Anchor Capital: Essential market review 27 Nov

South African markets closed in the red yesterday, amid weakness in platinum miners and banking sector stocks. Northam Platinum, Anglo American Platinum and Lonmin fell 3.1%, 2.2% and 0.9%, respectively. Lonmin revealed that it had completed three deals to make up the remaining 8.0% of its Black Economic Empowerment. Banking sector stocks, Capitec Bank Holdings, Standard Bank Group and Barclays Africa Group declined 1.5%, 1.2% and 0.2%, respectively. Growthpoint Properties dropped 0.4%, after it indicated that its diluted headline EPS is expected to fall after the acquisition of Acucap. On the upside, MMI Holdings rose 2.4%, after it stated that its new business recurring premiums increased 22.0%. The JSE All Share Index dropped 0.3% to close at 50,355.78.

UK Market Review

UK markets finished marginally lower yesterday. TUI Travel and easyJet lost 2.1% and 1.0%, respectively, after shares of their peer, Thomas Cook, suffered huge losses following the resignation of its CEO. Compass Group shed 1.3%, even as it reported a 10.5% rise in its dividend and a 5.4% increase in FY14 profit. Royal Mail fell 0.8%, after its CEO cautioned the Parliament that the universal delivery service was endangered by rival companies opting for profitable work in big cities. However, mining sector stocks, Antofagasta, Anglo American and Fresnillo gained 3.8%, 1.4% and 1.0%, respectively. BT Group rose 2.2%, after EE’s owners confirmed that they were in discussions with BT for a potential sale. The FTSE 100 Index declined marginally to close at 6,729.17.

US Market Review

US markets ended in the green yesterday. Among technology sector stocks, Analog Devices climbed 5.5%, after posting better-than-expected 4Q14 results, while Hewlett-Packard gained 4.1%, despite reporting lower-than-expected 4Q14 revenue. Texas Instruments, Avago Technologies and Applied Materials climbed 3.6%, 2.9% and 2.8%, respectively. Mylan advanced 4.4%, after media reports revealed that the company is the most likely takeover target for Pfizer. However, Diamond Offshore Drilling, Transocean and Noble plummeted 10.9%, 8.1% and 5.1%, respectively, tracking a fall in crude oil prices. The S&P 500 Index advanced 0.3% to settle at 2,072.83, while the DJIA Index rose 0.1% to close at 17,827.75. The NASDAQ Index climbed 0.6% to finish at 4,787.32.

Asia Market Review

Asian markets are trading mixed this morning. In Japan, Yakult Honsha plummeted 6.4%, amid reports that Danone is mulling selling its 20% interest in the company. Cyberdyne slumped 5.1%, after it indicated that it would sell JPY20.00bn in convertible bonds. In Hong Kong, energy sector stocks, Cnooc and PetroChina eased 0.8% and 0.2%, respectively, tracking decline in crude oil prices. In South Korea, Samsung Electronics surged 7.7%, amid news that the company would repurchase shares worth USD2.00bn. The Nikkei 225 Index is trading 0.8% lower at 17,243.62, while the Kospi Index is trading 0.3% in the green at 1,985.92. The Hang Seng Index is trading 0.4% in negative territory at 24,012.92.

Commodities

At 06:00 SAST today, Brent crude oil fell 1.3% to trade at $75.35/bl. Yesterday, Brent crude oil fell 0.8% to settle at $76.35/bl, after a report released by the US Energy Information Administration indicated that crude oil inventories rose more than expected by 1.90mn bls to 383.0mn bls last week. Additionally, speculations among investors continued to build up that the OPEC members would refrain from cutting crude output in their meeting today.

Yesterday, the Illinois North Central No.2 Yellow corn spot prices rose 1.6% to $3.53/bushel, as demand for the crop increased to make ethanol in the US.

At 06:00 SAST today, gold prices declined 0.3% to trade at $1,193.79/oz. Yesterday, gold dropped 0.3% to close at $1,197.87/oz., as US equities markets traded near record highs, dampening demand for the precious metal as an alternative asset.

Yesterday, copper declined 0.3% to close at $6,631.00/mt. Aluminium closed 0.2% higher at $2,082.00/mt.

Currencies

Yesterday, the South African rand strengthened against the US dollar, after the release of mixed economic data in the US. Data showed that durable goods orders in the US rose unexpectedly in October, however, the revised Reuters/Michigan consumer confidence print missed the preliminary estimates for November.

The yield on benchmark government bonds fell yesterday. The yield on 2015 bond fell to 6.06% while that for the longer-dated 2026 issue declined to 7.68%.

At 06:00 SAST, the US dollar is trading 0.1% higher against the South African rand at R10.9621, while the euro is trading unchanged at R13.7078. At 06:00 SAST, the British pound has remained flat against the South African rand to trade at R17.3050.

Yesterday, the euro advanced against most of the major currencies. Market participants will keep a tab on today’s German consumer price inflation, unemployment and Gfk consumer confidence data for further direction to risk appetite.

At 06:00 SAST, the euro remained unchanged against the US dollar to trade at $1.2507, while it has remained flat against the British pound to trade at GBP0.7922.

Economic Updates

On a quarterly basis, in 3Q14, the second estimate of Gross Domestic Product (GDP) in the UK climbed 0.7%, in line with the preliminary figures and compared with a 0.9% rise reported in 2Q14.

In November, the consumer confidence index in Italy dropped unexpectedly to 100.20 from a revised reading of 101.30 reported in October.

The consumer confidence index in France rose unexpectedly to 87.00 in November from a reading of 85.00 posted in October.

On an annual basis, the import price index in Germany slid 1.2% in October, compared with a fall of 1.6% reported in September.

The European Central Bank (ECB) Vice President, Vitor Constancio, stated that the central bank would be able to gauge in 1Q15 whether it requires to commence purchases of sovereign bonds.

Durable goods orders in the US rose surprisingly by 0.4%, on a monthly basis, in October, compared with a revised drop of 0.9% recorded in September.

The final Reuters/University of Michigan consumer sentiment index in the US rose to 88.80 in November, less than the preliminary estimate of 89.40 and compared with a reading of 86.90 reported in October.

The seasonally adjusted initial jobless claims in the US rose unexpectedly to 313.00 K in the week ended on 22 November 2014, compared with a revised reading of 292.00 K posted in the previous week.

Industrial profits (YTD) in China increased 6.7%, on an annual basis, in October, following an advance of 7.9% registered in September.

The trade deficit in New Zealand fell to NZD0.91bn in October, compared with a revised trade deficit of NZD1.37bn reported in September.

Corporate Updates

South Africa

MMI Holdings Limited: The company, in its trading update for the three months ended 30 September 2014, announced that it had a good quarter from a new business perspective, with the total present value of premiums (PVP) increasing 30.0% on the prior year, primarily on the back of continued good employee benefits production. Its new business recurring premiums increased 22.0% compared to the same quarter previous year, mainly due to good growth in employee benefits.

Santam Limited: The company, in its operational update for the ten month period ended 31 October 2014, indicated that its net underwriting margin remained above the long term target range of 4.0% to 6.0%, although slightly lower than the 7.4% net underwriting margin reported for 1H14. The company stated that underwriting conditions remain challenging, with continued pressure on claims costs and the tough general economic climate impacting on growth. The company also indicated that solvency margin is expected to remain close to the higher end of the target range of 35.0% to 45.0%.

Vukile Property Fund Limited: The company, in its 1H15 results, announced that its property revenue increased to R744.11mn from R657.37mn recorded in the same period previous year. Its earnings per linked unit stood at 96.94c, compared with 205.25c posted in the corresponding period a year ago. The company reported that the normalised distribution increased 7.8% to 59.09c/linked unit, compared with same period previous year. The company also indicated that it remains on track to deliver FY15 growth in distributions of between 7.5% and 8.0%.

Nedbank Group Limited: The company announced that Nedbank Capital and Corporate would be integrated into a single client-facing, wholesale business cluster. This newly formed cluster would offer the full spectrum of wholesale products under one brand and one leadership team.

Growthpoint Properties Limited: The company indicated that the potential offer to acquire the remaining shares in Acucap is likely to increase its diluted EPS to 549.61c from 543.87c. However, its diluted headline EPS is expected to fall to 308.18c from 308.59c.

Lonmin Plc: The Platinum producer indicated that it has completed three deals to make up the remaining 8.0% of its Black Economic Empowerment (BEE).

Delta Property Fund: The company announced that its debt and equity holders have approved the conversion of its current linked unit capital structure to an ordinary share structure.

Advtech Limited: The company announced that that it has concluded comprehensive agreements to acquire 100.0 % stake in Maravest Group for around R450.00mn.

Moody’s extends review period for downgrade of African Bank: Rating agency Moody’s has extended the review period for the downgrade of African Bank’s credit ratings as the Reserve Bank’s restructuring plan is still in progress.

Transaction Capital hints at interest in African Bank: Financial services company Transaction Capital on Tuesday said it had R1.20bn in cash to fund acquisitions for future growth.

Support grows for Pickvest class action: More than 6 000 investors in the Highveld Syndications (HS) companies have to date confirmed support of a class action application being brought against the Pickvest-promoted property schemes, attorney, Jacques Theron, confirmed.

Sanlam is serious about Africa on choice of Hubert Brody: The Sanlam Group recently created a position for Hubert Brody, the former CEO of Imperial Holdings, proving if nothing else (and in case the market had doubts) that it takes its emerging market expansion plans very seriously.

Eskom formalises voluntary retrenchments: Eskom formalised a process of offering employees voluntary severance packages two weeks ago.

Stocks end lower, Nigerian Naira hits MTN: South African stocks slipped on Wednesday, driven by losses in Africa’s largest telecoms operator, MTN, after the devaluation of the Nigerian currency.

AngloGold employee dies in mine accident: An AngloGold Ashanti employee was killed in an accident at the Mponeng mine in Carletonville, the company said on Wednesday.

UK and US

Deere & Company: The heavy equipment engines manufacturer, in its FY14 results, indicated that its total net sales dropped to $32.96bn from $35.00bn posted in the previous year. Net income attributable to the company fell to $3.16bn from $3.54bn reported in the prior year. Additionally, the company indicated that equipment sales in FY15 are expected to decrease about 15.0% and the net income attributable to the company is anticipated to be about $1.90bn.

Golar LNG: In its 9M14 results, the liquefied natural gas shipping company stated that its total operating revenue declined to $70.88mn from $80.07mn reported in the same period prior year. The company reported a net loss of $3.47mn, compared with a net income of $131.40mn recorded in the same period prior year. Additionally, the company stated that Sir Frank Chapman replaced John Fredriksen as the Chairman of the board and Hilli conversion activities were commenced in the US and in Singapore. Furthermore, the company indicated that it sold a 10.0% stake in the entity that owns the Hilli to a Keppel Corporation wholly owned subsidiary.

Astro-Med Inc.: The company, in its 3Q15 results, revealed that its net sales advanced to $23.14mn from $18.18mn registered in the same period prior year. Its diluted net EPS climbed to $0.20 from $0.14 recorded in the corresponding period a year ago.

Medtronic: The company announced that the US Federal Trade Commission had approved its proposed acquisition of Covidien.

Kinder Morgan: The company announced that it has completed the acquisition of the outstanding shares of Kinder Morgan Energy Partners, Kinder Morgan Management and El Paso Pipeline Partners, for an approximate consideration of $76.00bn.

Leucadia National: The company disclosed that its increased its stake in Harbinger Group by 12.0%, bringing the former’s share in the latter to 23.2%. Moreover, the company announced that its Chairman, Joseph Steinberg, was now appointed as the Chairman of Harbinger Group’s Board, effective as of 1 December 2014.

Avanir Pharmaceuticals: The company revealed that the US Food and Drug Administration (FDA) has issued a Complete Response letter to its New Drug Application (NDA) for AVP-825. In the response letter the US FDA indicated that it did not find any issues in the drug and no additional clinical trials were required.

Smith & Wesson Holding: The firearm manufacturer announced that it has signed a definitive agreement to acquire Battenfeld Technologies, a provider of hunting and shooting accessories, for a cash consideration of $130.50mn. The acquisition is expected to close in mid- to late December.

Compass Group: The food and support services company, in its FY14 results, indicated that revenue dropped to GBP17.06bn from GBP17.56bn posted in previous year. However, its diluted EPS rose to 48.9p from 23.4p recorded in the preceding year.

Wolseley Plc: The company, in its 1Q15 interim management statement, stated that its revenue from the ongoing businesses stood at GBP3.51bn, 9.8% ahead of last year at constant exchange rates and 6.6% ahead on a like-for-like basis including 0.9% price inflation. Trading profit amounted to GBP235.00mn, up 13.5% year-on-year at constant exchange rates. The company sees annual trading profit for the ongoing businesses, at current exchange rates, to be in line with the current consensus of analyst expectations.

United Utilities Group: The water utility, in its 1H15 results, announced that its revenue increased to GBP859.40mn from GBP845.70mn posted in the same period preceding period. Its underlying EPS rose to 25.80p from 24.70p recorded in the corresponding period a year ago. The company also stated that it expects to deliver both 2010-15 regulatory outperformance targets and dividend policy of targeting 2.0% per annum growth above the rate of RPI inflation through to 2015.

Britvic Plc: The soft drinks maker, in its FY14 results, indicated that its revenue increased to GBP1.34bn from GBP1.32bn posted in the preceding year. Its diluted EPS was reported at 36.20p, compared with 25.30p/share. The company anticipates FY15 EBIT in the range of GBP164.00mn to GBP173.00mn, underpinned by cost saving initiatives.

Thomas Cook Group: The company, in its FY14 results, indicated that its revenue declined to GBP8.59bn from GBP9.32bn recorded in the previous year. Its basic and diluted loss per share narrowed to 8.20p from 17.10p posted in the previous year. Separately, the company announced that its Chief Executive, Harriet Green, has stepped down and would be replaced by its Chief Operating Officer, Peter Fankhauser, with immediate effect.

MITIE Group: The strategic outsourcing company revealed that it has acquired a majority stake in Source Eight Limited, the real estate, technology and risk management consultancy. Initial consideration payable is a maximum of GBP2.95mn, with GBP2.5mn paid in cash on completion, and remainder payable dependent on performance targets.

Kier Group: The company announced that it has successfully raised GBP120.00 via the US private placement market.

Domino Printing Sciences: The company announced the appointment of Sucheta Govil and Rachel Hurst as directors of the company, with immediate effect.

Tullett Prebon: The company revealed that it has completed the acquisition of PVM Oil Associates Limited, the independent oil brokerage firm, and its subsidiaries.

Financial Times

Patisserie chain rolls out expansion after profits rise: Patisserie Holdings plans to open a further 20 Patisserie Valerie outlets this year after the café and cake chain owner reported a sharp jump in profits following its May flotation.

Bob Diamond pounces as global banks retreat from Africa: Bob Diamond, the former Barclays boss who is investing in African lenders, said big global banks have moved “off the stage” in the competition to buy financial assets, creating an opportunity for entrepreneurial new businesses like his.

Royal Mail warns on threat to rural deliveries: Vince Cable, business secretary, accused Royal Mail of “scaremongering” on Wednesday after the privatised postal operator warned that competition from rivals could threaten its obligation to deliver letters anywhere in the country.

Top investors warn of revolt over new BG Group Chief’s pay deal: A multimillion-pound pay package that would make Helge Lund, incoming Chief Executive of BG Group, one of Europe’s best remunerated oil bosses has run into fierce opposition from shareholders, who are threatening to vote against the deal within days.

Oil price fall starts to weigh on banks: Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850.00mn loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy.

UK music industry fights copyright changes: The UK music industry has begun legal action against the government over recent changes to copyright legislation, claiming the reforms will cost rights holders GBP60.00mn a year in lost revenues.

Big data deal pushes WANdisco shares up by 13.0%: Shares in WANdisco, the UK-based cloud computing company, were trading up more than 13.0% on Wednesday after securing a contract to provide “big data” services to one of the top 10 US banks.

Lloyds Chief says keeping account numbers will not help switching: António Horta-Osório, the Chief Executive of Lloyds Banking Group, has said that allowing customers to keep their account numbers when switching banks will not make the process easier – and could cost the banks GBP5.00bn.

Quindell Finance Director surrenders right to repurchase shares: Quindell’s Finance Director, Laurence Moorse, has given up the right to repurchase about GBP175.00k of shares in the company, after a share deal went wrong.

Compass Chief Richard Cousins dismisses Tesco Chairman rumours: Richard Cousins, Chief Executive of Compass, the world’s largest catering company by revenues, has ruled himself out of the running to succeed Richard Broadbent as Chairman of Tesco.

French Connection shares rise despite fall in sales: French Connection has become the latest high street fashion retailer to warn that milder autumn weather in the UK has dented its sales as shoppers delay the purchase of coats, jackets and warmer clothing.

UK manufacturers plan to raise level of investment: Almost 70.0% of small and medium-sized manufacturers plan to increase their investment in technology and capital equipment in the coming year.

Quantum to notch up sector’s biggest Aim float of the year: Quantum Pharma, which began operations in a training college ‘clean room’, is set to become the biggest float on Aim this year in the pharmaceutical and biotechnology sector.

BDO revenues rise above $7.00bn for first time: Growth and acquisitions drove BDO’s global revenues above $7.00bn for the first time, the accountancy firm said on Thursday, as it benefited from consolidation in the mid-tier part of the sector.

Newspaper profitability rises at Daily Mail and General Trust: Daily Mail and General Trust has reported improved profitability at its newspaper division and bold revenue targets for MailOnline, the website of its flagship Daily Mail newspaper, as it seeks to steady investor sentiment following recent hiccups.

Britvic warns of slow start to year in flat soft drinks market: Britvic, the Fruit Shoot and Tango producer, warned that the UK’s supermarket price war and consumer health concerns would lead to a flat soft drinks market this year, saying its own financial year had got off to a slow start.

Zalando on track to make first annual profit: Zalando, Europe’s largest online-only fashion retailer, said it was on track to make an annual profit this year for the first time, on the back of increased use of mobile phones and improved efficiencies.

China charges Microsoft $140.00mn for tax ‘evasion’: The Chinese government has charged Microsoft $140.00mn in back taxes and interest, in the latest case of a US technology group coming under regulatory scrutiny in the country.

EE owners confirm sale talks with BT: Deutsche Telekom and Orange have confirmed that they have held talks with BT to sell EE, their UK mobile business, which would create a dominant group in Britain’s wireless and fixed line telecoms markets.

Thomas Cook: Dropped 17.7% to GBP1.14, on the unexpected departure of its Chief Executive, Harriet Green.

AA: Rose 1.0% to GBP3.54, after it was added to the Stoxx 600 index.

Lex:

OPEC: the prisoner of Vienna: After 2010, OPEC’s largest producer, Saudi Arabia, had a production cost under $10.00/bl, while Brent crude traded over $100.00/bl, on average. They could have pumped more, driven prices down and made more money in the short term. So demand for OPEC’s oil has slowed. Its forecasts imply 29.00Mb/d of demand for its product next year versus its 30.00Mb/d production ceiling, Deutsche Bank notes. So this week’s 166th OPEC conference in Vienna would normally be nailed on to announce a production cut of 1.00Mb/d or so. In reality, production cuts risk more defections than a Soviet-era ballet. Saudi Arabia is producing 1.00Mb/d more today than it did before OPEC adopted the production ceiling. The kingdom reduced output by 6.00Mb/d over five years in the FY80s, but fellow OPEC countries did not follow. The Saudi response by late FY85 was to raise output, sending oil prices below $10.00. Already Russia, a non-OPEC member, has signalled it will maintain output levels next year even though it would, naturally, prefer less global production overall. State-owned Rosneft must maintain production. It needs the cash. And Saudi now seems content to protect its market share and let prices fall. How un-cartel like.

Banking: end of the universe: New regulations, higher capital requirements and the consequences of past misbehaviour all damp bank Executives’ risk appetite. No banker wants to be all things to all people any more. And specialists are producing better returns. Lloyds, a UK-only retail lender, is expected to produce a return on tangible equity of nearly 15.0% next year. Swedbank, a Nordic and Baltic expert, is expected to pass 17.0%. Some of the Swiss private banks should do even better. Meanwhile, Deutsche Bank and Barclays, which have broader business models, are forecast to produce Rote of 8.0% and 9.0%, respectively. That is largely down to their exposure to investment banking with its high (and growing) capital requirements and high staff costs. Equity investors have bought into this narrative. Shares in specialists such as Lloyds and Swedbank have outperformed those of generalists over the past three years. Either way, specialisation is a good place to start. Customers, investors and staff need to have a clear idea of what their bank is trying to do and why, and management need to allocate capital and costs accordingly. The latter point is particularly important. Too many banks have not done enough to keep a lid on costs. As another of the speakers at the summit put it, if you have a cost to income ratio of more than 50.0%, you are in the wrong place.

Picking losers: trapped value, value traps: There are 17 mega-cap companies (enterprise value over $20.00bn) that are down more than 20.0% net of dividends this year, according to Capital IQ data. The list falls into rough categories. Commodity stocks: Rosneft, Vale, ArcelorMittal, SeaDrill, Ecopetrol. Rosneft or Vale are yours for 5.00 times forward earnings. But these are primarily bets on the commodity, not the company. Vale would have made it to the FY13 loser list as well. It looked cheap then too. Another category: Macau casinos. Sands China and Galaxy Entertainment are both down a fifth. October was the worst month on record for Macau gambling revenues. But these are still very profitable companies. A little upturn in China’s economy, or a little softening of its anti-corruption drive, and money will be made here. There are two companies on the list that have compounded structural pressures on their business with management actions apparently designed to infuriate investors. Hyundai might not have chosen the moment when a weak Japanese Yen was strengthening its Japanese competition to spend $5.50bn on a flash new office building. Rolls-Royce can’t seem to hit the targets it sets for itself: investors have had it. The good thing about bad management though is that it is under the company’s control – unlike, say, a secular shift in industry profitability. Ask Tesco about this.

*Published with special permission by Anchor Capital (ACG)