Sunday 18 February 2018

Ryanair and Total Produce are top picks in global investment outlook

Michael O'Leary, chief executive officer of Ryanair Holdings Plc.
Michael O'Leary, chief executive officer of Ryanair Holdings Plc.
John Mulligan

John Mulligan

Shares in Ryanair and Total Produce are among the top long-term picks from Merrion Stockbrokers in its second quarter global investment strategy outlook.

But the stockbroker has warned that it expects increased market volatility over the next three months because current market complacency will likely lead to “misplaced confidence” that central banks will step in to arrest the decline seen in economic growth indicators since the start of the year.

“With limited additional upside expected from better-than-forecast earnings growth coupled with valuation multiples that are currently at elevated levels, notably in the US, we believe that equity markets will struggle to make new highs in the near term and that the risk of a material move lower of stock markets is increasing,” according to Merrion’s strategy update.

“Our preference is for stocks which have defensive qualities and trade on valuation metrics which are not stretched,” it added.

Its top long stock picks for the second quarter are Apple, AT&T, British American Tobacco, biotechnology firm Gilead, Rolls Royce, Ryanair, British supermarket chain Sainsbury, Total Produce, and gambling group William Hill.

“European equities remain cheaper than US alternatives but downside risks remain owing to the risk of renewed political and economic setbacks. However, we do expect profitability levels to improve from current levels,” said Merrion.

It said that current valuation multiples at Total Produce are attractive and “quite undemanding for such a high quality stock”.

It pointed out that the company has very low debt metrics and that the Oppenheimer business in North America, in which Total Produce acquired a stake, continues to trade well, while in Europe trading conditions are improving.

“Also, in light of the recent merger between Fyffes and Chiquita, it is likely that increased focus will be placed on Total Produce from potential interested parties, given the low-risk nature of the company’s business model coupled with the valuation discount that exists versus other companies in the sector,” Merrion’s strategy report predicts.

With Ryanair, Merrion believes the major upgrade of the airline’s website coupled with other initiatives will result in increased business being directed through the digital channel.

“With the exception of 2009, Ryanair has been profitable in each of the last 10 years, producing profits that have steadily improved in recent years from being in excess of €300m in 2010-2011 to being in excess of €500m in each of the subsequent years,” noted Merrion. “Our expectations are that this pattern will continue.”

The stockbroker added that Ryanair believes there remains a large, untapped market for low-cost fares, especially in countries such as France, Germany, Italy, Finland, Norway and Poland.

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