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Five Best of Brexit shares

Which shares look set to benefit from Brexit?
October 12, 2016

For five years this column has been following a “Best of British” screening strategy that aims to pick FTSE 350 companies that generate most of their sales in the UK and look promising based on price and earnings momentum and some basic quality measures. The recent referendum and the negative implications for UK focused stocks delivered something of a broadside to this screen, although, long-term performance continues to look impressive. However, in an attempt to focus on where the action has really been since the vote for the UK to leave the EU, I’m turning the screen on its head this week to create a “Best of Brexit” screen. All the screening criteria are the same, except rather than looking for companies that generate more than three-quarters of their sales in Britain, I’m looking for those that get more than half their revenues from other shores.

Since the Brexit vote, a consistent theme that seems to have emerged is sterling weakness. The most recent downward leg followed Prime Minister Theresa May’s comments at the Conservative Party conference that suggested the country may be heading for a so-called 'hard' Brexit and that Article 50 would be triggered before the end of March 2017, after which detailed negotiation will get under way. While sterling could bounce back, the prevailing sentiment increasingly seems to be the pound will stay – to borrow a phrase – lower for longer.

 

Sterling vs US dollar

 

UK stocks are doing very well from these events thanks in to the international nature of the London market and the fact that there are many big exporters among the large London listed companies. These currently look like big Brexit beneficiaries based on currency movement, although the longer-term economic implications of the referendum vote remain the source of fevered and highly-politicised debate.

The criteria for my Best of Brexit stocks are:

■ At least half of revenue from outside UK.

■ Three-month share price momentum better than the FTSE 350.

■ Return on equity of more than 10 per cent.

■ One-year beta of less than one.

■ Forecast EPS growth in this and the next financial year.

■ Better than average five-year compound annual growth rate (shorter periods used where a full five-year record is unavailable).

■ Net debt of less than 2.5 times cash profit.

Only two FTSE 350 stocks passed all the Best of Brexit tests (Burberry and Johnson Matthey). Given this slim showing, my table also includes all the stocks that passed the non-UK revenue test and all but one of the others. The two stocks that met all the criteria are given write-ups below along with the three stocks showing the strongest share-price momentum over the last three months.

 

BEST OF BREXIT

NameTIDMMkt CapPriceFwd NTM PEDYFwd EPS grth FY+1Fwd EPS grth FY+23-mth MomentumNet Cash/Debt(-)UK RevenueTest failed
Burberry Group plcBRBY£6,211m1,420p202.6%1.5%8.2%22.7%£660m10%na
Johnson Matthey PlcJMAT£6,636m3,461p182.1%7.7%8.1%18.2%-£683m33%na
Hill & Smith Holdings PLCHILS£926m1,180p181.8%22.0%6.0%37.8%-£100m48%Beta
Smiths Group plcSMIN£5,970m1,510p172.8%7.4%2.8%32.7%-£978m3.9%5y EPS grth
GKN plcGKN£5,692m333p112.6%0.5%11.5%26.3%-£753m<50%5y EPS grth
Spirax-Sarco Engineering plcSPX£3,423m4,669p281.5%15.0%6.7%25.6%£21m<50%Beta
BGEO Group plcBGEO£1,126m3,036p92.7%24.6%10.3%25.0%-GEL1,526m<50%RoE
Genus plcGNS£1,242m2,042p301.0%12.4%8.3%23.5%-£90m<50%Beta
Ashtead Group plcAHT£6,479m1,301p131.7%16.4%9.8%21.7%-£2,348m14%Beta
Mondi plcMNDI£8,135m1,680p132.7%5.1%5.0%20.9%-€1,474m0.5%Beta
Diploma PLCDPLM£1,058m936p231.9%6.8%10.2%19.0%-£18m25%Beta
Spectris plcSXS£2,450m2,056p172.4%2.9%9.1%18.7%-£104m3.6%5y EPS grth
Synthomer plcSYNT£1,280m377p152.3%12.8%3.5%16.9%-£219m<50%Beta
Wolseley plcWOS£11,235m4,515p162.2%17.2%7.6%15.5%-£967m14%Beta
WPP plcWPP£23,331m1,850p162.4%17.8%9.4%13.0%-£4,249m14%Beta
Carnival plcCCL£28,070m3,855p132.9%24.5%9.5%12.5%-$8,973m<50%Beta
Croda International plcCRDA£4,718m3,624p232.0%9.2%5.5%12.0%-£419m<50%Beta
James Fisher and Sons plcFSJ£819m1,637p211.5%8.5%9.1%11.3%-£106m<50%Beta
Experian plcEXPN£15,046m1,594p222.0%5.9%7.8%9.7%-$3,083m21%Beta

Source: S&P CapitalIQ