Merlin set to be gobbled up and Costain issues profit warning

“It seems unlikely that we’re going to get much reaction from global stock markets until this weekend’s G20 summit has taken place as investors are looking for updates on trade talks,” says Russ Mould, Investment Director at AJ Bell.

“Instead it is worth taking stock of how markets has performed this year now we’ve reached the halfway point in 2019.

“The best performer among the major market indices is Russia’s Trading System index, up 29.9% year-to-date. The Bank of Russia recently cut interest rates and Russian companies are under state pressure to be more generous to shareholders. For example, energy firm Gazprom hiked its dividend twice in a week, sending its share price soaring.

“In second place is China’s CSI 300 index, up 27.4% which may surprise some people given how the US/China trade war keeps rumbling on.

“The UK’s FTSE 100 index is up 10.1% so far this year – a good result for investors but lagging many other major markets in relative terms.

“The worst performer is Japan’s Nikkei 225, ‘only’ up 6.6% in value. In historical terms that’s about the average you’d normally get on equities in a year so investors shouldn’t really be disappointed, particularly as we’re still only halfway through the year. A continuation of this trend would make 2019 a standout year for equities.”

Major markets in first half of 2019
Russian Trading System (Russia) +29.9%
CSI 300 (China) +27.4%
Nasdaq (US) +20.1%
S&P 500 (US) +16.7%
DAX (Germany) +16.6%
CAC 40 (France) +16.1%
Bovespa (Brazil) +14.6%
Dow Jones Industrial (US) +13.7%
Hang Seng (Hong Kong) +10.4%
FTSE 100 (UK) +10.1%
Nikkei 225 (Japan) +6.6%

Merlin Entertainments

“Another activist investor has had their wish granted. Following ValueAct Capital’s insistence that Merlin seek life as a private business a takeover bid has been made by a private equity consortium.

“Whether ValueAct’s public pressure enticed the bidders to make a move remains to be seen. But what seems highly likely is that Merlin is now going to leave the stock market.

“The UK stock market continues to be a magnet for takeover activity as weak sterling and fears over the impact of Brexit have depressed equity valuations.

“Companies experiencing short-term trading or financial pressures have been particularly vulnerable to third party bids, and Merlin has been seen as a potential takeover for some time, even before ValueAct threw its thoughts into the ring.

“Merlin was somewhat unique on the UK stock market by being the only London-listed theme park operator. Diversity is important to investors and reducing choice by losing names such as Merlin can actually be a bad thing.

“The business had found life a lot harder in recent years following a rollercoaster accident at its Alton Towers site, terror attacks in London making some people nervous about visiting the capital, and demand for Legoland easing back after a long run of success.

“Being a privately-owned business means Merlin’s management would no longer be under constant scrutiny from analysts and investors regarding quarterly trading. They could focus more on running the business and not have to worry about the share price and how the market views the company.”

Costain

“Smart infrastructure play Costain ended 2018 with a record order book implying 2019 could be a good year for earnings.

“So why then six months later is the company warning on profit? Well, being awarded lots of contracts is great, but these contracts can always be cancelled or delayed, and the profit derived from this future revenue depends on how efficiently the orders are executed.

“The company’s focus on providing construction and building services on large infrastructure projects to the likes of Network Rail and Highways England always left it vulnerable to delays when you consider the pressure on public finances in the UK, not to mention the high levels of political uncertainty.

“There was also a reminder of the perils of being exposed to a crumbling UK construction sector as the company took a near-£10m hit to cover remedial work on an historic contract, the subcontractor who should have been liable having gone bust.

“Today’s news marks a very tough start for Alex Vaughan as CEO, after the internal candidate took the helm in May. Vaughan is wasting little time in seeking to rebuild the market’s trust and plans to outline his medium-term strategy for the business next month.”

These articles are for information purposes only and are not a personal recommendation or advice.