2 UK shares to capture the reopening theme
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BP released all round solid results on Tuesday, the share price may not reflect that, but they were strong nonetheless. Deleveraging the business by reducing their debt to more digestible targets were achieved. There was an announcement of a $500 mln share buyback of investors to sink their teeth into for Q2 and at least 60% of surplus cash going forward. The CEO also alluded to dividends potentially being restored to pre-covid levels next year. BP see the oil market continuing in its quest to rebalance itself with multiple moving parts both on the supply and demand side of the equation. Like OPEC+ the BP CEO is looking through short term demand destruction from Covid related restrictions in India, Japan, Turkey and Europe. Europe looks to be turning a corner though, so the jet fuel demand from summer tourism may just be saved. As economies return to normality with a significant pick up mobility , we should see the oil price continue to tick higher. This will feed into BP’s share price. Lastly, BP is trying to reinvent itself by transitioning to a cleaner energy company. It won’t be easy and there will be challenges along the way, but it is a necessity to survive in my opinion.
Eyeing up the charts, an ascending channel becomes clear as price makes higher lows and higher highs. From around late March, price has been stuck in a range between 310 GBX and 290 GBX. With a firmer oil price I think we’ll see a breakout to the topside with an initial target around early March channel highs of 320 GBX. There’s a lot of price support – the uptrend line, 50-day SMA and the 21-day EMA. The RSI is sniffing around the 57 level, which marked previous peaks in price in the range.
Lloyds was battered during the pandemic given they’re tied at the hip to the health of the economy, but now as the recovery heats up the dark horse bank stands to benefit. Results out today would point to this being the case. Profits surged as credit loss provisions were significantly unwound. There is room for further unwinds as the bank remains on the conservative side in terms of their modelling – not seeing another lockdown, but rather some form of a modest third wave. If this doesn’t transpire due to a solid vaccine rollout in the UK then those provisions may be unwound even more aggressively. There are a lot of factors working in Lloyd’s favour. Net interest margins have increased as the yield curve (difference between short term and long term bond rates) has widened. The Stamp Duty cut, stimulated housing demand and led to increased mortgage lending activity. Even with the Stamp Duty holiday coming to an end, the shift in work from home trends should continue to see solid demand in property and thereby mortgage lending. Costs came in lower than analyst expectations helping to increase profit margins. There will also be a change of the guard as Horta-Osório is leaving after 10 years of service. His replacement, Charlie Nunn Global Head of Wealth and Personal Banking at HSBC will takeover in August. Lastly, the new dividend policy should be announced at the half year mark. Distributions to shareholders via dividends and buybacks should continue as the year progresses and we overcome the pandemic.
The technicals depict an ascending channel with the 21-day EMA providing solid price support as Lloyd’s marched higher. All the key moving averages are pointing upwards. The only thing making me slightly cautious is the negative divergence between the RSI and price candles. As price made a higher high the RSI didn’t confirm this with a corresponding higher high. Although this indicator is usually very predictive it’s not foolproof. I still think Lloyds is a good candidate for a buy the dips approach.