Anchor Capital: Essential market review, 3 March

By Anchor Capital

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South African Market Review
South African markets closed lower yesterday. Meanwhile, macro data revealed that manufacturing sector in South Africa contracted in February. The insurance company, Santam dropped 2.8%, despite reporting higher gross written premium in FY14 results. Bidvest Group plunged 2.4%, although it recorded a 16.5% gain in its turnover in 1H15. Banking sector stocks, Nedbank Group, Barclays Africa and Standard Bank plummeted 1.8%, 1.2% and 0.8%, respectively. However, Delta Property Fund climbed 1.7%, after announcing that it anticipates earnings distribution to be higher by 15.0% to 16.9% from the previous year. Ascension Properties rose 1.4%, after posting a 25.1% rise in its 1H15 revenue. The JSE All Share Index fell 0.7% to close at 52,952.91.
UK Market Review
UK markets finished lower yesterday, amid weakness in energy sector stocks. Tullow Oil tumbled 7.8%, after Ivory Coast asked explorations to be stopped in a disputed region with Ghana and amid speculation that the firm could lose its position in the FTSE 100 index. Mining sector stocks, Randgold Resources and Rio Tinto fell 1.5% and 1.2%, respectively, reversing earlier gains which were triggered by better-than-expected Chinese manufacturing PMI data for February. Energy sector stocks, Royal Dutch Shell and BG Group declined 1.3% and 1.0%, respectively. Bucking the trend, Intertek Group rose 1.3%, after the firm boosted its full-year dividend. The FTSE 100 Index declined 0.1% to close at 6,940.64.
US Market Review
US markets ended higher yesterday, despite economic data pointed to a slowdown in US manufacturing activity and consumer spending. Visa and Citigroup advanced 2.6% and 2.0%, respectively, after Costco Wholesale entered into agreements with both companies for co-branded credit cards, replacing American Express. Hewlett-Packard added 0.2%, after it announced the acquisition of Aruba Networks. However, Valero Energy and Noble Corporation tumbled 4.9% and 4.2%, respectively, tracking a decline in oil prices. The S&P 500 Index rose 0.6% to settle at 2,117.39, while the DJIA Index climbed 0.9% to close at 18,288.63. The NASDAQ Index gained 0.9% to finish at 5,008.10.
Asia Market Review
Asian markets are trading mostly lower this morning. In Japan, Sharp tumbled 6.7%, following a report that the company is planning to sell shares and seek investment from its key creditors. Fast Retailing slipped 1.5%, ahead of the release of its sales numbers for February due later in the day. In Hong Kong, PetroChina, China Petroleum & Chemical Corporation and Cnooc retreated 1.9%, 0.8% and 0.7%, respectively. In South Korea, Samsung Heavy Industries gained 0.5%, amid news that it bagged an $618.90mn order to build four TEU-class container ships from Mitsui OSK Lines. The Nikkei 225 Index is trading 0.1% lower at 18,809.54, while the Kospi Index is trading 0.1% higher at 1,998.60. The Hang Seng Index is trading marginally higher at 24,892.25.
Commodities

At 06:00 SAST today, Brent crude oil rose 0.5% to trade at $61.20/bl.

Yesterday, Brent crude oil fell 1.5% to settle at $60.87/bl, after Iran indicated that a deal on its nuclear programme could be concluded this week if the US and other Western countries lifts sanctions, which could boost the country’s oil exports.

Yesterday, the Illinois North Central No.2 Yellow corn spot prices fell 1.2% to $3.58/bushel.

At 06:00 SAST today, gold prices advanced 0.1% to trade at $1,207.57/oz.

Yesterday, gold declined 0.5% to close at $1,206.83/oz. Meanwhile, investors assessed a batch of US economic reports.

Yesterday, copper rose marginally to close at $5,925.50/mt.

Aluminium closed 0.7% lower at $1,789.00/mt.


Currencies

Yesterday, the South African rand weakened against the US dollar. Meanwhile, economic data showed that manufacturing sector in South Africa contracted in February, while the total number of new vehicle sales in South Africa grew modestly in February. Additionally, macro data indicated that US manufacturing activity slowed in February, while personal spending in the US declined more than expected in January.

The yield on benchmark government bonds were mixed yesterday. The yield on 2015 bond declined to 6.13% while that for the longer-dated 2026 issue rose to 7.63%.

At 06:00 SAST, the US dollar is trading 0.3% lower against the South African rand at R 11.7384, while the euro is trading 0.2% lower at R13.1397. At 06:00 SAST, the British pound has declined 0.2% against the South African rand to trade at R18.0440.

Yesterday, the euro advanced against most of the major currencies, but declined against US dollar. Euro was lifted following better-than-expected flash consumer price annual inflation data in the eurozone. Additionally, data showed that the unemployment rate in the eurozone dropped for January. Later today, investors will keep a tab on eurozone producer prices and German retail sales data.

At 06:00 SAST, the euro advanced 0.1% against the US dollar to trade at $1.1193, while it has gained 0.1% against the British pound to trade at GBP0.7282.


Economic Updates

The Bureau for Economic Research has reported that, in February, the manufacturing purchasing managers’ index (PMI) fell to a level of 47.60 in South Africa, compared with a reading of 54.20 in the previous month. Market anticipations were for the manufacturing PMI to fall to 52.00.
On an annual basis, new vehicle sales recorded an unexpected rise of 1.1% in February, in South Africa. In the prior month, new vehicle sales had dropped 1.2%.

The Markit Economics has indicated that compared with a revised reading of 53.10 in the prior month the manufacturing PMI in the UK recorded a rise to 54.10 in February. Markets were expecting the manufacturing PMI to advance to a level of 53.40.

The manufacturing PMI registered an unexpected drop to a level of 54.20 in February, in Spain. In the previous month, the manufacturing PMI had registered a level of 54.70.

The Markit Economics has reported that, in Germany, the final manufacturing PMI rose unexpectedly to 51.10 in February, compared with a reading of 50.90 in the prior month. The preliminary figures had recorded a flat reading.

The eurostat has reported that, in January, the unemployment rate fell unexpectedly to 11.2% in the eurozone, compared with a revised rate of 11.3% posted in the previous month.

On an annual basis, the preliminary consumer price index in the eurozone slid 0.3% in February, compared with a fall of 0.6% in the prior month. Markets were expecting the consumer price index to ease 0.5%.

In January, on a monthly basis, personal income advanced 0.3% in the US, less than market expectations for a rise of 0.4%. Personal income had registered a similar rise in the prior month.

On a monthly basis, personal spending recorded a drop of 0.2% in the US, in January, higher than market expectations for a fall of 0.1%. In the prior month, personal spending had dropped 0.3%.

In February, the ISM manufacturing activity index in the US fell to a level of 52.90, compared with a reading of 53.50 in the previous month. Market anticipations were for the ISM manufacturing activity index to ease to a level of 53.00.

The monetary base registered a rise of 36.7% on an annual basis, in February, in Japan. The monetary base had recorded a rise of 37.4% in the previous month.

In January on a seasonally adjusted annual basis, building approvals in Australia unexpectedly rose 9.1%, higher than market expectations for a fall of 1.7%. In the previous month, building approvals had risen by a revised 9.6%.

Corporate Updates

South Africa

Bidvest Group: The company, in its 1H15 results, revealed that turnover increased 16.5% to R104.44bn from the same period last year. Its diluted headline EPS was 876.90c, compared with 835.00c reported in the corresponding period previous year. The company is confident in delivering further growth in FY15.

Santam Limited: The insurance company, in its FY14 results, indicated that its gross written premium was up 10.1% to R22.71bn, compared with the previous year. Its diluted EPS was R13.72, compared with R9.73 reported a year ago. Additionally, the company stated that its direct insurance company, MiWay, would expand into the life insurance segment this year to diversify its business and earnings growth.

SA Corporate Real Estate Fund: The company, in its financial statements for FY14, indicated that revenue was up 18.8% to R1.41bn, compared with the preceding year. Its net profit attributable to unitholders was R0.97bn, compared with R1.16bn posted a year ago. The Fund delivered a full-year distribution of35.70c/unit, representing growth of 9.0% compared with the last year and in line with guidance given during the interim announcement.

Delta Property Fund: The company, in its trading statement for FY15, stated that it anticipates distribution would be between 15.0% and 16.9% higher than the previous year.

Ascension Properties: The real estate company, in its unaudited 1H15 results, stated that revenue increased 25.1% to R0.21bn from the last year. Its basic and fully diluted headline EPS was $1.95, compared with $1.90 recorded in the previous year. The company indicated that it would pay an interim distribution of 20.95c per A-linked unit and 11.28c per B-linked unit.

Times Media Group: The media company announced that its board of directors have approved to declare a pre-acquisition dividend of 30.00c/share for its shareholders. In last month, the company along with Blackstar Group SE indicated that the latter would acquire the entire issued ordinary share capital of the former, not already owned by Blackstar or Blackstar (Cyprus) Investors Limited, excluding treasury shares.

Joffe doubts PIC will sell Adcock: Bidvest CEO Brian Joffe on Monday said he doubted the Public Investment Corporation would sell its stake of just over 22.0% in JSE-listed pharmaceuticals maker Adcock Ingram.

Pan African expects Evander boost: Pan African Resources is in negotiations about expanding its debt facilities as its Evander mine moves into a cash-generating position later this year, giving it firepower to fund growth.

UK and US

Mylan Inc.: The generic and specialty pharmaceuticals company, in its FY14 results, indicated that total revenue increased 11.7% to $7.72bn from the preceding year. Its diluted EPS stood at $2.34, compared with $1.58 recorded in the previous year. The company expects revenue to grow between $9.60bn and $10.10bn in FY15 and adjusted diluted EPS to be in the range of $4.00 to $4.30.

Endo International: The healthcare company, in its FY14 results, indicated that total revenue rose 9.9% to $2.88bn, compared with the previous year. However, its adjusted diluted EPS dropped to $4.31 from $4.79 posted a year ago. For FY15, the company expects adjusted diluted EPS from continuing operations to be in the range of $4.35 to $4.55. Furthermore, it also announced that it has entered into a definitive agreement with Boston Scientific, under which the latter would acquire the former’s American Medical Systems’ Men’s and Prostate Health businesses for up to $1.65bn, with $1.60bn in cash payable at closing.

Salix Pharmaceuticals: The pharmaceutical company, in its FY14 results, indicated that net product revenue grew 24.0% to $1.13bn from the last year. However, it incurred a diluted loss of $6.53/share, compared with diluted EPS of $1.99 reported in the prior year.

American Realty Capital Properties: The company, in its 3Q14 results, indicated that total revenue increased sharply to $457.12mn from $95.26mn reported in the same period a year ago. Its basic and diluted net loss from continuing operations stood at $0.35/share, compared with diluted loss of $0.36/share posted in the corresponding period a year ago.

Intercept Pharmaceuticals: The clinical-stage biopharmaceutical company, in its FY14 results, indicated that its licensing revenue decreased 6.9% to $1.62mn from the preceding year. Its basic and diluted net loss was $3.76/share, compared with basic and diluted net loss of $13.63/share reported a year ago.

Nabors Industries Limited: In its FY14 results, the company indicated that its total revenue and other income was up 9.0% to $6.81bn, compared with the last year. However, it reported a basic and diluted loss from continuing operations of $2.28/share, compared with basic and diluted EPS of $0.51 recorded in the previous year.

Stratasys Limited: The 3D printers and 3D production systems manufacturing company, in its FY14 results, indicated that its net sales advanced 54.9% to $0.75bn from the preceding year. However, it reported a diluted loss of $2.39/share, compared with diluted loss of $0.68/share posted in the previous year. For FY15, the company expects its revenue to be between $0.94bn and $0.96bn.

Costco Wholesale: The company announced that it has entered into a new co-brand credit card programme agreement with Citi and an acceptance and co-brand incentive agreement with Visa.

Hewlett-Packard: The company entered into the agreement to acquire Aruba Networks, a leading provider of next-generation network access solutions for the mobile enterprise, for $24.67/share in cash.

Cardinal Health.: The health care services company announced that it has agreed to buy the heart-product business of Johnson & Johnson for $1.94bn in cash, in a move that would add stents and catheters to the list of products it offers to hospitals, physicians and ambulatory centers.

Intertek Group: The company, in its FY14 results, indicated that revenue decreased 4.2% to GBP2.09bn from the preceding year. Its diluted EPS stood at 108.80p, compared with 123.00p recorded in the previous year. The company recommended dividend of 49.10p/share, an increase of 6.7% from the last year. For FY15, the company expects its organic revenue growth rate to improve gradually during the year compared withFY14 growth rate.

Amlin Plc: The insurance company, in its preliminary FY14 results, revealed that its total income was up 3.0% to GBP2.31bn, compared with the previous year. However, its diluted EPS decreased to 46.60p from 59.10p posted a year ago. The company stated that it is reorganising its business into three business units to improve its global presence. Furthermore, it announced Sir Mark Wrightson is to step down from the board with effect from the conclusion of the next Annual General Meeting due to be held on 21 May 2015.

Hiscox Limited: The insurance company, in its FY14 results, indicated that its revenue increased 2.1% to GBP1.39bn from the prior year. Its diluted EPS was 64.50p, compared with 63.50p recorded in the preceding year.

Ultra Electronics Holdings: The company, in its preliminary FY14 results, revealed that revenue decreased 4.2% to GBP0.71bn from the last year. Its diluted EPS was 29.70p, compared with 54.70p posted in the previous year. The company indicated that FY15 performance would benefit from acquisitions made in FY14 and from foreign exchange translation at current rates.

Alent Plc: The specialty chemicals and engineered materials supplying company, in its FY14 results, stated that its net sales value was down 1.7% to GBP413.00mn, compared with the previous year. Its statutory EPS was 17.00p, compared with 22.10p recorded in the preceding year.

GlaxoSmithKline Plc: The company stated that its three-part transaction with Novartis has been completed. As a result of this transaction, ithas acquired Novartis’s global vaccines business (excluding influenza vaccines) for an initial cash consideration of $5.25bn.

Wolseley Plc: The company announced the acquisition of a substantial shareholding in BathEmpire.com, a leading B2C online bathroom retailer in the UK, with an option to acquire the remaining equity stake at a future date.

British Land Co.: The company announced the acquisition of Surrey Quays Leisure Park in Canada Water for GBP135.00mn from clients of Aviva Investors.

Johnson Matthey: The technology company announced that on 28th February 2015, it completed the acquisition of the battery materials business of Clariant AG for $75.00mn.

GAME Digital: The specialist video games retailing company announced the acquisition of Multiplay Limited, a community-based games company focused on live events, online gaming services and eSports, to increase its presence in the digital PC games market.

Financial Times

Morrison poised to take axe to dividend: Wm Morrison is poised to take an axe to its dividend, to provide its new chairman and Chief Executive with more headroom to turn around the struggling supermarket chain.

Lloyd’s insurers Amlin and Hiscox fail to allay fears on outlook: Two of the biggest listed Lloyd’s of London insurers pledged to pay GBP475.00mn worth of dividends, but the distributions failed to assuage concerns about the outlook for the specialist insurance market.

Liberum Chief Simon Stilwell to leave bank: Simon Stilwell, Chief Executive of boutique investment bank Liberum Capital, is leaving the firm he helped establish eight years ago, according to two people familiar with the situation.

Sotheby’s earnings tumble on higher costs: Sotheby’s earnings tumbled 18.5% in the fourth quarter due to higher expenses, amid ongoing boardroom turmoil and the second public attack on the company from an activist investor in less than a year.

Queens Park Rangers owners write off £60m in loans: Air Asia tycoon Tony Fernandes and steel magnate Lakshmi Mittal have written off loans worth £60m to Queens Park Rangers as the west London football club puts a period of lavish spending behind it and tries to avoid heavy fines for running at a loss.

Abu Dhabi fund kicks off bidding war for London luxury hotels: The Abu Dhabi Investment Authority has made a GBP1.60bn takeover offer for a trio of London’s luxury hotels, in a move that could resolve an acrimonious ownership dispute.

Trinity Mirror eyes online acquisitions: Trinity Mirror has said it will look for acquisitions and online investments after reporting a substantial improvement in its balance sheet.

Rangers Chairman resigns ahead of EGM: The turmoil at Rangers deepened on Monday when David Somers resigned as Chairman of the Scottish football club, four days before an emergency general meeting at which his future was set to be challenged.

Thorntons shares fall on further sales setback: Thorntons shares fell 8.0% in early Monday trading before recovering some ground after the chocolate maker revealed a further setback in its strategy of orientating its business towards commercial sales.

Grosvenor House Hotel on the market: London landmark the Grosvenor House Hotel has been put up for sale after its owner, Sahara Grosvenor House Hospitality, was put into administration.

BAT sues PwC over historic pollution liabilities in the US: British American Tobacco is changing its auditor after 17 years, because it has filed a suit against PwC over historic pollution liabilities in the US.

Pay gap between London and rest of UK narrows: Workers who live in London have suffered a worse wage squeeze than those in any other UK region since the crash, even as the capital’s economy seems to have rebounded more strongly than the rest of the country.

Noble Chairman increases his stake: The Chairman and Founder of Noble Group has increased his shareholding in the commodity trader as it attempts to deal with the fallout from an attack on its accounting policies by a mysterious research group.

Gordon Dyal to retire from Goldman Sachs: Gordon Dyal, a former global head of M&A at Goldman Sachs, has decided to retire from the investment bank, according to an internal memo.

GSK-Novartis deal ‘a model’ for industry: A $2.00bn disposal by Johnson & Johnson and the completion of a $20.00bn asset swap between GlaxoSmithKline and Novartis on Monday highlighted a push by healthcare groups to streamline their portfolios.

Toyota vows to stay profitable in Russia: Toyota has vowed to stay profitable in Russia this year even as the world’s biggest carmaker forecast a 28.0% drop in the car market in the country.

Gannett settles governance dispute with Icahn: Gannett has settled a dispute over corporate governance with Carl Icahn ahead of the spin-off of the USA Today owner’s publishing arm, prompting the activist investor to drop a proxy fight at Gannett’s upcoming shareholder meeting.

Investors send Vivendi share price tumbling after Altice deal: Vivendi shares suffered their biggest one-day fall in more than three years on Monday as investors reacted to the group’s decision to accept less than market value for its shares in telecoms group Numericable-SFR.

Unilever to buy REN skincare brand: REN skincare, a niche brand based on natural ingredients, is to be bought by Unilever, the Anglo-Dutch consumers goods company that is looking to extend its reach into personal care products.

Marks and Spencer Asia head quits amid China revamp: Marks and Spencer’s head of Asia has quit just as the high street retailer sets out plans to expand in China.

Google to launch small US mobile network: Google is launching its own mobile network in the US, threatening to become a powerful competitor to telecoms groups unless they move quickly to support its ambitious efforts to improve internet access globally.

Japan’s NTT buys Germany’s E-shelter as data competition deepens: Competition in the European market for data storage and services is intensifying with NTT, the world’s largest telecoms company by sales, agreeing to pay €742m for a majority stake in German data centre provider E-shelter.

Microsoft and Sony fight for smartphone middle ground: Microsoft and Sony are set to fight for the growing middle ground of the rapidly maturing smartphone sector with devices that will bring previously market-leading technology at lower prices.

Malaysia Airlines to pare back flights: Malaysia Airlines will cut its global seat capacity by 10.0% this year as the disaster-hit carrier refocuses on expanding its regional business in Asia.

Tullow Oil: Lost 7.7% to 357.30p after warning that a maritime boundary dispute between Ghana and Côte d’Ivoire may affect its flagship TEN development, which is due to start production in mid-2016.

Smith & Nephew: Rose 1.1% to GBP11.99 on a revival of takeover speculation.


Lex

NXP/Freescale: tandem cycle: In FY06, both NXP and Freescale were bought out by private equity groups, for $9.40bn and $17.60bn in cash, respectively. The deals were done at premium prices and high valuations. They larded both companies’ balance sheets with debt. The semiconductor industry is highly cyclical, FY06 turned out to be almost the top, and both deals got ugly fast. NXP brought this story full circle Monday, when it announced that it would buy Freescale. NXP will not pay a premium (although Freescale’s stock has run up vigorously in the past month), the valuation looks only mildly expensive if savings targets are hit, and because the deal is being done mostly in shares, the debt load at the combined company will be bearable. NXP will pay $17.60bn: $1.90bn in cash, $5.20bn in assumed net debt, and $10.50bn worth of NXP shares. That is 15 times expected profits for this year (before interest, taxes, depreciation and amortisation) — hardly cheap, but not much higher than NXPs own multiple. A target of $500.00mn in cost savings brings the effective valuation down. The combined company will have net debt of something over 3 times ebitda. Compare this to FY06: Freescale’s buyout left it with a debt ratio of nearly 6 times. NXP was left at 5. Similarly, a mild word of caution for those who bid up NXPs value by 16.0%, or close to $5.00bn, on Monday. You do not know exactly where you are in the economic cycle, either. If this were the sort of thing it was possible to know with any certainty, there would not be economic cycles to speak of.

Orange/Telecom Italia: wrong number: Two wrongs, famously, do not make a right. Similarly, two static, unexciting companies are unlikely to become more dynamic by combining. And so what to make of the idea that two of Europe’s lumbering incumbent telecoms operators, France’s Orange and Italy’s Telecom Italia, could merge? The political sensitivities around such a deal would be horrific. Technically, neither government controls these two companies. Yet the French government has three (of 14) seats on the Orange board of directors and neither country will happily let the other take control of its incumbent operator. Jobs and offices would have to be delicately split between the two countries. If Orange were to buy TI for cash, its net debt would roughly treble (although it would have more earnings with which to finance that debt). So using equity would be the best option, especially as Orange’s share price has more than doubled since June 2013. Its valuation (six times its enterprise value to ebitda) is at five-year highs. Orange and Telecom Italia have enough on their plates trying to deal with tough domestic markets. Bringing the companies together would not make those challenges any easier to overcome.

Rio Tinto: black sheep: Rio Tinto, the Anglo-Australian miner, has been scratching its head over what to do with its coal business, and has come up with a particularly inelegant solution. It is to merge its energy division (which includes uranium as well as coal) with its copper business. Lumping coal in with copper suggests that the former is no longer a priority for Rio, where the main focus is iron ore. The company sold one of its big Australian coal assets, Claremont, to Glencore in October FY13 and last year it sold its Mozambique venture. More disposals could be on the way. According to BMO Capital, the company loses money mining coal at the current price of $62.00 a tonne. Rio has the highest costs among the biggest diversified miners. Coal has accounted for less than 4.0% of Rio’s earnings over the past two years. By hiding what is left of coal in the copper division, Rio may be hoping to deflect attention from the business while it quietly looks for buyers. Analysts at Bernstein think that something more radical, such as a spin-off, should be on the table. Either way, the proposed copper-coal combination does not look like a long-term solution.

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