The Daily Mail supported the U.K.’s exit from the European Union in a referendum in June. Bonds from oil giant BP PLC and drug makers GlaxoSmithKline PLC and AstraZeneca PLC are also included. Financial firms are excluded.
In setting its eligibility criteria, the BOE has taken a page from the Bank of Japan’s playbook. Japanese officials’ purchases aim to support firms that are “proactively investing in physical and human capital” and “enhance their growth potential through effective corporate governance,” among other criteria. The BOJ still doesn’t directly invest in these corporations. Rather, it buys shares in exchange-traded funds that track stock indexes that officials deem eligible.
The European Central Bank, which is also engaged in corporate bond purchases, buys euro-denominated bonds of non-bank corporations established in the euro area.
The BOE’s corporate bond-buying program is part of a multipronged stimulus effort announced last month in the wake of the U.K.’s decision to leave the EU.
The central bank also revived a crisis-era government bond-buying program, cut its benchmark interest rate to a new low of 0.25% and lined up cheap four-year loans for banks to cushion the economy from a possible slowdown.
Officials fret that uncertainty over the U.K.’s future economic ties to its largest trading partner may weigh on spending and investment, although a recent run of data suggest the economy has weathered the initial surprise of the result reasonably well.
Most BOE officials have high hopes for the corporate-bond plan, even though it is a relatively small slice of their planned purchases overall. BOE Gov. Mark Carney, in testimony to lawmakers Wednesday, said the plan had already led to an uptick in corporate-bond issuance. The theory is that the policy lowers borrowing costs for companies and should hopefully spur investment.
Some officials and economists have reservations, though. Kristin Forbes, a member of the BOE’s rate-setting panel who opposed the purchases, told lawmakers there is a risk the BOE may end up buying the bonds of firms about which there are “bad headlines.”
Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, added there is no guarantee the companies whose debt is purchased will make new investments in the U.K. “What they can’t do is trace where the money goes,” he said.
We initiate coverage of European beverages. At a time when global growth remains subdued, we see the European beverages sector offering visible structural growth. Buy recommended stocks are ABI, Diageo, Pernod and CCH. Holds are Heineken, Carlsberg, Campari, Remy Cointreau and Britvic.
Robust fundamentals. Although top-line growth will not match the pre-2008 period, we see stocks under coverage delivering organic revenue growth of +3.3%, ahead of global GDP at +2.8 (2016-18E). Average three-year earnings growth for stocks under coverage (+8.7%) is broadly in line with the Euro Stoxx (+8.6%); however, given the wide range (4%-13%), stock selection is key.
Bottom-up stocking picking. We see a more favourable top-line outlook for the spirits industry over beer after several years of subdued reporting. However, our stock picking is not driven by top-down sub-sector preferences. Our highest conviction ideas offer strong, visible returns in a low-growth environment, strong FCF generation and reasonable dividend yields.
ABI (Buy, PT €130). We initiate with a Buy rating and PT of €130, which is predicated on delivery of US$3bn cost cutting from the SABMiller transaction vs guidance US$1.4bn. In our long-range outlook, we think a share price of €180-200 is justified (by 2022) through delivery on the 2020 Dream Incentive Plan. (fullnote attached)
Diageo (Buy, PT 2,500p). We reiterate our Buy rating with a raised PT of 2,500p. We think Diageo could look different under new chairman Ferran. His deep roots in the beverages sector and private equity background will bring fresh perspectives to cost discipline, balance sheet utilisation and growth potential of the business.
Pernod (Buy, PT €115). We upgrade to Buy from Hold, with a new PT of €115. We see growth renewing after several years of hiatus, and expect execution to dial up as Alex Ricard makes his mark on the business. Self-help provides some support to earnings. Pernod is unloved and trades at a discount to spirits peers.
CCH (Buy, PT 2,000p). We initiate with a Buy rating and PT of 2,000p. We believe CCH is attractively positioned to benefit from top-line and margin recovery. Better alignment with KO argues for greater participation in soft drinks consolidation.
We initiate coverage with Hold ratings on Heineken, Carlsberg, Campari, Remy Cointreau and Britvic.
Valuation. The beverages sector is not cheap trading at 18.5x 2018 P/E vs consumer staples 19.8x, a 30% premium to the market. Although it is hard to argue for a significant upward re-rating, our top picks offer earnings momentum and some re-rating potential.
Scepticism is probably the best reflection of investor sentiment at the moment, with many calling into question the post-Brexit move higher in markets. In addition to the recent turn in yields, the three areas of concern appear to be a maturing profits cycle in the US, a sharp slowdown in China and the economic impact of Brexit. While we agree that the risks to the cycle have increased, it is important to note that that sentiment, positioning and valuations do not embody the exuberance that characterizes the peak of a bull market. Even if the Fed hikes rates in September, risking a further short-term correction in markets, excess money growth remains supportive of further PE multiple expansion. Ultimately, if the global economy maintains its post-crisis resilience, valuations could revert higher, in our view.
* Scepticism is probably the best reflection of sentiment towards stocks at the moment, in our view. With a background of performance that has been challenging, and outflows that have been significant, many have been calling into question the sustainability of the post- Brexit rally in stock markets. This scepticism hasn’t escaped the consensus of our fellow
equity strategists across the sell-side. In Europe, the average strategist forecast implies 4.2% downside to STOXX 600 according to Bloomberg. While we were not able to find a time series for this data in Europe, history from the US suggests that the consensus is far more conservative than historical norms
AB InBev may have route to acquisition of Castel via SABMiller’s right of first refusal
SABMiller [LON:SAB], the UK-based brewer being taken over by Anheuser-Busch InBev [EBR:ABI], has right of first refusal over a potential sale of Castel Group of France, the Irish Examiner reported.
Sources said SAB and family-owned Castel have a cross-shareholding which would offer SAB the right to acquire Castel in the event the French company ever seeks to sell itself outside the Castel family. Pierre Castel, head of the family, is approaching 90 years old, the report noted.
Once Belgium-headquartered AB InBev’s proposed GBP 79bn (USD 94bn) acquisition of SAB has completed, AB InBev will also acquire the potential right to buy out Castel, possibly leading the way to a full takeover, the item reported. Analysts estimate Castel to have a value in excess of USD 30bn, the report said.
Alicia Forry, an analyst with Liberum, predicted AB InBev would be very keen to acquire Castel if it had the opportunity, describing the Africa-focused French drinks group as a jewel.
Carlos Brito,Chief Executive of AB InBev, was asked about Castel by analysts last month and said AB InBev plans to nurture its “very important” links with the French business, the item reported.
The report went on to note banker speculation that AB InBev might attempt to take over Atlanta-based soft drinks giant The Coca-Cola Company [NYSE:KO], possibly with the backing of Coke investor Warren Buffett. Buffett and 3G Capital, a backer of AB InBev, have a growing relationship, the report said. Coca-Cola has a USD 188bn market cap, the item noted.
Irish Examiner