FTSE 100 higher, British American Tobacco in £25 billion impairment charge, TUI might delist from London and Ten Entertainment bowled over by takeover offer

“The FTSE 100 moved higher on Wednesday as it responded to positive trading in Asia,” says AJ Bell Investment Director Russ Mould.

“Cooling job vacancy data from the US helped bolster expectations that we are at the pivot point of this rate hiking cycle – though more news on the US labour market through the course of this week will provide a fuller picture.

“Miners were in demand as Rio Tinto CEO Jakob Stausholm briefed investors that Chinese steel mills were ‘producing flat out’. This is good news for iron ore producers like Rio, with the patchy recovery in China a big reason why the mining sector has had a difficult time in 2023.

“Rio also announced big spending plans. Along with signs of burgeoning M&A elsewhere in the sector, any excitement felt by investors at the growth potential may be tempered by concerns the industry is losing some of the discipline it has demonstrated in recent years.”

British American Tobacco

“British American Tobacco is going through a significant period of change as it targets half of its revenue to come from non-combustibles by 2035 and struggles with difficult US market conditions.

“Smokers continue to switch to next generation products including vaping and that has prompted British American Tobacco to take a long-term view about the value of its assets in the combustibles category. Reassessing their economic value has led to a £25 billion impairment charge and the decision to accelerate investment in the business to make it fit for the shift in consumer preferences.

“Naturally that’s going to have a negative impact on near-term financial results and so the share price has fallen once again and is now down 30% year-to-date. That’s hardly what you would expect from a FTSE 100 company deemed to be defensive due to the addictive nature of its products.

“While it pays a generous dividend, investors are likely to be questioning their commitment to the stock given the poor share price performance and the fact the sector is facing increasing regulatory and political headwinds.

“The problems don’t stop there. The US is being flooded with thousands of different unauthorised vaping devices, many thought to have originated from China. These illegal disposable e-cigarettes are taking market share and causing headaches for authorised sellers such as British American Tobacco, which is already having to deal with an ongoing decline in traditional cigarette usage in the US.”

TUI

“Unlike some recent departures from the UK stock market, TUI may not be massively missed if it follows through on a suggestion it might upgrade to a prime standard listing in Frankfurt with inclusion to the MDAX – the one just below the Germany’s flagship DAX index – and delist from London.

“Partly thanks to the pandemic, its share performance has been turbulent to say the least and its operational track record has been far from flawless too. The company is on an upwards trajectory though – announcing an impressive increase in earnings as it demonstrated some pricing power and managed to trim its still onerous debt pile.

“There is obvious logic to the move given TUI is very much a German business which even received a bailout from the country’s government during Covid. It will be interesting to see how investors vote in February – with the required 75% approval a high bar to clear.

“You can see the company’s reasoning, as it feels there is more trade struck through Frankfurt and it reports its numbers in euros for good measure. Its claim that index inclusion in the MDAX would be beneficial is harder to judge as the firm is already in the FTSE 250 and chasing passive, index-tracking flows is not necessarily a good idea, as that can work for or against you.

“Moreover, management teams should be in the business of managing the assets to best effect, and getting the best, risk-adjusted returns, not managing the share price. If they do the former properly, the latter should take care of itself over time.”

Ten Entertainment

“Strike! Here comes another takeover offer for a company on the UK stock market.

“Ten Entertainment is a classic example of stock that has traded on a cheap valuation and delivered decent results, yet has remained under the radar of many investors.

“Given the market hasn’t recognised its true value, it’s no surprise that a private equity-backed vehicle has come along and tabled an offer which looks too good to refuse, hence why the board has recommended it.

“Ten Entertainment is the perfect example of why some investors like to fish for opportunities in the small cap space. The business has been ticking a lot of the right boxes for years, albeit disrupted by the pandemic. There were plenty of signs it was a well-run business and its decision to offer bowling at affordable prices during the cost-of-living crisis has proved wise.

“Assuming the takeover completes, it will be yet another loss to the UK stock market which still isn’t replenishing the pot with new IPOs.”

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