FTSE 100 opens lower, IMF cuts UK growth forecast and UBS sees value in BAE Systems

Proactive Investors -

• FTSE 100 opens lower, down 46 points
• IMF cuts UK GDP forecast for 2023
• Tesco (LON:TSCO) set to swoop for Paperchase - reports

9.40am: BAE's Asian potential undervalued - UBS

BAE Systems (LON:BAES) held in positive territory as the FSE 100 tumbled boosted by an upgrade to ‘buy’ from ‘neutral’ from UBS.

Relaunching its coverage the bank set a 1,050p price target believing consensus forecasts ignore the company’s long-term potential, especially in Asia, despite BAE’s strong position in the region.

The broker sees upside in munitions, Australia and potentially Japan while restocking European munition stockpiles is a central short-term focus for European customers.

As a result, UBS estimated BAE’s growing exposure could drive 15% CAGR between 2021-25 and up to 30% CAGR if supply chain issues ease.

UBS suggested it is not clear that AUKUS is factored in to valuations, given that material revenues are only likely from 2025 onwards while Japan joining Tempest is itself a “large, potentially overlooked, upside.”

UBS thinks the combination of Tempest and its credentials as a US contractor leaves BAE potentially uniquely positioned to benefit in Japan as it evolves to become a 50% larger market than France as soon as 2027.

“We see Q1 as catalyst-rich, as UK, Australia and Japan all announce defence reviews” the bank concluded.

Shares were trading 0.4% higher with the FTSE 100 now down 46 points, or 0.6%.

9.21am: Tesco to cut 2,100 jobs

Like London buses you wait for one Tesco announcement and two come along.

Alongside reports that the food retailer may be looking at Paperchase comes news of a shake-up in management and the closure of hot counters and delis which will impact approximately 2,100 jobs.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown (LON:HRGV) said: “Ultimately, the UK has a productivity and demand problem, which when put together creates a very difficult environment.”

“There’s a chance the UK could muster a better performance than the IMF is predicting, given upgrades to expectations from other bodies in recent months.”

“The market will remain very sensitive to interest rate and inflation readings until we have a clear path out of the stagnation.”

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High prices were one of the reasons the IMF blamed for the downgrade and they were in evidence today as the monthly survey from Kantar showed grocery price inflation hit another record, rising 16.7% in January, adding a potential extra £788 to annual shopping bills.

Fraser McKevitt, head of retail and consumer insight at Kantar, commented: “Late last year, we saw the rate of grocery price inflation dip slightly, but that small sign of relief for consumers has been short-lived.”

“Grocery price inflation jumped a staggering 2.3 percentage points this month to 16.7%, flying past the previous high we recorded in October 2022.”

In corporate news, Pets at Home Group PLC (LON:PETSP) soared 9.25% after it upped its full-year guidance on the back of a good third quarter.

But British American Tobacco PLC (LON:BATS) was little moved by news of a shake-up of its global operations and Wickes Group PLC (LSE:WIX) slipped 1.4% despite predicting profits in line with guidance.

Peel Hunt noted the statement flagged c.£6mln of additional cost headwinds, £3.5mln of this in the form of pulling forward an additional pay award with the remaining £2.5mln from higher energy costs.

7.48am: BAT in operational rejig

A bit of a shake-up at British American Tobacco PLC which has decided to streamline its operations, cutting the number of business units and restructuring its regional set-up.

Under the plans the number of regions will be reduced from four to three, and the number of business units from 16 to 12, the FTSE 100 cigarette seller said.

The three new regions will be USA, Americas & Europe (AME) and Asia Pacific, Middle East & Africa (APMEA).

“The new structure will increase the efficiency of BAT's geographical footprint, optimise market prioritisation and will be based on fewer, larger business units, enabling even greater collaboration and accelerated decision-making across BAT” the company said in a statement.

Jack Bowles, BAT chief executive said the changes “will drive increased focus, accelerate our transformation and fuel growth as we strengthen the foundations of our future as a category-led enterprise."

Two new board roles will be created in order to ensure clarity of ownership, accountability and focus: chief transformation officer and director, Combustibles, BAT said..

7.32am: Wickes sees profits in line

Kicking us off today is trading news from Wickes PLC which has forecast adjusted pre-tax profits in line with market expectations after reporting strong quarter four trading with sales up 11.5%,

In a trading update, the building materials supplier reported particularly strong growth in its Do It For Me business where sales soared 34.5% on last year although the prior year was hit by the omicron outbreak.

Core like-for-like sales rose 5.2%, continuing the improving trend since the summer.

Local Trade sales again performed strongly, with the digital TradePro customer base ending the year at 746,000 (+18% year-on-year) although DIY sales remained below last year but stabilised towards the end of the quarter supported by sales of energy saving products.

The company also reported an easing in pricing pressures aided by reductions in the cost of timber and inflation, which was 9% in quarter four, “continues to trend lower.”

Wickes said the order book at the end of December was lower than 2021 but still above 2019 levels with orders in the fourth quarter down “moderately” versus last year but on an improving trend from the third quarter.

The company said this trend has continued and orders in quarter one to date are in line with the prior year.

As a result, the company predicted pre-tax profits in line with City forecasts which it put between £72mln to £76mln.

7.00am: Footsie to follow US and Asia lower

FTSE 100 is expected to open lower following losses in the US and Asia and as the IMF posted another gloomy assessment of the UK economy.

Spread betting companies are calling the lead index down by around 28 points.

The IMF has downgraded its UK gross domestic product forecast once again, predicting a contraction of 0.6% against the 0.3% growth pencilled in last October as Britain looks set to suffer more than most from soaring inflation and higher interest rates.

In the US markets ended the Monday nursing heavy losses with the Dow down 260 points, 0.8%, at 33,718, the Nasdaq Composite off 228 points, 2%, to 11,394 and the S&P 500 53 points worse off, 1.3%, to end at 4,018.

Asian equities followed New York’s path, despite new figures showing China's factory activity returned to growth.

In Tokyo, the Nikkei 225 index was down 0.4%. In China, the Shanghai Composite was down 0.4%, while the Hang Seng index in Hong Kong was down 1.6%.

In London, trading updates are expected from Pets at Home PLC and half-year numbers from ITM Power PLC.

On the economic front, consumer credit, mortgage approvals numbers and the latest Nationwide house price index are also due.

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