Investors turn cautious despite Chinese rate cut and Greek IMF paymentAfter a positive start to the day, the market’s euphoria in the wake of the Conservative election victory last week wore off slightly.Despite a cut in Chinese interest rates giving a lift to the mining sector, and the Bank of England leaving UK borrowing costs unchanged, the FTSE 100 finished 16.97 points lower at 7029.85, having earlier climbed as high as 7083.There is likely to be ongoing UK uncertainty:a majority of 3 or 4 MPs is small given that there tend to be five by-elections a year; the Scottish National Party’s near clean sweep of Scotland requires a resolution to the West Lothian issue (i.e. Scottish MPs voting on English issues, without English MPs having the corresponding right), as well as raising the possibility of a second independence referendum on a 5 to 10 year view. Finally, without the need for a Lib Dem coalition partner, the terms of the EU referendum are not likely to be watered down.While trying to compete with the universal coverage services of Royal Mail may seem like a great market opportunity, without significant scale or market share in our opinion it is very difficult to get the appropriate level of return. The requirement for scale should also be considered in the context of Whistl’s letter service having an apparent market share of around 24% in the areas in which it operated.In our opinion, the only way a new entrant can hope to compete successfully and profitably is if a large part of its infrastructure and delivery costs are more than covered by the distribution of other items, say newspapers & magazine. The same is true of parcel home delivery, where despite the continued growth of internet fulfilment, very few companies make an acceptable return. This is neatly illustrated by the fact that Yodel has 18% of the UK home delivery market yet still doesn’t make a profit.Inevitably there will be selling pressure as Glencore shareholders do not own Lonmin for its shares, but equally if there were any buyers of Lonmin they would have waited for this buying opportunity.Diploma has delivered first half results marginally ahead of our expectations. However, we are lowering our forecasts fractionally (1%-2%), to bring us in line with consensus, owing to a slightly more cautious outlook for organic growth in the second half of 2015. Acquisitions have been a key driver of performance in the first half, and further accretive bolt-on deals are possible in the second. Given recent strong share price performance, and having gone through our 843p price target, we downgrade to hold [from add] and would look for a better entry point into the shares.In an environment where industrial companies are struggling to find much growth, 4% organic in the first four months is very respectable (and much as we expected for the first half and full year). On unchanged estimates, our target price rises by around 4% to 3,350p (including the 120p special dividend) due to peer group re-rating, but the shares have performed very strongly since the results in March. We consider that consensus estimates, which are higher than ours, are vulnerable along with the share price. We move from hold to sell. Continue reading...
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