South Africa Market Review
South African markets closed in the green yesterday. Retail sector stocks, Truworths International gained 3.3%, after the company revealed that it has entered into an agreement with ZA One and its parent company to acquire Naartjie Kidswear. Foschini Group, SPAR Group and Massmart Holdings climbed 2.5%, 2.3% and 1.6%, respectively. Santam rose 2.9%. Sanlam announced that its personal finance CEO, Lize Lambrechts, would be appointed as Santam’s new CEO. On the downside, ArcelorMittal South Africa dropped 2.7%, after the Supreme Court of Appeal demanded the company to share details about its environmental-protection plan for the Vanderbijlpark plant in Gauteng province. The JSE All Share Index climbed 0.4% to close at 50,557.83.
UK Market Review
UK markets finished marginally lower yesterday, led by losses in oil sector stocks after the Organisation of the Petroleum Exporting Countries (OPEC) failed to trim its oil output target. Tullow Oil, Petrofac and BG Group tumbled 7.2%, 6.2% and 6.0%, respectively. Shares of BG Group also suffered losses as investors did not welcome the company’s decision of the proposed GBP25.00mn pay package for its new CEO, Helge Lund. On the contrary, a decline in oil prices led airline sector stocks, EasyJet and International Consolidated Airlines to rally 5.7% and 4.8%, respectively. GlaxoSmithkline rose 1.0%, after it announced that it was on track to finish its three-way GBP11.00bn deal with Swiss-based Novartis next year. The FTSE 100 Index declined 0.1% to close at 6,723.4.
US Market Review
US markets were closed yesterday on the account of a Thanksgiving Holiday.
Asia Market Review
Markets in Asia are trading mixed this morning. In Japan, airline sector stocks, Japan Airlines and ANA Holdings surged 7.1% and 7.0%, respectively, tracking lower crude oil prices. Mitsubishi Estate advanced 1.5%, amid news that it is selling an office tower to Mizuho Financial for a consideration of USD1.35bn. In Hong Kong, Cnooc and PetroChina slipped 5.3% and 3.5%, respectively, after the OPEC decided not to reduce its production. In South Korea, Asiana Airlines and Korean Air Lines soared 8.0% and 5.2%, respectively, following a drop in crude oil prices. The Nikkei 225 Index is trading 1.1% firmer at 17,431.66, while the Kospi Index is trading 0.2% lower at 1,978.77. The Hang Seng Index is trading 0.1% weaker at 23,973.68.
Commodities
At 06:00 SAST today, Brent crude oil fell 0.5% to trade at $71.37/bl. Yesterday, Brent crude oil fell 6.1% to settle at $71.72/bl., after the members of the OPEC decided to keep their crude output unchanged in their meeting.
Yesterday, the Illinois North Central No.2 Yellow corn spot prices remained flat at $3.53/bushel.
At 06:00 SAST today, gold prices declined 0.8% to trade at $1,183.26/oz. Yesterday, gold declined 0.4% to close at $1,192.67/oz, as the US dollar strengthened against its key peers.
Yesterday, copper declined 0.2% to close at $6,615.00/mt. Aluminium closed 0.3% lower at $2,075.00/mt.
Currencies
Yesterday, the South African rand weakened against the US dollar. Data released in South Africa showed that producer prices in the nation rose more-than-expected for October. Investors will eye today’s South African trade data for further direction to the South African rand against its key peers.
The yield on benchmark government bonds were mixed yesterday. The yield on 2015 bond rose to 6.08% while that for the longer-dated 2026 issue declined to 7.68%.
At 06:00 SAST, the US dollar is trading 0.2% higher against the South African rand at R11.0009, while the euro is trading 0.1% higher at R13.6958. At 06:00 SAST, the British pound has remained flat against the South African rand to trade at R17.2820.
Yesterday, the euro weakened against most of the major currencies, after preliminary data released in Germany showed that consumer price inflation (CPI) in the nation eased in November. Going forward, market participants will eye the preliminary CPI readings in the eurozone and German retail sales report due later today for further direction to risk appetite.
At 06:00 SAST, the euro slipped 0.1% against the US dollar to trade at $1.2449, while it has gained 0.1% against the British pound to trade at GBP0.7924.
Economic Updates
The producer price index in South Africa rose 6.7% on an annual basis in October, compared with an advance of 6.9% posted in September.
The GfK consumer confidence index in the UK remained unchanged at -2.00 in November, compared with market anticipated reading of -1.00.
The final gross domestic product (GDP) in Spain rose 1.6% on an annual basis in 3Q14, compared with a revised rise of 1.3% reported in 2Q14.
The preliminary harmonised index of consumer prices (HICP) in Spain dropped 0.5% on an annual basis in November, following a drop of 0.2% posted in October.
The seasonally adjusted unemployment rate in Germany remained flat at 6.6% in November, lower than market expectations of a rise to a reading of 6.7%.
The GfK consumer confidence index in Germany rose to 8.70 in December from a reading of 8.50 reported in November.
On a monthly basis in November, the flash consumer price index in Germany remained steady, compared with 0.3% drop posted in October.
The European Central Bank (ECB) President, Mario Draghi, urged the eurozone member nations’ governments to implement economic reforms in their respective nations as failure to do so might “threaten the essential cohesion of the Union”. Furthermore, he cautioned against the downside risks to the economy and termed unemployment, lack of productivity and structural reforms as the three major risks surrounding the economy.
In November, the final consumer confidence index in the eurozone fell to -11.60 from a reading of -11.10 posted in October.
The national CPI in Japan rose 2.9% on an annual basis in October, less than market expectations for an advance of 3.0% and compared with an increase of 3.2% recorded in September.
In October, the unemployment rate in Japan dropped unexpectedly to a level of 3.5% from 3.6% registered in September.
Corporate Updates
South Africa
SABMiller: The brewing and beverage company along with Coca-Cola Company and Gutsche Family Investments have agreed to combine the bottling operations of their non-alcoholic ready-to-drink beverages businesses in Southern and East Africa. The new bottler, Coca-Cola Beverages Africa, would serve 12 high-growth countries, accounting for approximately 40.0% of all Coca-Cola beverage volumes in Africa. On completion of the proposed merger, SABMiller would hold about 57.0% of shareholding in Coca-Cola Beverages Africa.
Sasol Limited: The company indicated that it plans to use Microbes to transform potentially harmful trace elements found in industrial waste sludges into an environmentally friendly form.
Sanlam Limited: The company has announced that the personal finance CEO, Mrs Lizé Lambrechts, would leave by the end of December 2014 to take over as the CEO of Santam with effect from 1 January 2015. The company further revealed that Mrs Lizé Lambrechts would succeed Mr Ian Kirk who has been appointed as the company’s Deputy Group CEO.
Truworths International: The company has agreed to acquire the South African based business of Naartjie, a retailer of fashionable children’s clothing and associated apparel.
ArcelorMittal South Africa: Media reports revealed that the Supreme Court of Appeal has upheld a ruling that would make the company hand over details about its environmental-protection plan for the Vanderbijlpark plant in Gauteng province.
Arrowhead Properties: The company revealed that its wholly owned subsidiary, Arrowhead Residential, has concluded an agreement with Citiq Proprietary and Amber Falcon Properties 185 Proprietary to acquire the entire stake in Jika Properties Proprietary.
Hudaco Industries: In light of the company’s recent announcement regarding its acquisition of Partquip, it indicated that all suspensive conditions related to the acquisition have been dealt with and the approval of the Competition Commission has been received for the acquisition. The effective date of the acquisition would be 1 December 2014.
Brait to spend Pepkor gains on acquisitions: Investment firm, Brait, says it plans to spend the R26.40bn in proceeds from the sale of its stake in Pepkor on as many as three acquisitions in SA and Europe in the next year and a half.
Foschini group launches online stores for brands: The Foschini Group on Thursday joined the e-commerce fray, launching online stores for the @home and Hi brands.
De Beers set to co-operate with small players: De Beers is considering allowing junior miners or community groups to mine small, diamondiferous kimberlite deposits around Orapa operations in Botswana as it investigates mining alluvial diamonds to the northwest of its richest mine.
Steinhoff looks beyond rivals with Pepkor buy: Steinhoff had not considered using its hefty cash pile to pursue acquisitions of competitors such as distressed Ellerines because the group “certainly didn’t need more of the same”, CEO Markus Jooste said in an interview this week.
One Re targets 38 African countries: One Re, the first reinsurer approved under UK’s “twin peaks” system of financial regulation, has said it is seeking clients across 38 African countries in the next year as growth outpaces developed regions.
Kalahari.com expects Black Friday boon: Kalahari.com, South Africa’s largest online retailer, is expecting one of its biggest sales days of the year on Friday, as it jumps on the Black-Friday bandwagon and offers discounts of up to 70.0% on a range of goods until midnight.
Madonsela meets potential development partners: Public Protector, Thuli Madonsela, has met potential partners for funding and development, her office said on Thursday.
Eskom finalising new tariff applications: Eskom is finalising its applications for a further tariff increase to compensate for over-expenditure and under-recovery in FY13/FY14 as well as tariffs for the period beyond FY18.
Advanced Health eyes Australia acquisitions: Day hospital group, Advanced Health, is in negotiations to acquire two day hospitals in Sydney, Australia, it announced at its annual general meeting on Thursday.
UK and US
Google Inc.: Media reports revealed that the European Parliament has approved a resolution that calls for a possible breakup of Google Inc, wherein the company’s search functions would be entirely separate from all other services.
Starbucks Corporation: The company revealed that it has introduced a $200.00 card for the coffeemaker’s fans. The card is made with sterling silver and engraved with the company’s logo.
Shaftesbury Plc: The company, in its FY14 results, announced that its revenue increased to GBP98.20mn from GBP89.60mn posted in the previous year. Its net property income rose to GBP79.70mn from GBP73.2mn recorded in the preceding year. Its diluted EPS stood at 164.60p, much higher compared with 94.70p/share posted a year earlier.
SSP Group: The company, in its FY14 results, indicated that its revenue stood at GBP1.83bn, almost unchanged compared with the previous year. Its diluted loss per share widened to 10.70p from 0.50p posted in the preceding year.
RPC Group: In its 1H15 results, the company stated that revenue rose 12.2% to GBP588.90mn from GBP524.70mn posted in the same period a year ago. Its total diluted EPS rose to 10.90p from 3.60p recorded in the corresponding period preceding year. Additionally, the company announced the proposed acquisition of Promens Group AS for a consideration of GBP307.00mn on a cash-free, debt-free basis.
GlaxoSmithKline: The pharmaceutical company indicated that the US Federal Trade Commission has approved GSK’s proposed acquisition of Novartis’s vaccines business excluding influenza vaccines and the proposed creation of a consumer healthcare joint venture between GSK and Novartis.
Rio Tinto: The miner stated that it has formally approved the development of a fourth pipe, known as A21, at its Diavik diamond mine in Canada’s Northwest Territories.
Legal & General Group: The insurer and pension fund manager announced that it has won a bulk annuity contract worth GBP2.50bn for the pension scheme of TRW Automotive. The transaction removes the liabilities from TRW’s balance sheet and insures over 22,000 of the scheme’s pensioners.
African Barrick Gold Plc: The company indicated that it has officially changed its name to Acacia Mining Plc and has entered into an earn-in agreement with Sarama Resources Limited to earn up to a 70.0% interest in the South Houndé Project in Burkino Faso. In return, the former would spend up to $15.00mn over a number of staged payments on the project.
Stagecoach Group: The company’s joint venture with Virgin has been awarded the East Coast Mailine rail franchise, which runs between Edinburgh and London. The companies promised to invest GBP140.00mn in the route over eight years, and would pay the government GBP3.30bn for the contract.
Financial Times
LCH.Clearnet interest rate swaps fall in value: LCH.Clearnet will this year report the first ever fall in the value of the interest rate swaps it clears for the world’s big investment banks as new global capital rules designed to reduce the leverage in markets begin to bite.
UK’s pro-EU business lobby Chief quits: Alisdair McIntosh, Director of Britain’s pro-EU business lobby group Business for New Europe, is to leave his job after less than a year as the organisation struggles to make its voice heard against its louder, more eurosceptic rival.
Vincent Tchenguiz launches GBP2.20bn lawsuit: Vincent Tchenguiz, the property entrepreneur who was a subject of a failed criminal investigation by the UK fraud office, has launched a GBP2.20bn lawsuit against accountants Grant Thornton, two of its partners, a lawyer and Kaupthing Bank for their role in the probe.
Tesco parts company with three Executives: Tesco has parted company with at least three of the Executives asked to step aside amid the grocer’s GBP260.00mn profit overstatement, said people familiar with the situation.
India unlikely to appeal Vodafone INR30.00bn tax victory: India is unlikely to launch an appeal against the recent INR30.00bn ($490.00mn) tax victory won by British telecoms group Vodafone, in a sign that Prime Minister, Narendra Modi, is shedding his country’s image for aggressively targeting the taxation affairs of foreign businesses.
US financial advisers resist regulators on pensions rule: US financial advisers and investment providers are battling consumer protection rules they say could disrupt the way more than $6.50trn of retirement products are sold.
SSP sees strong sales growth in US and Asia: SSP Group, which operates brands in the UK including Upper Crust and Millie’s Cookies, reported strong profit growth in its first FY14 results since floating earlier this year, despite gloomy economic conditions in mainland Europe.
Monitise signs up Santander, TelefĂłnica and MasterCard: Monitise has struck deals that will see Santander, TelefĂłnica and MasterCard become major shareholders in the British mobile money group, just weeks after long-time backer Visa revealed plans to sell its stake in the company.
Barrick Gold considers asset sales: Barrick Gold is open to selling a wide range of assets as the world’s largest gold miner by output tries to cut its debts after a sharp fall in the gold price, according to one of its most senior Executives.
Mulberry bags Creative Director Johnny Coca from CĂ©line: Shares in Mulberry, the British design house famed for its luxury handbags, rose nearly 2.0% on Thursday after it said it had hired Johnny Coca as its new Creative Director.
Poundland reports 11.7% rise in profit: The growing popularity of cut-price retailers on the UK high street was highlighted on Thursday after Poundland posted a sharp rise in profits, paid a maiden dividend and outlined aggressive expansion plans.
Stagecoach wins East Coast rail franchise: The London-to-Edinburgh East Coast rail franchise has been awarded to Inter City Railways, a joint venture between Stagecoach and Richard Branson’s Virgin Group.
Oil plunges as OPEC tests the mettle of US shale industry: OPEC threw down the gauntlet to US shale oil producers by deciding not to cut its production, in a move that sent the oil price tumbling by more than 8.0% to a four-year low.
Deutsche quits precious metals trade: Deutsche Bank is pulling out of trading in precious metals, completing the German bank’s retreat from buying and selling physical commodities after being investigated for alleged abuse.
Dubai World moves to restructure debt mountain: Dubai will next week present proposals to extend restructured loans at one of its largest conglomerates, taking advantage of the revived economy to manage its debt mountain, people aware of the matter say.
Rémy Cointreau profit falls as China gives up gifts: Rémy Cointreau’s heavy exposure to a slowing Chinese market and a continuing reliance on cognac sales have harmed its financial performance – resulting in a 14.6% like-for-like fall in 1H15 operating profit.
London rail stocks head in different directions: Shares in the UK’s biggest train operating companies headed in opposite directions on Thursday in response to the government’s award of the East Coast rail franchise.
Weir: Fell 4.8% to GBP19.60 on worries that US shale gas producers will scale back investment.
Stagecoach: Surged 8.2% to GBP4.00, after its joint venture with Virgin was awarded the East Coast rail franchise.
Russia: pushing planes: Lenders to UTair Aviation may find it darkly funny in any case. A UTair subsidiary was operating the plane. Last week, another unit failed to pay RUB2.70bn ($60.00mn) due on bonds. UTair is thus now taking advice on restructuring its debt. Value investors do not care about symbolism. They will wonder instead whether such defaults herald the beginning of a wider debt crisis – given both sanctions limiting access to western financing and the hit to cash flow from oil’s collapse. The process of dealing with debt may render traditional valuation tools even less illuminating than usual in Russia, where single-digit price/earnings ratios go to die.
UTair is one of 32 listed Russian companies with net debt more than 3.00 times earnings before interest, taxes, depreciation and amortisation, according to Bloomberg data. Then again, shares in Rusal, also one of the 32, have tripled this year. It has already restructured its debt, and its earnings have recovered with aluminium prices. This hints at the rebound that may be possible after a debt crunch – especially in US dollar terms, should the Russian ruble continue to fall. That depends on bad debts being recognised and dealt with. Banks will have to juggle that with keeping their own funding stable as sanctions bite. The $32.00bn market value of the largest lender, Sberbank, is an uncomfortable fact for any who bought at $66.00bn last year. Loan provisions increased sharply during 3Q14.
RĂ©my: Cointreau-cyclical: At a recent auction in Singapore, a bottle of the limited edition spirit sold for $16.00k. RĂ©my Cointreau is very serious about top-end cognac. In mid-FY12, analysts expected the company to produce EUR5.00 a share in earnings this year. Forecasts now hover about EUR1.70. The shares have been relatively resilient, though. Yes, they have fallen by a quarter in that period (underperforming more diversified rivals such as Diageo and Pernod Ricard) but that is modest compared with the cut in forecasts. This may reflect some hope that RĂ©my is a takeover candidate. But with the HĂ©riard Dubreuil family holding more than half the shares, that is optimistic.
More likely it reflects hopes of a recovery. Certainly, the rate of decline is slowing. In the last financial year, group revenues fell 11.0%. Numbers reported on Thursday showed that the rate slowed to 6.0% in 1H15. If recent downgrades have been too pessimistic and the company can eke out EPS of EUR2.50 this year, that PE falls to 24.00. Still a premium, but not such a big one. And with debt rising as a proportion of earnings, the company has less flexibility to diversify further than it used to. So RĂ©my Cointreau remains a play on cognac, and on top-end cognac at that. Better hope the dichroic effect does the trick.
Non-Gaap measures: we’re not savages: Alternative performance measures often present a sort of parallel world – earnings adjusted for one-off gains and losses reflect what management thinks is normal. EBITDA – earnings before interest, taxes, depreciation and amortisation – purports to show the cash flow independent of capital structure. These subjunctive (if not subjective) measures are often a big help.
Moody’s recently argued that EBITDA is useful in signalling rising default risk in today’s ocean of covenant-lite corporate debt. The whole point of cash flow, as opposed to earnings, is that it is not adjusted. But not all problems are obvious. Telecoms companies merrily present EBITDA as a proxy for cash profits when capital investment is a constant cash drain. The danger presented by APMs is no greater than the danger of assuming that any standard set of metrics can fit all companies. “Embedded value” statements present a longer term, more stable picture of insurers than IFRS.
*Published with special permission by Anchor Capital (ACG)