AIM weekly movers: CMO Group shares fall by nearly three-quarters from float price

Andrew Hore
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AIM weekly movers: CMO Group shares fall by nearly three-quarters from float price

CMO Group (LON: CMO) fell 54.8% to 35p, making it the worst performer of the week. Last year’s placing price was 132p. The online retailer of building products says revenues in the 27 weeks to June 2022 are 10% ahead, or 2% higher like-for-like. Full year guidance is that 2022 revenues will increase from £76.3m to at least £86m, but previously £95.5m was expected. The EBITDA estimate has been reduced from £5.55m to around last year’s level of £3.7m. Supply problems have increased costs and trading is getting tougher. CMO still appears to be winning market share. The shares are trading on less than 17 times prospective 2022 earnings.  

Fashion retailer Joules (LON: JOUL) shares declined every day last week and ended at 20.8p, down 37.3% to a new all-time low. Fears concerning the company’s financial position hit the share price, following reports about the appointment of KPMG as debt adviser. Joules is trying to manage its cash so that it gets through the seasonal borrowing peak. Net debt was £21.4m at the end of May 2022 and there was headroom of £11.3m. Chief executive Nick Jones is leaving the board and a successor is being sought.

Capital equipment manufacturer Mpac Group (LON: MPAC) warned that full year profit will be significantly below expectations. There was a small share price recovery at the end of the week, but it was still 36.2% lower at 242.5p. Interim revenues are better than last year, and the order book is higher. However, difficulties sourcing components and delays to the timing of orders have hampered progress. The longer lead times for components and inflationary pressures will continue for the rest of the year. There was cash of £14.5m at the end of 2021, which has enabled investment in inventories. The interims will be published on 8 September.

A £3.75m fundraising at 0.5p a share by EQTEC (LON: EQT) was not well received by the market and the share price fell 35.7% to 0.45p. EQTEC raised more than the minimum of £3m that it was seeking. The cash will fund wase to energy projects. These include a 9.9Mwe advanced gasification technology facility and 2MW anaerobic plant at Deeside. Black and Veatch has been appointed as engineering and construction consultant for part of the facility. EQTEC has to invest £2.3m to gain a 32% stake in the company owning the project. The completion data has been extended.

Fevertree Drinks (LON: FEVR) has lost more than two-thirds of its value this year and it declined 33.1% to 866.5p last week. The mixer drinks supplier says first half sales were 14% higher at £160.9m and full year revenues are still expected to be £355m-£365m. However, margins are under pressure from higher freight and glass costs, which have doubled. This means EBITDA guidance has been slashed from £63m-£66m to £37.5m-£45m.

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Fallers

Ncondezi Energy Ltd (LON: NCCL) has launched a feasibility study for its solar photovoltaic and battery energy storage system project in Tete, Mozambique. Initially, the share price more than doubled in early trading on the day of the announcement and it ended the week 50% higher at 1.275p. Pre-money NPV is estimated at between $60m and $65m.

Shares in Nanosynth Group (LON: NNN) continue to rise and were 41.5% higher on the week at 0.695p. Directors were buying shares at 0.6p a share each early in the week.

Shares in 88 Energy Ltd (LON: 88E) rose ahead of the quarterly figures and then lost some of the gains after they were published, ending 38.1% higher at 0.725p. The Australia-based oil and gas company had A$10.5m in the bank at the end of June 2022, although there was a cash outflow from operating activities.  

FTSE 100 gains despite Chinese economic slowdown

Natasha Doris
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FTSE 100 gains despite Chinese economic slowdown

The FTSE 100 closed 1.5% higher at 7,151.2 on Friday as investors piled into defensive sectors providing reliable dividends.

“On the UK market, the FTSE 100 was propped up by oil, tobacco, pharmaceutical and banking stocks. All four of those sectors are known for generous dividends, suggesting that investors may be looking for safety in income stocks once again,” said AJ Bell financial analyst Danni Hewson.

British American Tobacco shares climbed 3.3% to 3,477.5p, Barclays increased 3.5% to 150.7p and NatWest rose 2.7% to 216.5p.

Meanwhile, AstraZeneca shares rose 2.6% to 11,060p, GSK gained 1.8% to 1,711.4p, Hikma increased 1.4% to 1,687.5p and Smith & Nephew climbed 2.3% to 1,153.5p.

Shell shares gained 3.3% to 2,000.5p and BP shares rose 3%% to 375p as the price of benchmark Brent Crude oil climbed above the $100 per barrel mark to $101 after its fall below the level earlier this week.

However, reports that China’s economy fell dramatically below analyst estimates in Q2 gave commodities groups reason for concern, as fears of falling demand in the largest global consumer sent investors scrambling.

Chinese GDP grew 0.4%, coming in far below expectations of 1.2% growth in previous economic forecasts as the country’s continued series of lockdowns sent economic activity plummeting as a result of the region’s “zero-Covid” policy.

Asian markets sank, with the Shanghai SSE falling 1.6% and the Hang Seng sliding 2.4% in Friday trading.

Rio Tinto warns of weakened economic outlook

Rio Tinto shares gained 0.2% to 4,579, rebounding from its slide earlier in trading after the mining company reported a weakened economic outlook partially due to reduced demand from China, with the news of China’s economic slowdown serving to confirm its fears and send shares falling.

“This doesn’t bode well as recession fears grow in many parts of the world, and it could fuel speculation that China’s commodities appetite may wane if economic activity is stalling,” said Hewson.

“It’s no coincidence that Rio Tinto has given a warning about China in its latest production update, flagging uncertainties for this important commodities market.”

Burberry sales stumble on Chinese lockdowns

Burberry shares tumbled 4.4% to 1,575.5p on a meagre 1% growth in sales over Q1 2023 against a 90% climb in Q1 2022 as a result of lockdowns in mainland China dragging its revenues down.

“Burberry’s first quarter performance has sorely disappointed the market, with concerns around lacklustre growth rates,” said Hargreaves Lansdown analyst Sophie Lund-Yates.

The fashion group reported a retail revenue of £505 million compared to £497 million the last year, and mentioned its £400 million share buyback scheme launched over the financial period, which is scheduled for completion by the end of FY 2023.

“Burberry said in its latest update that trading had been impacted by lockdowns in China,” said Hewson.

“While the country’s latest GDP figures included news that retail sales had picked up in June, there is a feeling that boost may only reflect pent-up demand from people who couldn’t get out during lockdowns, meaning the month’s sales recovery might be unsustainable.”

DP Poland LFL sales increase 23.5% in June, appoints new executive Nils Gornall

Natasha Doris
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DP Poland LFL sales increase 23.5% in June, appoints new executive Nils Gornall

DP Poland shares rose 4.4% to 6% in late afternoon trading on Friday after the firm announced a like-for-like systems sales increase of 23.5% in June 2022 against June 2021.

The Dominos Pizza Polish arm reported a 55.8% growth in dine-in sales year-on-year, alongside a 9.6% delivery like-for-like system sales rise, despite a resurgence in dine-in sales on the back of easing Covid-19 restrictions.

DP Poland mentioned a total system sales climb of 20.5% in June against the same term the last year, and commented its June 2022 system sales were substantially ahead of pre-Covid levels.

The firm highlighted a like-for-like systems sales growth of 23.1% in June 2022 compared to June 2019, along with a total systems sales increase of 15.1% in the same term.

DP Poland noted a drop in cash to £800,000 at 30 June 2022 against £1.8 million at 31 December 2021, linked to CAPEX for two new store openings, the purchase of six new ovens, 30 new fuel scooters, 50 e-bikes and covering working capital requirements.

The eatery group also confirmed the continued reorganisation of All About Pizza following its proposed acquisition of the company announced on 15 June 2022.

DP Poland said it expected the reorganisation to complete ahead of its previously reported longstop date of 29 July 2022, and would release further updates in the near future.

“I am delighted to see the strong sales performance achieved in the first half of 2022 continuing which is a consequence of our hard work in prior months and investment in customer acquisition,” said DP Poland CEO Piotr Dzierżek.

New executive appointment

The company also welcomed new executive Nils Gornall, who has worked with Dominos Pizza as a store operator in Australia and is set to move to the group’s operations in Poland.

“I welcome Nils Gornall to the company and I am convinced that his outstanding track record, supported with guidance from Andrew Rennie, we can accelerate this growth to the benefit of our customers and shareholders,” said Dzierżek.

Gornall added: “I started my Domino’s career at the age of 15 and had the privilege of running 5 of the 10 best stores in Australia, one of the most successful Domino’s markets globally and the birthplace of Domino’s Pizza Enterprises.”

“My experience in Australia helped to build the success of our Croatian business and my goal is now to transfer those learnings to the Polish market.”

“I’ve now spent a number of weeks on the ground in Poland and I am excited by the opportunity for the Domino’s Pizza brand in the country.  I feel confident we will emulate the success of the brand in other markets.”

Fevertree shares tumble 26% after company downgrades annual EBITDA guidance

Natasha Doris
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Fevertree shares tumble 26% after company downgrades annual EBITDA guidance

Fevertree shares tumbled 26.3% to 883p in early afternoon trading on Friday after the drinks company announced a revised FY 2023 EBITDA between £37.5 to £45 million, down from £63 million to £66 million.

The drinks producer reported a significant worsening of cost headwinds in the last few months, predominantly linked to freight and glass expenses.

“Markets have reacted badly to news that costs are significantly higher than expected. Issues getting inventory into the US mean the group’s been more exposed to soaring freight charges,” said Hargreaves Lansdown equity analyst Matt Britzman.

“At the same time, the cost of glass, which makes up 30% of the total cost base, has doubled. The result, a significant hit to gross margin and cash profit guidance for the full year.”

“We’d hoped that local bottling partnerships in the US would start to ease inventory pressures, but labour shortages have scuppered those plans, at least for now. That means, aside from soaring costs, Fevertree hasn’t been able to fully service the demand that clearly exists.”

Fevertree highlighted a HY1 revenue climb of 14% to £160.9 million, led by Europe but reflecting growth across all geographies.

The company said its bar and restaurant sales displayed signs of recovery, and noted a continued strength in consumer demand.

The group confirmed a revenue guidance between £355 to £365 million for FY 2023 on the basis of maintained customer sales.

“That brings us to the positive side, demand for Fevertree’s products is clearly there and that comes through in the stable revenue guidance,” said Britzman.

“The challenge from here is getting costs back under control, and that’s a hefty challenge.”

Five reasons to be optimistic about UK equities

UK Investor Magazine
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Five reasons to be optimistic about UK equities

There is a considerable level of doom and gloom in markets at the moment. Rising prices are increasing concerns around a cost of living crisis and central banks seem hellbent on increasing rates, just at a time economic indicators start to weaken.

However this is not all bad news for UK equities, and one may argue much of the negativity is already priced in. Here are five reasons to be positive about UK equities in the current environment.

1: Defensive Composition

The FTSE 100 is highly weighted towards defensive sectors that have so far held up fairly well during this year’s sell off. The FTSE 100 is down just 3.7% so far in 2022 whilst the S&P 500 has shed 20%. This is due to the FTSE 100’s weighting towards sectors such as pharmaceuticals, financials, and oil companies.

Oil major have benefitted from soaring energy prices and financial’s thrive in higher interest rate environments.

Energy prices and interest rates have caused severe volatility in some areas of the market, not so for the FTSE 100.

2: Central Bank Options

Central Bank action is largely responsible for the sell off in global equities this year. The selling was pronounced in US equities, in particular the tech sector that suffered as the Federal Reserve began rising rates.

The Bank of England has also raised rates, and will likely raise rates further. However, this is broadly priced into stocks now and we are actually in the favourable situation of central banks having plenty of room for manoeuvre to stimulate the economy, should we enter a recession.

If central banks continue to hike rates through the summer, they will be at the highest levels for well over a decade and will provide MPC and Fed voters with significant scope to ease monetary policy in the future, and markets love an easing of monetary policy.

3: Resilient Earnings

Investors will be looking forward to bumper updates from BP and Shell at the end of July which will likely provide support for the broader index.

The oil majors will of course be standout earners but the picture throughout the rest of the market isn’t as bad as one would think, given the backdrop of rising prices and softer growth.

For all the concern around Chinese growth, Burberry still managed to carve out a 1% increase in group sales in Q1 while comparable sales excluding mainland China rose 16%.

This resilience is not limited to FTSE 100 companies. For example, Topps Tiles provided a positive trading update for the 13-week period ended 2 July 2022.

“Despite the continuing headwinds from lower consumer confidence, supply chain challenges and high inflation, trading remained encouraging and in line with our expectations in the third quarter, with Group sales up 9.2%,” said Rob Parker, Topps Tiles CEO.

Hostelworld recently said revenue was at 104% of pre-pandemic levels while housebuilder Vistry said they were seeing “good demand across all areas of the business” and saw earnings at top end of forecasts.

Although these recent trading updates don’t provide a full picture of how costs are impacting profits, a strong top-line will support earnings.

4: Bumper UK Dividends

Should we see further volatility in UK shares, forcing investors to wait for capital appreciation from their portfolio, they will be handsomely rewarded for the wait through bumper dividends from UK companies.

“The FTSE 100 is now expected to yield 4.2% in 2022, thanks to the combination of share price falls and increases in dividend forecasts. The index’s total dividend pay-out is expected to reach £85 billion in 2022 excluding special dividends, up from £78.5 billion in 2021,” explains Russ Mould, investment director at AJ Bell.

“It means total payments could surpass 2018’s record, although the current expectation is that they come in just shy of the £85.2 billion record.”

5: There’s No Guarantee of Recession

Higher grocery prices, mortgage payments and fuel costs will curtail household spending power, but it doesn’t neccessarily guarantee a recession. Indeed, the UK economy grew 0.5% in May dispelling concerns we are currently in a recession.

Market commentators like to throw the word ‘recession’ around as it gets people attention. However, the reality is we are looking at a period a slowing growth, rather than sustained economic contraction.

AIM movers: Fevertree Drinks goes flat and Ncondezi Energy feasibility study for solar power plant

Andrew Hore
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AIM movers: Fevertree Drinks goes flat and Ncondezi Energy feasibility study for solar power plant

Fevertree Drinks (LON: FEVR) was already one of the worst performing large AIM companies this year before the latest 27.6% sump to 867.75p. The share price has fallen by two-thirds during 2022 and, because of its size, this is one of the major reasons why AIM has underperformed so hugely this year. The mixer drinks supplier says first half sales were 14% higher at £160.9m and full year revenues are still expected to be £355m-£365m. However, margins are under pressure from higher freight and glass costs. Glass is 30% of cost and its price has doubled. This means EBITDA guidance has been slashed from £63m-£66m to £37.5m-£45m. Chief executive and co-founder Tim Warrilow has bought 115,000 shares at 870.887p each. In September 2020, he exercised options and made a profit of £3.46m selling the shares at 2019p each. In the previous five years he sold £34.3m worth of shares – the majority at 1925p a share.

Ncondezi Energy Ltd (LON: NCCL) has launched a feasibility study for its solar photovoltaic and battery energy storage system project in Tete. Mozambique. The study will assess a solar photovoltaic power plant of up to 300MW and will take four months. Pre-money NPV is estimated at between $60m and $65m. The share price more than doubled in early trading and it is still 77.4% higher at 1.375p.

Positive analysis of blood and tissue samples from a study of TNF-alpha using Nuvec as a delivery mechanism has helped the N4 Pharma (LON: N4P) share price to add 14.9% to 2.7p. Nuvec is a delivery mechanism developed by N4 Pharma that drug companies can use to get the antigens they have developed into cells to express the required protein. The study shows that the treatment resulted in an increase in circulating plasma TNF-alpha levels. This helps to better understand how the mechanism works.

Novacyt (LON: NCYT) says that its exsig Covid-19 Direct Real-Time PCR test has been approved by the UK regulator. The test can be used with rival systems, as well as Novacyt systems. The share price is 8.53% higher at 117p.

Shares in Angle (LON: AGL) have fallen 12.6% to 81.75p following yesterday’s £20m fundraising at 80p a share. The cash will be used to take full advantage of the recent FDA approval for the use of its Parsortix diagnostic technology in harvesting breast cancer cells for analysis. Discussions are ongoing with medtech and pharma companies. The pharma services operation will be expanded, and laboratory developed tests launched. The liquid biopsy market could be worth up to $100bn in the US.

Allergy Therapeutics (LON: AGY) is down 6.85% to 17p following its full year trading statement. In the year to June 2022, revenues were £4.7m lower than forecast at £72.8m and cash was £4m lower than forecast at £20.5m. The phase III Grass MATAMPL trial and phase I VLP peanut allergy vaccine trial will start recruiting in the second half of 2022.  Debt will be required to finance the completion of these trials.

Chinese economic slowdown sparks recession fears

Natasha Doris
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Chinese economic slowdown sparks recession fears

China’s economy saw a significant slowdown in Q2 2022, coming in significantly below expectations with a 0.4% growth compared to a 1.2% forecast and sparking recession fears across the globe.

The figures mark the country’s most devastating performance since Q1 2020, which saw China’s economy shrink 6.9% as the first wave of Covid-19 hit Wuhan.

Asian markets tumbled as the Shanghai SSE dipped 1.6% and the Hang Seng fell 2.4% in Friday’s trading session.

The Chinese economy suffered from continued lockdowns across its major production hubs as part of its “zero-Covid” policy, including Shenzhen, Beijing and Shanghai.

The lockdowns meant consumption and demand ground to a halt, sending ripple effects across the global markets as demand dried up for offerings from fashion to iron ore.

The reports signal potential trouble for global markets, as commodities companies, which the FTSE 100 remains anchored on, look set to suffer even lower commodities prices.

“China is one of Asia’s key growth powerhouses. We already knew that growth expectations were being pared back, but the latest GDP figure is the sort of pedestrian number one might expect from a developed Western nation,” said AJ Bell financial analyst Danni Hewson.

“This doesn’t bode well as recession fears grow in many parts of the world, and it could fuel speculation that China’s commodities appetite may wane if economic activity is stalling.”

Mining group Rio Tinto flagged concerns about its production linked to China’s slowdown, and mentioned a drop in consumption in China over Covid-19 lockdowns had served to send metals prices down.

“It’s no coincidence that Rio Tinto has given a warning about China in its latest production update, flagging uncertainties for this important commodities market,” said Hewson.

Meanwhile, high fashion retailer Burberry announced a dramatic slowdown in sales in its latest trading update, attributing its lower sales to lockdowns across its Chinese stores.

The news follows the impacts of Covid-19, the Ukraine war and rising inflation across the world’s biggest markets, with the Chinese economic data representing the latest recession alarm on the rising tide of economic concerns.

Rio Tinto reports weakened economic outlook, Q2 production results

Natasha Doris
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Rio Tinto reports weakened economic outlook, Q2 production results

Rio Tinto shares declined 2.8% to 93.2p in early morning trading on Friday, after the company reported a weakened economic outlook as a result of the Ukraine war, tighter monetary policy and Covid-19 restrictions in China.

The mining group acknowledged prices for its commodities fell over the period, linked to rising recession concerns and a drop in consumer confidence.

Rio Tinto further mentioned inflationary pressures hitting its supply chains were currently exacerbated by trade disruptions, food protection and the international focus on securing energy supplies.

Rio Tinto Q2 Production

The company also reported its Q2 production results, which included the delivery of its first ore at its Pilbara greenfield mine, Gudai-Darri, and the firing of its first draw bell at its Oyu Tolgoi underground project in June.

“We strengthened our operational performance at a number of sites, which we will now replicate across the portfolio. The delivery of first ore at Gudai-Darri, our first greenfield mine in the Pilbara for over a decade, increases mine capacity and supports production of our flagship Pilbara Blend,” said Rio Tinto CEO Jakob Stausholm.

“We also fired the first draw bell at the Oyu Tolgoi underground project in June, and started producing scandium and tellurium. These critical minerals are being extracted from existing waste streams at our titanium operation in Quebec and copper operation in Utah, without the need for new mining.”

“We are committed to transforming our culture and building better relationships. In May, we signed a Heads of Agreement with the Puutu Kunti Kurrama and Pinikura (PKKP) people which will guide the co-management of PKKP country where mining takes place.”

Rio Tinto reported a 5% growth in its Pilbara iron ore shipments on a 100% basis to 79.9 Mt and a 4% rise in its Pilbara iron ore production to 78.6 Mt against Q2 2021.

The mining company mentioned a 3% increase in Bauxite to 14.1 Mt, a 10% slide in Aluminium to 731 kt and a 9% climb in mined copper to 126 kt.

Rio Tinto also noted a 2% drop in titanium dioxide slag to 293 kt and a 4% fall in IOC iron ore pellets and concentrate to 2.6 Mt.

Production Guidance

The firm commented its iron ore shipments and bauxite production guidance remained subject to weather and market conditions.

The company said its Pilbara shipments guidance remained dependent on ramp-up of Gudai-Darri and Robe Valley, alongside the availability of skilled labour and the mangement of cultural heritage, including any possible impacts from the Aboriginal Cultural Heritage Act 2021.

Rio Tinto confirmed its Pilbara iron ore 2022 unit cost guidance remained unchanged at $19.50 to $21.00 per tonne, with an operating cost guidance based on an Australian dollar exchange rate against the US dollar of 0.71.

Rio Tinto highlighted a Copper C1 unit cost guidance in 2022 of 130 to 150 US cents per pound, remaining unchanged year-on-year.

Burberry Q1 sales suffer from China lockdowns

Natasha Doris
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Burberry Q1 sales suffer from China lockdowns

Burberry shares fell 5.6% to 1,555p in early morning trading on Friday after the fashion company announced its Q1 2023 sales suffered from the impact of lockdowns in Mainland China in its latest trading update.

The retailer reported a 1% increase in store sales compared to a 90% rise in Q1 2022, with the lockdowns in China contributing to the drag on sales growth.

“Burberry’s first quarter performance has sorely disappointed the market, with concerns around lacklustre growth rates,” said Hargreaves Lansdown analyst Sophie Lund-Yates.

“Mainland China is acting as a serious drag for the group, which is overshadowing successes elsewhere, including increased domestic spending in other markets, which is needed to offset lost tourism spending from Chinese visitors to Europe.”

Burberry highlighted a retail revenue of £505 million against £479 million year-on-year, marking a 5% change in reported FX.

Burberry confirmed comparable store sales outside mainland China rose 16%, with a 47% climb in Europe, the Middle-East, India and Africa (EMEIA) store sales.

It further mentioned a 4% decrease in America against “very tough comparatives”, with reported growth in its outerwear and bags businesses.

However, the fashion group noted double-digit comparable growth in leather goods and outerwear outside mainland China, with good performance in its Lola handbag range and strong performance in its rainwear and jackets segments.

Burberry commented its sales were driven by a programme of brand activators to boost customer engagement, including its Lola campaign, pop-ups and pop-ins and TB Summer Monogram takeovers.

The company also launched its £400 million share buyback scheme over the term, with the total repurchase scheduled for completion by the close of FY 2023.

Burberry announced a target of high-single digit revenue growth and approximately 20% margins in its medium-term.

The firm noted the volatile macro-economic environment, and commented that its mainland China store sales were currently providing promising returns at reopened stores in the region.

The retailer also confirmed it was working to manage the headwind from inflation.

Burberry added it expected a currency tail wind of £190 million in revenue and £90 million in adjusted operating profit in FY 2023 based on FX rates at 11 July 2022.

“The group’s medium-term ambitions for revenue growth are admirable, but exactly how this will be achieved is the big question for newly minted CEO – ex-Gianni Versace leader Jonathan Akeroyd,” said Lund-Yates.

“The heavy lifting for Burberry’s strategic pivot is largely over, and the question now turns to one of delivery.”

“The group’s done very well to forge all these new commercial tools – now it’s time to use them.”

Lloyds share price: how much will a recession cap gains?

Natasha Doris
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Lloyds share price: how much will a recession cap gains?

Lloyds has remained a darling of UK investors despite the crushing cost of living crisis and ongoing recession alarm bells. With market commentators increasingly suggesting there may be a recession on the horizon, how much could Lloyds shares be capped in the short-term by a period of economic contraction in the UK?

The Lloyds share price has thus far remained resilient and held the important support level at 40p. Indeed, at these lower levels, Lloyds does seem attractively valued.

Lloyds has a current PE ratio of 5.4 and a forward PE ratio of 6.4, indicating analysts expect a mild drop in earnings in the coming months.

The firm is currently undervalued when compared to its UK banking peers, so even with the anticipated drop in earnings, the shares are still great value against their competitors.

Compared to other FTSE 100 banking groups, Barclays has a PE ratio of 3.6 and a forward PE ratio of 5, however Natwest has a PE ratio of 9.1 with a forward PE ratio of 7.7, while Standard Chartered has a similar PE ratio of 9.1 against a forward PE ratio of 7.2.

It is worth noting that Lloyds boasts a strong dividend yield of 4.8%, and a dividend cover of 3.9, which suggests the bank has ample room to increase dividends, despite the risk of a recession.

Furthermore, the stock price has fallen 14% year-to-date, leaving a key opening to potentially buy the dip and take advantage of the shares while they remain undervalued compared to peer banking groups.

Recession Fears

As a retail bank, Lloyds is sensitive to reduced consumer spending, however. The bank is the largest mortgage lender in the UK, and the company already highlighted trouble in that department in its Q1 2022 financial results.

The firm noted a £72m impairment to its mortgage book in Q1 2022 which suggests the first sign of pressure of mortgage holders after an impairment credit in the same period a year prior. A downturn in economic activity could see further impairments.

The cost of living crisis has already seen hints of a slowdown in the UK housing market as the house prices become unattainable for a rising number of consumers who currently have their sights set on paring spending back to the essentials.

However, despite the recession alarm bells, interest rates are set to continue rising from their current levels of 1.25% as the Bank of England seeks to stamp out the secondary effects of surging 9.1% inflation. This will benefit the Net Interest Margin for Lloyds and the general banking industry.

Furthermore, the generous dividend payments seem to be locked in for the coming months, and the company appears well-positioned to weather the short-to-medium term shocks of a recession.

Lloyds handed out a dividend of 2p per share at the end of 2021, and launched a £2 billion share buyback earlier this year as a reflection of its strong capital position.

The Lloyds share price will probably suffer a dent if recession settles in, but the company will likely recover, and its capital position appears sufficient to handle the disruption and bounce back from any market chaos.

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