A year for stock pickers - top picks for 2016
Most sub-sectors saw positive share price momentum in 2015. Although the market is one year further along the current cycle UBS economists see accelerating GDP in 2016 with Eurozone PMIs seem supportive for share prices. We see a number of companies which still offer upside partly due to companies trading at valuation discounts to the
past and partly due to earnings momentum. In our view 2016 is likely to be very much a stock pickers year given the cycle development.
Some recommendations of Top picks for BLT in 2016…
While there is potential for non-base case views to happen in 2016 (we highlight scenarios in the note) based on our base case expectations we suggest the following share as Most favoured: IAG (Buy, £8), Vopak (Buy, €50), Bpost (Buy, €26), Elior (Buy, £22), Sodexo, (Buy £96.25 ), DCC (Buy, £63), Teleperformance (Buy, €86). We recommend the following as Least favoured: IHG (Sell, £21.75), SSP (Sell, £2.80), Air France-KLM (Sell, €7.1), DPost (Neutral, €26), Securitas (Sell, Skr 105), Aggreko (Neutral, £10.5).
Earnings momentum still underpin a number of our ratings
We see 2016e earnings growth across the BLT space with an aggregate 15% growth (a year ago we forecast 20% for 2015). However, there is large range for earnings momentum of 5% to over 40% (in the case of aviation). Earnings momentum is predicated upon both top line and margin enhancement (through restructuring benefits and operational gearing delivery in 2016).
Valuations remain selectively attractive with over half subsectors at discount
Slightly over half of the sub-sectors are at a discount to past mid-cycle PE averages (only 25% are above previous mid-cycle average) which might suggest further multiple expansion. From the Sell-side perspective ratings have stayed broadly consistent on a year ago with 47% of ratings Buy (14: 46%) and 15% of shares rated Sell (14: 13%).
Furthermore, since 2012 80% of the sub-sectors have de-geared their balance sheets and further de-gearing should help underpin shareholder value accretion. Nevertheless, we see scope for further M&A in 2016 given the low rate environment.