By Anchor Capital
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South African Market Review South African markets closed higher yesterday, amid strength in resources and banking sector stocks. Capitec Bank Holdings, Standard Bank Group and Nedbank Group climbed 5.0%, 0.9% and 0.2%, respectively. Kumba Iron Ore and Anglo American firmed 3.5% and 1.0%, respectively. Peer, BHP Billiton gained 2.4%, after it reported that its production was up 9.0% for the nine months ended March 2015, compared with the same period a year ago. Merafe Resources advanced 1.3%. The company announced that its FY15 attributable ferrochrome production increased 15.1% from the previous year. However, Harmony Gold, Sibanye Gold and AngloGold Ashanti dropped 3.7%, 3.1% and 1.9%, respectively. The JSE All Share Index rose 0.3% to close at 54,281.56. |
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UK Market Review UK markets finished lower yesterday, pressurised by weakness in shares of Tesco. Separately, the minutes of the Bank of England’s latest policy meeting revealed that keeping interest rates at a record low in April was a “finely balanced” decision for two officials. Tesco fell 5.2%, after the company reported its biggest ever full year loss, swinging to a pre-tax loss of GBP6.40bn in FY15. Peer firms, WM Morrison Supermarkets and J Sainsbury dropped 4.1% and 3.7%, respectively. Bucking the trend, Rolls-Royce Holdings advanced 4.1%, after revealing that its current CEO would be succeeded by the former boss of ARM Holdings, Warren East.Travis Perkins climbed 2.7%, after reporting a rise in its 1Q15 sales. The FTSE 100 Index declined 0.5% to close at 7,028.24. |
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US Market Review US markets ended in the green yesterday. Visa and MasterCard advanced 4.1% and 3.9%, respectively, after China’s government indicated that it would open up its bank-card clearing market. McDonald’s Corporation gained 3.1%, after the company stated that it was working on a plan to arrest its declining sales. EMC Corporation rose 3.1%, despite posting a sharp drop in its 1Q15 profit. Better-than-expected 1Q15 results led Coca-Cola Company to rise 1.3%. However, Chipotle Mexican Grill dropped 7.4%, as its 1Q15 same-store sales fell short of market estimates. The S&P 500 Index climbed 0.5% to settle at 2,107.96, while the DJIA Index gained 0.5% to close at 18,038.27. The NASDAQ Index rose 0.4% to finish at 5,035.17. |
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Asia Market Review Asian markets are trading firmer this morning, taking cues from overnight gains on Wall Street. In Japan, electronics-makers, Sharp and Panasonic advanced 2.7% and 2.6%, respectively. In Hong Kong, Tencent Holdings gained 0.6%, after reports indicated that its new online banking division, WeBank, was likely to open for business soon. In South Korea, LG Display jumped 3.1%, after reporting its strongest 1Q15 profit in more than four years. SK Hynix climbed 2.2%, after it posted a 50.2% rise in its 1Q15 profit. The Nikkei 225 Index is trading 0.3% higher at 20,195.48, while the Kospi Index is trading 1.3% firmer at 2,171.47. The Hang Seng Index is trading 0.6% in the green at 28,088.40. |
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Commodities At 06:00 SAST today, Brent crude oil fell 0.7% to trade at $60.14/bl. Yesterday, Brent crude oil rose 2.1% to settle at $60.54/bl, after the Energy Information Administration (EIA), in its weekly report, stated that crude production in the US declined by 18,000bls/d last week. Yesterday, the Illinois North Central No.2 Yellow corn spot prices remained unchanged at$3.54/bushel. At 06:00 SAST today, gold prices marginally advanced to trade at $1,187.20/oz. Yesterday, gold declined 1.3% to close at $1,187.13/oz, as the US dollar trimmed earlier losses following upbeat US economic data. Yesterday, copper declined 0.7% to close at $5,902.00/mt. Aluminium closed 0.7% lower at $1,820.75/mt. |
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Currencies Yesterday, the South African rand weakened against the US dollar. Meanwhile, data showed that on an annual basis, consumer price inflation in South Africa rose in March, albeit at a slower than expected pace. In addition, existing home sales in the US climbed higher than market expectations in March. Going forward, market participants will eye the preliminary Markit manufacturing PMI, new home sales and jobless claims data in the US, scheduled later today, for further direction. The yield on benchmark government bonds rose yesterday. The yield on 2015 bond advanced to 6.11% while that for the longer-dated 2026 issue rose to 8.01%. At 06:00 SAST, the US dollar is trading marginally lower against the South African rand at R12.2246, while the euro is trading 0.1% lower at R13.0907. Yesterday, the euro declined against the majors , but advanced against the South African rand. Macro data showed that the flash consumer confidence index in the eurozone fell unexpectedly in April, amid intensifying concerns about the possibility of Greece defaulting on its debts and leaving the euro area. Moving ahead, the preliminary print of Markit manufacturing and services PMI from the eurozone and various European economies will attract attention today. At 06:00 SAST, the euro slipped 0.2% against the US dollar to trade at $1.0709, while it has weakened 0.1% against the British pound to trade at GBP0.7126. |
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Economic Updates The consumer price index (CPI) climbed 1.4% in South Africa on a monthly basis in March, compared with a rise of 0.6% in the previous month. Markets were expecting the CPI to advance 1.5%. The minutes of the Bank of England’s (BoE) latest monetary policy meeting indicated that BoE policymakers sounded more bullish on the eurozone and the prospects for higher inflation. The minutes revealed that the nine members of the Monetary Policy Committee voted unanimously to keep rates unchanged at a record low 0.5%. The policymakers remain cautiously upbeat about the health of the nation’s economy and is open for any potential action later if the country sorts out its political uncertainty. The Centre for European Economic Research (ZEW Institute) reported that, in Switzerland, the economic expectations index recorded a rise to -23.20 in April, compared with a level of -37.90 in the previous month. In Italy, the seasonally adjusted industrial orders registered a rise of 0.8% in February on a monthly basis. Industrial orders had dropped by a revised 3.7% in the previous month. In the eurozone, the flash consumer confidence index dropped unexpectedly to -4.60 in April, compared with a reading of -3.70 in the previous month. The existing home sales in the US registered a rise of 6.1%, on monthly basis, to a level of 5.19mn in March, compared with market expectations of 5.03mn. The existing home sales had recorded a revised level of 4.89mn in the prior month. In April, the preliminary manufacturing PMI dropped unexpectedly to 49.70 in Japan, compared with a level of 50.30 in the previous month. Market anticipation was for manufacturing PMI to rise to 50.70. The preliminary HSBC/Markit manufacturing PMI index in China registered a drop to 49.20 in April, lower than market expectations of a drop to a level of 49.40. HSBC/Markit manufacturing PMI index had registered a level of 49.60 in the prior month. The business confidence index eased to 0.00 in 1Q15, in Australia. In the previous quarter, the business confidence index had registered a level of 2.00. The consumer confidence index in New Zealand recorded a rise of 3.4%, on monthly basis, to a level of 128.80 in April. In the previous month, the consumer confidence index had registered a reading of 124.60. |
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Corporate Updates South Africa BHP Billiton Plc : The mining company, in its operational review for nine months ended 31 March 2015, indicated that group production increased by 9.0%, with records achieved for ten operations and five commodities. It stated that it is on track to deliver group production growth of 16.0% over the two years to the end of FY15.Merafe Resources Limited: The mining company, in its production report for the quarter ended 31 March 2015, stated that its attributable ferrochrome production from the GlencoreMerafe Chrome Venture increased 15.1% to 99kt from the same period a year ago. It stated that the ramp-up of Project Lion II continues to be on track with the furnaces already producing above 80.0% of operating capacity. Netcare Limited: The healthcare company announced the retirement of its non-Executive Chairman, Mr Skhulumi Jeremiah Vilakazi, at the end of May 2015. Brimstone Investment Corporation: The investment company announced that through its indirect controlling beneficial interest in Brimstone Mtha UK SPV, it has concluded a forward sale transaction with Citigroup Global Markets relating to the disposal of 11,390,000 Old Mutual ordinary shares at a price of GBP2.27/share or R40.30/share. Big investors oppose Advtech deal: Private education group, Advtech, looks set for a showdown with its two biggest institutional shareholders over the funding structure for a proposed R450.00mn acquisition of the smaller rival, Maravest. PPC slows down expansion as debt piles up: South Africa’s biggest cement maker, PPC, will expand more slowly after spending on several cross-border projects jacked up its debt load, its chief executive said on Wednesday. FirstRand picks banks as it revives dollar-bond plans: FirstRand, Africa’s largest lender by value, hired four banks to help it arrange meetings with fixed- income investors from Germany to Hong Kong as it plans to sell dollar bonds. UK and US Facebook Inc.: The social networking service company, in its 1Q15 results, indicated that revenue increased 41.6% to $3.54bnfrom the same period a year ago. Its non-GAAP diluted EPS stood at $0.42, compared with $0.35 recorded in the corresponding period of previous year. The Coca-Cola Co.: The beverages company, in its 1Q15 results, stated that its net operating revenue rose to $10.71bn from $10.58bn posted in the corresponding period of prior year. However, its diluted net EPS was down 2.8% from the same period of last year to $0.35. The company announced that it has agreed in principle with three US bottlers, namely Coca-Cola Bottling Company High Country, Coca-Cola Bottling Company United and Swire Coca-Cola USA to continue granting new expanded territories, as steps toward the implementation of a 21st Century Beverage Partnership Model in the United States. AT&T Inc.: The telecommunications company, in its 1Q15 results, revealed that its total operating revenues was up 0.3% to $32.58bnfrom the same period of preceding year. However, its diluted EPS dropped to $0.61 from $0.70 reported in the corresponding period of prior year. Qualcomm Inc.: The semiconductor company, in its 2Q15 results, indicated that its total revenue climbed 8.3%to $6.89bn from the corresponding period of previous year. However, its GAAP diluted net EPS from continuing operations fell to $0.63 from $1.14 posted in the same period of last year. The company stated that it expects non-GAAP diluted EPS in the range of $0.85 to $1.00 for 3Q15, compared with non-GAAP EPS of $1.40 recorded in 2Q15. Boeing Co.: The aircraft manufacturing company, in its 1Q15 results, stated that its total revenue was up 8.2%to $22.15bn from the same period of preceding year. Its GAAP diluted EPS stood at $1.87, compared with $1.28 posted in the corresponding period of prior year. The company indicated that it anticipates revenue to be between $94.50bn and $96.50bn in FY15 and GAAP EPS in the range of $8.10 to $8.30. McDonald’s Corporation: The fast food restaurant company, in its 1Q15 results, revealed that its total revenue dropped 11.1% to $5.96bnfrom the corresponding period of prior year. Its diluted EPS was $0.84, compared with $1.21 posted in the same period of previous year. eBay Inc.: The e-commerce company, in its 1Q15 results, stated that its net revenues increased to $4.45bn from $4.26bn recorded in the same period of last year. However, its diluted EPS was down to $0.51 from $1.82 posted in the corresponding period of previous year. For FY15, the company expects non-GAAP diluted EPS to be in the range of $3.05 to $3.15. ARRIS Group Inc.: The telecommunications equipment manufacturing company announced that it has agreed to acquire Pace for aggregate stock and cash consideration of $2.10bn (GBP1.40bn). Rocket Fuel Inc.: The digital-advertising technology company stated that it is planning a cost-cutting program including job cuts that aims to reduce annual costs by $30.00mn which would help to achieve its goal of positive adjusted EBITDA for FY15. Reed Elsevier Plc: The publishing and information company, in its 1Q15 trading update, stated that business trends were consistent with FY14 across the group and it continues to remain focused on organic growth, with limited acquisition activity. It revealed that the group has completed GBP200.00mn of the previously announced GBP500.00mn share buyback. The company stated that its FY15 outlook remains unchanged and it is confident of delivering another year of underlying revenue, profit, and earnings growth in FY15. Tesco Plc: The grocery and general merchandise retailing company, in its preliminary results for FY15, stated that revenue from continuing operations dropped 2.0% from the preceding year to GBP62.28bn. It incurred a diluted net loss of 70.24p/share from its continuing operations, compared with EPS of 23.75p recorded in the previous year. The company stated that in FY16, it would continue to focus on regaining competitiveness in its UK business; protecting and strengthening the balance sheet; and rebuilding trust and transparency in the business and the brand. Travis Perkins Plc: The retailer, in its 1Q15 trading statement, indicated that total sales grew by 7.2%, with like-for-like sales growth of 5.1%, despite the anticipated sales decline in the Plumbing & Heating division. It stated that the overall trading was in line with market expectations. Rio Tinto Plc: The metals and mining company stated that as previously announced, it is conducting a $2.00bn share buy-back programme, of which $1.58bn is expected to be completed through the on-market purchase of its shares. It revealed that the overall programme is expected to be fully executed by 31 December 2015. Rolls-Royce Holdings Plc: The energy company announced that John Rishton has decided to retire as Chief Executive on 2 July 2015. It stated that Warren East would succeed John Rishton. British Land Co.: The property development and investment company announced that Facebook UK has signed an agreement for lease at 338 Euston Road, part of its 13 acre mixed use campus at Regent’s Place. Hammerson Plc: The property development and investment company announced the successful syndication and signing of a GBP415.00mn unsecured revolving credit facility at an initial margin of 80.00bps with a syndicate of nine banks. Financial Times Funding Circle raises $150.00mn in new boost for London tech sector: Peer-to-peer lending platform Funding Circle has raised $150.00mn from some of the world’s leading investment groups, in one of the largest fundraising rounds by a British technology start-up. Carmakers buck UK low productivity trend: The UK may be suffering a productivity crisis but its carmakers are bucking the trend and enjoying record output per worker. Life assurer Guardian loses Chief ahead of potential float: The Chief Executive of Guardian Financial Services is stepping down as its private equity owner Cinven considers a potential listing or sale of the “zombie” life assurer, worth as much as GBP2.00bn, according to people familiar with the matter. HSBC to stand by leadership despite shareholder complaints: HSBC is determined to shake off shareholder complaints and stand by its Chairman and Chief Executive as it braces for aggressive complaints at its annual meeting on Friday. Punch cuts debt ahead of beer deal change: Punch Taverns’ Executive Chairman has warned that as many as two-thirds of the pub group’s landlords could break their tie to it and start buying their beer on the open market – forcing the company to offer a more flexible business model. Ladbrokes profits fall 60.0% on unfavourable sports results: Ladbrokes blamed “the worst” sports results for seven years for a near 60.0% drop in its quarter-on-quarter profits. Tesco slides to record GBP6.40bn annual loss: Tesco has capped a disastrous year with a pre-tax loss of GBP6.40bn, the worst performance in its near 100-year history, and the revelation that it overstated previous profits by more than previously disclosed. ‘Silicon Fen’ champion brings exacting approach to Rolls-Royce: Warren East was dubbed the champion of “Silicon Fen” for his efforts turning Cambridge-based Arm Holdings into one of the few truly global tech successes to have emerged from British shores. StanChart recruits former GCHQ Director to tackle financial crime: The trend of former spies joining banks has continued with Standard Chartered’s appointment of Sir Iain Lobban, former Director of GCHQ, to advise its board of Directors on financial crime. Japan moves closer to nuclear restart: Japan has moved closer to generating nuclear power for the first time since FY13 after a court approved the restart of two reactors. Brazil’s Petrobras takes $17.00bn hit: Brazil’s Petrobras has estimated its losses from corruption at R6.20bn ($2.06bn) and taken a R44.60bn impairment charge, as the embattled state-owned oil company struggles to emerge from the nation’s biggest political bribery case. BofA appeals $1.30bn ‘Hustle’ toxic loan penalty: Bank of America has appealed against a $1.30bn penalty for selling toxic home loans, arguing that the court prevented it from putting up a robust defence to charges that it knowingly sold bad mortgages in the run-up to the financial crisis. Mylan readies its poison pill defences: Israel’s Teva faces an uphill battle in its $40.00bn takeover pursuit of rival generics drugmaker Mylan, thanks to recent corporate governance changes by the US-listed company designed to complicate an unsolicited approach. Rishton’s departure fuels Rolls-Royce takeover speculation: The unexpected departure of John Rishton as Chief Executive of Rolls-Royce after a tumultuous period at the leading aerospace engine maker has fuelled speculation that the UK group could soon be a takeover target. Ebay lays out post-split vision for marketplace and PayPal: Ebay on Wednesday tried to lay out a stronger long-term business case for its core ecommerce and payments businesses as it set a summer deadline for their separation in a seminal corporate break-up. Pace $2.10bn takeover extends tax inversion deals: Pace, the world’s largest maker of TV set-top boxes, has agreed a $2.10bn takeover by Arris, a US networking equipment maker that will change its domicile to the UK in the latest transatlantic tax inversion deal. Google enters US wireless service market: Google made its entry into the mobile communications business on Wednesday with a limited test in the US of a service under which customers pay based on the amount of data they use. ANA offers lifeline to rival Skymark: Japan’s biggest carrier ANA Holdings has provided a lifeline to bankrupt rival Skymark Airlines in a deal that will give it access to lucrative landing slots but raises questions over the industry’s competitiveness. Mobile advertising spend in US jumps 76.0%: Mobile advertising spending in the US jumped 76.0% to $12.50bn last year, overtaking display ads to become the second-largest online ad format, according to a report from the Interactive Advertising Bureau and PwC, the professional services firm. Tesco: End 5.2% lower at 222.70p after in-line results. Electrocomponents: Was off 1.0% to 242.00p on word of a share placing equivalent to nearly 1 % of the electronic parts distributor. |
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Lex Facebook: hey big spender: Look no further than Google, which dominates global search advertising but cannot manage to keep cost growth in line with revenue growth. Now Facebook is heading down a similar path, with expensive research projects in areas such as artificial intelligence and rural internet access driving up operating expenses. Facebook’s top-line growth is still impressive. Its user base is growing and users are getting more and more hooked: growth in daily active users accelerated sequentially in the first quarter of this year, and the ratio of daily to monthly active users has increased. Average revenue per user is growing too, up 25.0% from the previous year. Advertising revenues shot up 55.0%, adjusted for constant currency, reaching $3.30bn in the quarter. However, Facebook’s expenses rose even faster. Operating expenses rose 57.0%, to $1.70bn (excluding share-based compensation). Some of this was expected: Facebook says operating expenses will increase between 50.0% and 60.0% this year. This is due to investments in its ad technology and long-term projects such as AI, virtual reality and its internet access project. The cost of research and development in the first quarter more than doubled year on year. Zodiac Aerospace: sitting comfortably: The seat business of Zodiac Aerospace has itself been in a hard place since the French company fell behind on deliveries to Boeing, prompting a profit warning last month. Investors were reassured by Zodiac’s outlook in its March half-year results, marking up its shares on Wednesday by 7.0%. Seats accounted for only 27.0% of half-year sales of EUR2.30bn, however. It makes other kit, such as in-flight entertainment and seat technology (30.0% of sales), cabin interiors and galleys (31.0%) and safety systems including evacuation slides and parachutes (13.0%). Demand for Zodiac’s products in the buoyant commercial aerospace sector looks set to remain strong. Air traffic growth will accelerate to 7.0% this year, on International Air Transport Association forecasts. Each percentage point of traffic growth calls for about 150 new aircraft, estimates Investec. Airlines are also switching to more fuel-efficient aircraft and, with the lower oil price, some are extending the lifespan of existing fleets through refits. There is everything to shoot for. But Zodiac will need to show it has drawn a line under its production problems for its shares, trading on 18 times FY16 earnings (in line with closest peer BE Aerospace in the US), to sustain their upward trajectory. It is, in other words, sitting comfortably – but not yet sitting pretty. Rolls-Royce: East-ern promises: Seen at a certain level of abstraction, it is a record to be proud of. In the four years that John Rishton has been running Rolls-Royce, revenues have grown 10.0% a year. Dividends have increased just as fast and the stock is up 66.0%. Investment has risen significantly, yet the company still has no net debt. Most importantly, there was the 2011 decision to exit the International Aero Engines joint venture. That took Rolls out of the narrow body aircraft engine market, presently the fastest growing sector of the industry. Mr East, then, has plenty to do. First, he must improve the way Rolls sets market expectations. After years explaining Arm’s unique and complex business model, he should be well qualified to do so. He should set a small number of very clear long-term targets and help investors see past the unimportant quarterly shifts. This is especially crucial because of the large number of new engines the company is delivering for the Airbus A350. They will crimp margins for years to come: the real profits come after delivery, when long-term maintenance contracts kick in. Second, Mr East needs to rethink the company’s portfolio. Its aerospace business is in a great long-term position, forming half of a near-duopoly suppling a growing industry. Rolls has less scale and fewer structural advantages in, say, its marine business. Investors are going to judge Mr East and Rolls on the success of the aerospace business. Perhaps it would be better to focus the company on that area, too. |