Anchor Capital: Essential Market Review 29 December

South Africa Market Review

South African markets closed in the red on Wednesday, amid thin trade ahead of public holidays. Retail sector stocks, Foschini Group, Truworths International and Clicks Group plummeted 2.2%, 1.2% and 0.8%, respectively. Platinum miners, Aquarius Platinum, Impala Platinum Holdings and Northam Platinum dropped 1.5%, 1.5% and 1.2%, respectively. Gold miners, Sibanye Gold, AngloGold Ashanti and Harmony Gold Mining declined 3.0%, 1.6% and 1.4%, respectively. Banking sector stocks, Nedbank Group, Standard Bank Group and FirstRand fell 1.4%, 1.3% and 1.3%, respectively. However, Allied Electronics, Clover Industries and Octodec Investments advanced 5.5%, 3.6% and 3.3%, respectively. The JSE All Share Index dropped 0.2% to close at 49,478.57.

UK Market Review

UK markets finished higher on Wednesday in a half-day trading session ahead of the Christmas break. Smith & Nephew rallied 7.7%, after reports emerged that the US based surgical-implants maker, Stryker, was considering an acquisition offer for the former. Oil sector stocks, Royal Dutch Shell and BG Group advanced 0.5% and 0.2%, respectively. On the downside, mining sector stocks, Randgold Resources and BHP Billiton declined 2.1% and 1.0%, respectively. Intu Properties slipped 0.7%, after it announced the purchase of Spain’s Puerto Venecia shopping centre and retail park in Zaragoza for a sum totalling EUR451.00mn. The FTSE 100 Index advanced 0.2% to close at 6,609.93.

US Market Review

US markets ended in the green on Friday. Regeneron Pharmaceuticals and Alexion Pharmaceuticals rose 3.4%, 3.3% and 3.0%, respectively. Gilead Sciences advanced 2.7%, after reports indicated that it would launch a share buyback programme of around $10.00bn. Amazon.com added 2.0%, after revealing that a record 10.00mn new members signed up for its free shipping programme, Amazon Prime, during the holiday season. On the downside, Microsoft fell 0.5%, after company’s Xbox Live service was hacked on Christmas Day, which made the services inaccessible for millions of users. The S&P 500 Index climbed 0.3% to settle at 2,088.77, while the DJIA Index rose 0.1% to close at 18,053.71. The NASDAQ Index advanced 0.7% to finish at 4,806.86.

Asia Market Review

Markets in Asia are trading mixed this morning. In Japan, Sapporo Holdings fell 1.0%, amid news that the company’s operating profit would decline in 2014. However, Tokyo Electric Power advanced 3.9%, after a report indicated that prosecutors would not charge its executives over the March 2011 nuclear tragedy. In Hong Kong, Citic Securites surged 6.0%, after the company indicated that it would issue no more than 1.5 billion new shares in Hong Kong to raise around HKD 30.0 billion. In South Korea, Posco fell 2.1% while KB Financial Group retreated 3.5%. The Nikkei 225 Index is trading 0.4% lower at 17,739.44, while the Kospi Index is trading 0.9% lower at 1,929.98. The Hang Seng Index is trading 1.9% higher at 23,790.35.

Commodities

At 06:00 SAST today, Brent crude oil rose 0.6% to trade at $58.15/bl, as escalating conflicts in Libya stoked worries about that supply disruption. On Friday, Brent crude oil fell 1.1% to settle at $57.83/bl, extending Wednesday’s losses which were triggered after the US Energy Department report revealed a 7.30mn bl rise in the nation’s crude inventories.

On Friday, the Illinois North Central No.2 Yellow corn spot prices rose 1.9% to $3.84/bushel.

At 06:00 SAST today, gold prices declined 0.1% to trade at $1,195.16/oz. On Friday, gold advanced 1.9% to close at $1,196.00/oz.

On Wednesday, copper declined 0.3% to close at $6,361.00/mt. Aluminium closed 0.6% lower at $ 1,833.50/mt.

Currencies

On Friday, the South African rand strengthened against the US dollar.

The yield on benchmark government bonds fell/rose on Wednesday. The yield on 2015 bond remained flat at 6.52% while that for the longer-dated 2026 issue advanced to 8.05%.

At 06:00 SAST, the US dollar is trading 0.2% lower against the South African rand at R11.5846, while the euro is trading 0.1% lower at R14.1163. At 06:00 SAST, the British pound has remained flat against the South African rand to trade at R18.0348.

On Friday, the euro weakened against most of the major currencies. Later today, market participants will keep a tab on the German retail sales report for further direction to the euro-South African rand pair.

At 06:00 SAST, the euro advanced 0.1% against the US dollar to trade at $1.2186, while it has remained unchanged against the British pound to trade at GBP0.7828.

Economic Updates

In December, the NAPM-Milwaukee manufacturing index in the US fell to a reading of 57.61 from a revised reading of 68.93 reported in November.

On an annual basis, vehicle production in Japan fell 12.2% in November, compared with a 6.3% drop posted in October.

Industrial profits in China dropped 4.2% in November, recording the highest annual decline since August 2012.

Corporate Updates

South Africa

Aspen Pharmacare Holdings: The company, citing the Anti-Retroviral Tender results released by the South African National Treasury Department, announced that its South African operating company, Pharmacare Limited t/a Aspen Pharmacare, has been successful in winning a number of key products in the tender. Aspen’s award included 25.0% of the Fixed Dose Combination (FDC) containing Tenofovir, Emtracitibine and Efavirenz, which would be used to treat upwards of 80.0% of 1st line adult treatment. The tender is effective for a period of three years, starting from 1 April 2015.

Intu Properties: The company announced that it has entered into a deal with an entity indirectly fully owned by the Orion European Real Estate Fund III C.V. to acquire Puerto Venecia shopping centre and retail park in Zaragoza, Spain for EUR451.00mn.

Investec Australia Property Fund acquires AUD8.10mn property: Investec Australia Property Fund has acquired a new industrial property valued at AUD8.10mn, the company announced on Wednesday.

SA grants R10.30bn Aids-drug tender: South Africa’s Health Department has awarded four pharmaceutical companies a three-year tender worth R10.30bn to supply the country with antiretroviral drugs.

UK and US

Ossen Innovation: The company, in its 3Q14 results, indicated that its revenue dropped to $27.85mn from $33.12mn posted in the same period earlier year. Its basic and diluted EPS declined to $0.02 from $0.08 registered in the corresponding period a year ago.

Visa Inc.: The international payment system company announced that it has suspended its operations in Crimea after the US announced its latest round of sanctions.

Amazon.com: The company announced that its free shipping programme, Amazon Prime, witnessed a record growth, wherein more than 10.00mn new members worldwide tried this programme for the first time. Additionally, the company indicated that GoPro Inc.’s wearable equipment and accessories were the best-selling cameras on its website this holiday season.

Tesla Motor: The automaker announced a series of upgrades to its Roadster model that would enable the model with a range of more than 400.00 miles on a single charge, and promised to demonstrate the same early next year.

Groupon: Media reports revealed that the company is planning to sell at least 20.0% stake in its Korean Ticket Monster deals site to Goldman Sachs.

Financial Times

Taxpayers face bill for City Link redundancies: The private equity dealmaker who failed to turn round City Link has been forced on the defensive as it emerged taxpayers will pick up the redundancy bill for the 2,760.00 workers who are expected to lose their jobs at the parcel delivery business.

Disrupters bring destruction and opportunity: As buzz words go, it is an ugly one. But, in FY14, “disrupters” have been wreaking havoc on traditional business models everywhere, writes Sarah Gordon, Business editor.

Top managers’ pay reveals weak link to value: Executive managers’ pay is still determined by simplistic measures of performance that bear little relation to long-term drivers of companies’ value, according to an analysis of pay at FTSE 100 companies over the past decade.

Long-serving Non-Executives are on the wane in the UK: The UK’s biggest public companies are increasingly ready to say goodbye to long-serving directors. The number of Non-Execs who have been in the post for more than nine years at FTSE 100 groups has dropped by more than a quarter since February.

Young opt for life in London microhouses: London property developers are building hostels and microhouses for young workers who are not only priced out of buying a home but are even struggling to afford to rent more than a room in shared accommodation.

Network Rail faces probe over Christmas travel chaos: Network Rail came in for heavy criticism over the Christmas train travel chaos, with Britain’s rail watchdog launching an official investigation into the disruption.

Bricks and mortar loses out in online rush: Retailers in the UK and US reported a rapid acceleration of the trend towards online purchases and away from bricks and mortar shopping during the festive season.

Lex:

Superhero movies: with great power . . .: If you buy shares in Disney at their present valuation of 19.00 times next year’s earnings, hoping for that multiple to expand further, you are betting comic book movie time applies, too. Disney’s steady sales growth depends on it. Marvel, then, is at the forefront of Disney’s strategy to turn content into a reliable cash generator. This may be helped by another odd feature of Marvel comics characters: they share a universe. Iron Man fans will pay to see his films and The Avengers series, in which he appears. The trouble is that such universes have a tendency to sprawl. Marvel’s announcement of its third phase, in October, brought the number of superhero film releases by the end of this decade to 29. That is a lot of popcorn to be forecasting years ahead. Many of these films are from Warner Brothers. Time Warner owns DC and has plans for its own shared film universe. Batman will eventually pop up in Justice League films. The risk to valuation is saturation. Batman, after all, prefers to work alone.

Theme parks: rollercoaster: Disney is the big beast of the industry but theme parks are only a fifth of its profits. There are lots of pure plays though — Six Flags, Cedar Fair and SeaWorld in the US and Merlin in the UK are among the bigger ones. Building theme parks is a long, capital intensive business. The Kuwaiti Al-Humaidi family is backing a new Paramount-branded park in south east England that will cost GBP2.00bn-GBP2.50bn to build and will not be open until FY20. Done right, then, a theme park investment should more than cover the ice cream and souvenir photos. But this can be a fragile industry. SeaWorld has had an awful year after competitors upped their game and a film criticised the way it treats killer whales. And Euro Disney is the ultimate demonstration of how even big brands can get it wrong. The struggling park is being recapitalised by its parent to the tune of EUR1.00bn. As part of that The Walt Disney Company is offering to buy out Euro Disney minorities for EUR1.25 per share. Back in early FY04 they traded at over EUR25.00. That is no fun at all.

Caesars: the house always wins: For years, Caesars dodged a reckoning with creditors. Those moves have given way to restructuring talks with debt holders. Yet the listed Caesars equity has a market capitalisation of $2.00bn — an odd result for a business with more debt than enterprise value. Creditors have objected to how Caesars’ equity backers Apollo and TPG have protected their investments. If the PE groups claim a big recovery, it will startle even the most cynical observers. The most brazen gambit by Caesars management was to cut a guarantee the parent company had made on CEOC’s debt. Whether the transfers are upheld misses the point. The sponsors have bought themselves negotiating strength that they would not have had without such boldness. More news on a compromise is expected in January as an agreement with one set of creditors has just been reached. And expect shareholders to be better off than would have been predicted years ago. Private equity won’t let anything as trifling as a textbook stop them.

*Published with special permission by Anchor Capital (ACG)