Anchor Capital: Essential market review, 12 February

By Anchor Capital

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South African Market Review
South African markets closed lower yesterday, amid uncertainty surrounding Greece’s debt talks. Lonmin, Impala Platinum and Anglo American Platinum plunged 5.7%, 3.4% and 2.2%, respectively. Anglo American and BHP Billiton dropped 1.2% and 0.3%, respectively. Sappi Limited plummeted 3.0%, after indicating that sales were down 8.7% in 1Q15 from the previous corresponding period. FirstRand, Standard Bank and Barclays Africa shed 0.9%, 0.7% and 0.4%, respectively. However, Northam Platinum climbed 6.7%, after it projected to post earnings in 1H15 after reporting a loss in the same period a year ago. New Europe Property rose 2.5%, following a report of growth in distributable earnings in FY14. The JSE All Share Index fell 0.1% to close at 52,069.30.
UK Market Review
UK markets finished lower yesterday, amid a fall in energy and mining sector stocks. Tullow Oil tumbled 7.2%, after it swung to a loss during FY15 and announced that it would suspend its final dividend. Sky Plc dropped 2.2%, after retaining rights to air Premier League soccer for a significantly higher price of GBP5.14bn. Miners, Anglo American and BHP Billiton fell 2.2% and 1.4%, respectively. BG Group and Royal Dutch Shell slipped 2.1% and 0.3%, respectively. On the upside, Reckitt Benckiser Group jumped 3.3%, after reporting a rise in its FY15 profits and disclosing new cost cutting measures. The FTSE 100 Index declined 0.2% to close at 6,818.17.
US Market Review
US markets ended mixed yesterday, as investors tracked the negotiations between Greece and the eurozone finance ministers. Transocean and Ensco tumbled 4.1%and 2.9%, respectively, following a drop in crude oil prices. Pioneer Natural Resources plummeted4.0%, as its 4Q14 earnings fell short of market expectations. Bank of America fell 0.4%, following a report that it used its government-backed US banking subsidiary to finance billions of US dollars in controversial trades for years. Mondelez International, PepsiCo and Time Warner advanced 2.6%, 2.5% and 0.3%, respectively, amid upbeat 4Q14 earnings. The S&P 500 Index remained flat at 2,068.53, while the DJIA Index fell marginally to close at 17,862.14. The NASDAQ Index climbed 0.3% to finish at 4,801.18.
Asia Market Review
Markets in Asia are trading mostly higher this morning, after data showed that Japanese machine orders climbed more than expected in December. In Japan, Sony Corporation surged 5.1%, after the company entered into a deal with Walt Disney to make a new Spider-Man movie. Dentsu climbed 3.7%, ahead of the release of its 3Q15 earnings later in the day. In Hong Kong, China Construction Bank and Bank of Communications gained 1.8% and 1.4%, respectively. In South Korea, SK Innovation and S-oil dipped 3.7% and 3.6%, respectively, tracking a drop in crude oil prices yesterday. The Nikkei 225 Index is trading 1.9% firmer at 17,984.53, while the Kospi Index is trading 0.4% lower at 1,937.84. The Hang Seng Index is trading 0.6% in the green at 24,452.31.
 
Commodities
At 06:00 SAST today, Brent crude oil rose 0.6% to trade at $54.56/bl. Yesterday, Brent crude oil fell 3.7% to settle at $54.23/bl, after a weekly report from the US Energy Information Administration indicated that US crude oil inventories increased more than expected by 4.90mn bls in the week ended 6 February 2015.

Yesterday, the Illinois North Central No.2 Yellow corn spot prices fell 0.3% to $3.62/bushel.

At 06:00 SAST today, gold prices advanced 0.1% to trade at $1,220.22/oz. Yesterday, gold declined 1.2% to close at $1,218.83/oz, as the US dollar strengthened against most of its major currencies.

Yesterday, copper rose 0.1% to close at $5,610.25/mt. Aluminium closed 0.7% lower at $1,802.50/mt.

 
Currencies
Yesterday, the South African rand weakened against the US dollar. Later today, traders will keep a tab on South African gold and mining production data. Additionally, US retail sales and initial jobless claims data will garner market attention.

The yield on benchmark government bonds remained mixed yesterday. The yield on 2015 bond fell to 6.07% while that for the longer-dated 2026 issue advanced to 7.61%.

At 06:00 SAST, the US dollar is trading 0.1% lower against the South African rand at R11.8327, while the euro is trading 0.1% higher at R13.3858. At 06:00 SAST, the British pound has declined 0.2% against the South African rand to trade at R18.0110.

Yesterday, the euro declined against most of major currencies, but advanced against South African rand. Going forward, investors will keenly eye German consumer prices and Eurozone industrial production data along with the Bank of England quarterly inflation report for further direction. Meanwhile, investors continue to track negotiations between Greece and its international creditors.

At 06:00 SAST, the euro advanced 0.2% against the US dollar to trade at $1.1312, while it has gained 0.3% against the British pound to trade at GBP0.7432.

 
Economic Updates
In January, the house price balance dropped unexpectedly to a level of 7.00 in the UK, lower than market expectations of an unchanged reading. The house price balance had registered a revised reading of 12.00 in the prior month.

The current account deficit in France recorded a reading of EUR1.90bn in December. France had posted a revised current account surplus of EUR0.30bn in the previous month.

The Mortgage Bankers Association has reported that mortgage applications fell 9.0% on a weekly basis in the US, in the week ended 6 February 2015. Mortgage applications had advanced 1.3% in the previous week.

The President of the Dallas Federal Reserve Bank, Richard Fisher, stated that a stronger US dollar and lower global oil prices are a net positive for the US economy. Furthermore, he warned the Fed against delaying a hike in US interest rates, adding that the central bank should not formulate monetary policy based on short-term currency moves.

According to the Financial Management Service, the budget deficit in the US recorded a level of $17.54bn in January, following a budget surplus of $1.90bn posted in the previous month.

In December, machinery orders advanced 8.3% in Japan on a monthly basis, compared with an advance of 1.3% in the prior month. Markets were expecting machinery orders to advance 2.3%.

The Bank of Japan has reported that, on a monthly basis in January, the domestic corporate goods price index dropped 1.3% in Japan, more than market expectations for a drop of 0.6%. In the previous month, the domestic corporate goods price index had dropped by a revised 0.5%.

The University of Melbourne has indicated that the consumer inflation expectations in Australia rose to a level of 4.0% in February, compared with a reading of 3.2% in the previous month.

The seasonally adjusted unemployment rate recorded a rise to 6.4% in Australia, in January, higher than market expectations of a rise to a level of 6.2%. In the prior month, unemployment rate had recorded a level of 6.1%.

Business New Zealand has reported that the seasonally adjusted manufacturing Purchasing Managers’ Index (PMI) in New Zealand fell to a level of 50.90 in January. The manufacturing PMI had registered a revised reading of 57.10 in the prior month.

 

Corporate Updates
South Africa

New Europe Property Investments: The company, in its FY14 results, indicated that its pretax profit rose to EUR94.91mnfrom EUR65.67mn posted in FY13. Its headline EPS rose to 30.19c from 21.58c posted in the previous year. The board declared a final distribution of 17.35c/share for the six months ended 31 December 2014, resulting in a 32.22c/share distribution for FY14, an improvement of 20.3% compared with the previous year. The group acquired and developed four malls and three value centres during FY14, and the acquisition of another mall became unconditional in January 2015.

Sappi Limited: The company, in its 1Q15 results, indicated that sales fell to $1.38bn from $1.50bn posted in the same period a year ago. Its diluted EPS stood at $0.05, compared with $0.03 posted in the same prior period. Furthermore, the company stated that capital expenditure in FY15 is expected to be below $0.30bn and would focus largely on the efficiency improvement investments at its Kirkniemi and Gratkorn mills.

Assore Limited: The mining holding company, in its 1H15 results, stated that revenue was up 27.0% to R1.68bn from the same period a year ago. However, its basic and diluted EPS dropped to R9.06 from R23.52 posted in the corresponding period previous year.

Northam Platinum: The platinum mining company, in its 1H15 trading statement, revealed that its earnings and headline EPS are estimated to be between R0.80 and R0.98, compared with the loss and headline loss per share of R0.25 posted in the same period a year ago.

Aveng Limited: The engineering and construction company, in its 1H15 trading statement, indicated that it expects a decrease in its headline EPS by between 55.0% and 60.0% to between R0.33 and R0.37, compared with R0.82 posted in the same period a year ago.

Aquarius Platinum: The platinum company, in its 1H14 trading statement, stated that revenue rose marginally to $113.26mn, compared with the prior corresponding period. Meanwhile, the company reported a loss per share of 3.93c, compared with a loss per share of 2.89c posted in the corresponding previous period.

Group Five: The company, in its 1H15 results, stated that revenue from continuing operations was down 12.0% to R6.89bn, compared with the same period preceding year. Its fully diluted EPS was R1.17, compared with R1.96 reported in the same period a year ago.

HCI denies rift with shareholder: A specific share buyback by Hosken Consolidated Investments of 2.00mn shares held by its executives and former directors did not point to a rift between management and the conglomerate’s major shareholder, the SA Clothing and Textile Worker’s Union.

Fortress Income Fund tests new highs with favourable results: Fortress Income Fund, the JSE’s best-performing property stock for FY14, continues to test new highs every week.

UK and US

PepsiCo Inc.: The multinational food and beverage company, in its FY14 results, indicated that net revenue increased 0.4% to $66.68bn from the previous year. However, its diluted EPS stood at $4.27, compared with $4.32 reported a year ago. The company expects 7.0% core constant currency EPS growth in FY15 versus FY14 core EPS of $4.63, consistent with its long-term target of high-single-digit core constant currency EPS growth.

Cisco Systems: The manufactures and networking equipment company, in its 2Q15 results, stated that revenue increased 7.0% to $11.93bn, compare with the same period previous year. Meanwhile, its diluted EPS was $0.46, compared with $0.27 posted in the same period a year ago. The company expects revenue to increase by 3.0% to 5.0% in FY15.

Baidu Inc.: The web services company, in its FY14 results, revealed that total revenue was RMB49.05bn, a 53.6% increase from FY13. Its diluted earnings per ADS were RMB37.32, an increase of RMB7.39 from the previous year. It expects to generate total revenue in an amount ranging from RMB12.65bn to RMB13.07bn for 1Q15, representing a 33.2% to 37.6% annual increase. Additionally, it also announced the launch of a stock analysis app that uses artificial intelligence to predict how stocks and overall markets would perform.

Time Warner: The media and entertainment company, in its FY14 results, indicated that revenue increased 3.4% to $27.36bn and net diluted EPS rose 10.7% to $4.34, compared with the previous year. The company expects its FY15 adjusted diluted EPS from continuing operations to be in the range of $4.60 to $4.70.

Mondelez International: The confectionery, food and beverage conglomerate, in its FY14 results, stated that net revenue dropped 3.1% to $34.24bn from the previous year. Its diluted EPS from continuing operations was $1.28, down 0.8% compared with the preceding year, due almost entirely to the negative 90-cent impact of cycling the prior year’s arbitration award. In FY15, the company expects organic net revenue growth of at least 2.0%, essentially in line with expected category growth after accounting for the company’s strategic decision to exit certain lower-margin revenue.

Metlife Inc.: The life insurance company, in its FY14 results, revealed that total operating revenue was $71.08bn, compared with $69.02bnposted in the preceding year. The company stated that the net EPS was $5.42, compared with $2.91 posted in the previous year.

Applied Materials: The semiconductor manufacturing company, in its 1Q15 results, indicated that revenue came in at $2.36bn, versus the consensus estimate of $2.33bn. It reported EPS of $0.27, in line with market estimates. It sees 2Q15 EPS to be in the range of $0.28 to $0.30, versus the consensus of $0.32.

Tesla Motors: The company, in its 4Q14 results, stated that revenue came in at $957.00mn, an increase from $615.00mn in the same period a year ago. It further reported loss per share of $0.13, $0.44 worse than the market estimated EPS of $0.31. For FY15, the company expects to deliver about 55,000 Model S and X vehicles, representing more than a 70.0% increase over FY14 deliveries.

Lorillard Inc.: The company, in its FY14 results, revealed that net sales increased 0.6% to $6.99bn from the preceding year. Its diluted EPS stood at $3.28, compared with $3.15 recorded in FY13. The company expects to close the merger with Reynolds American in 1H15, subject to regulatory approval and other customary closing conditions.

Twitter: The social networking service company announced that it has acquired Niche, a New York startup that connects internet stars with big-brand advertisers.
Reckitt Benckiser Group: The company, in its FY14 results, indicated that net revenue from continuing operations dropped to GBP8.84bn from GBP9.27bn recorded in the previous year. However, the company’s diluted EPS from continuing operations rose to 227.60p from 192.30p posted in FY13. Meanwhile, media reports revealed that the company’s new cost-saving plan would include some job cuts.

Glencore Plc: The company, in its corporate and production report for FY14, indicated that own sourced copper production increased 3.6% to 1.55mnt, compared with the previous year, mainly due to the ramp-up of Mutanda. Own sourced zinc production was 1.39mnt, down 0.9% from FY13. Own sourced nickel production rose 2.5% to 101.00kt, compared with FY13. Own sourced coal production was 146.30mnt, up 5.9% over FY13. The company indicated that its marketing business performed in line with its expectations in FY14.It further announced that the company is planning to divest its non-core 23.9% stake in Lonmin Plc during 1H15 which it had inherited through the acquisition of Xstrata Plc in May 2013.

ARM Holdings: The company, in its FY14 results, stated that its revenue was GBP795.20mn, compared with GBP714.60mn posted in the prior year. Its diluted EPS surged to 18.00p from 7.40p recorded in the previous year. The company anticipates revenue for 1Q15 to be up by 10.0% annually, based on strengthening of royalty revenue growth, and expectation of licence revenue through FY15.

Tullow Oil: The oil and gas exploration company, in its FY14 results, revealed that sales revenue dropped 16.4% to $2.21bn from the previous year. It recorded a diluted loss per share of $1.69, compared with EPS of $0.19 posted in the preceding year.

Telecity Group: The company, in its FY14 results, stated that revenue rose 7.1% to GBP348.70mnbn from the preceding year. Its adjusted diluted EPS stood at 39.20p, higher compared with 36.50p posted in the previous year. The company confirmed a positive outlook with a strong on-going focus on capital discipline in FY15. Additionally, the company announced a non-binding agreement on an all-share merger with Interxion Holding N.V.

Thomas Cook Group: The travel company, in its 1Q15 results, indicated that like-for like revenue increased 1.6% to GBP1.52bn from GBP1.50bn reported in the same period a year ago. It expects to deliver further growth in FY15, despite trading conditions being tough, particularly in Continental Europe and Northern Europe.

WS Atkins: The design, engineering and project management consultancy, in its 3Q15 trading update, revealed that the group continues to trade in line with expectations and its outlook for FY15 remains unchanged. The company expects to report net funds of around GBP135.00mn at 31 March 2015, after reflecting the consideration for the acquisitions of both Houston Offshore Engineering and Terramar, completed since the half year.

Indivior Plc: The pharmaceutical company, in its preliminary FY14 results, announced that net revenue dropped 8.3% to $1.12bn, compared with the preceding year,. Its diluted EPS declined to $0.56 from $0.68 posted in the previous year. For FY15, the company forecast net revenue in the range of $0.85bn to $0.88bn and stated that the outlook is very uncertain because of the timing, extent and impact of tablet price erosion.

Homeserve Plc: The company, in its trading update for the period from 1 October 2014, stated that its business is trading in line with expectations. It further indicated that net debt as at 31 December 2014 was GBP79.00mn.

Cobham Plc: The company announced that it would recognise in its FY14 underlying results a one-off provision of GBP15.00mn before tax on its air-to-air refuelling development programmes. The provision addresses cost escalation and outstanding risks related to a small number of hardware subsystem development and design maturity issues.

Financial Times

Telecity agrees merger with Interxion: Telecity, the UK-based data centre provider that hosts servers for Facebook and Google, has agreed to buy Dutch competitor Interxion in an all-share deal that would create a single dominant European player valued at more than GBP3.00bn.

UK corporate tax not top of G20 league table, says Oxford study: George Osborne has failed in his ambition to create the most competitive corporate tax system in the Group of 20 leading economies, according to Oxford university analysis.

Shell and BP in stand-off with Abu Dhabi over signing-on fee: Two of the world’s biggest oil companies, Royal Dutch Shell and BP, are fiercely resisting efforts by Abu Dhabi to get them to pay a multibillion-dollar signing-on fee for a stake in developing the emirate’s biggest onshore fields.

Former Logica manager accused of insider trading before CGI takeover: A former manager of Logica, the IT consultancy, is accused of trading in the company’s shares just ahead of a GBP1.70bn takeover by its Canadian rival, CGI Group.

Balfour Beatty selects Aveva’s Philip Aiken as chairman: Balfour Beatty has tapped Aveva Group head Philip Aiken as its incoming Chairman, just weeks after issuing a profit warning and announcing the arrival of its new Chief Executive.

Electra uses cash to strike back at activist Sherborne: Electra, the listed British private equity group fighting off an activist campaign led by Sherborne Investors, is to begin returning cash to shareholders.

Redrow’s sales soar despite fears of UK housing market slowdown: Redrow looked to shrug off concerns of a cool-down in the UK housing market despite warning on planning delays and the inertia of a “hung parliament”, posting revenues up by half and a doubling of pre-tax profits for 2H14.

Bleak outlook for the UK’s young jobseekers: A survey of 18,000 UK employers has confirmed with hard data what frustrated young job seekers have long suspected: they cannot get a job without experience and they cannot get experience without a job.

Poundland sale nets Warburg Pincus GBP142.00mn: Private equity firm Warburg Pincus has raised GBP142.00mn by selling down nearly half of its stake in the discount retailer Poundland, a bigger share placing than was originally anticipated as investors buy into the bargain hunting trend.

Shell Chief urges industry to speak up in climate debate: The head of Royal Dutch Shell is urging his industry to spell out why the world needs it, as talks intensify on a global climate deal due to be signed this year.

Browne calls for extra North Sea tax to be scrapped: Lord Browne, former Chief Executive of BP, has called on the government to scrap a supplementary tax on North Sea oil and gas revenues, warning that the recent plunge in crude prices had done “permanent damage” to the region’s ageing fields.

UniCredit capital levels raise concern: UniCredit, Italy’s second-largest lender by market value, undershot expectations as it reported fourth-quarter net income of EUR170.00mn and a smaller than expected capital cushion, prompting a more than 4.0% drop in its share price.

M&A helps lift US healthcare stocks: Gilead Sciences, the biotech behemoth that has seen its market valuation soar to a cool $145.00bn, has put in a strong performance over the past 14 months with its shares rising more than 30.0%.

Reckitt lowers growth targets amid restructuring: Reckitt Benckiser announced a cost-cutting plan and organisational shake-up as the maker of Dettol disinfectant, Durex condoms and Vanish laundry aids sought to counter expected pressures from a tough year ahead.

Fiat Chief says rebel investors will spur mergers: Sergio Marchionne, Chief Executive of Fiat Chrysler Automobiles, has predicted that carmakers reluctant to consolidate will be forced to reconsider their stance as they come under attack from activist investors.

Fosun secures EUR939.00mn Club Med deal: Fosun International’s tender offer for the shares of holiday group Club Méditerranée has been successful, the French stock market regulator confirmed on Wednesday — drawing a line under the longest takeover battle in French history.

Cisco reports best revenue growth for 3 years: Cisco Systems on Wednesday reported its best revenue growth for three years, prompting executives to claim the US network equipment company has put the worst effects of a difficult technology shift behind it.

Redrow: Edged up 16.2% to 345.00p, after it said demand for new homes remained strong with encouraging customer traffic.

Telecity: Gained 15.3% to 978.00p after proposing an all-share takeover of US-listed Dutch peer Interxion.

 

Lex:
Fanuc: press to activate: Fanuc, a Japanese maker of factory robots, has no interest in the Turing test. Management has long turned away from other humans, at least those who hold its shares. Until very recently, Fanuc did not even meet investors. Dan Loeb of Third Point, the activist hedge fund, would like to see more shareholder friendliness. However, Fanuc’s high operating profit margins (40.0%) have generated more cash flow than it can invest. Free cash flow, post capital expenditure, has averaged more than Y100.00bn annually since FY12. Cash on the balance sheet has piled up to nearly Y1.00tn, a third of its enterprise value. Plus the company has no debt. Fanuc could return this cash. Share buybacks would not enhance value, but arguably the company could pay a higher dividend. Its yield is just over 1.0%, low even for Japan. Mr Loeb has struggled with Japanese technology companies in the past. His calls for a break-up of Sony were ignored. There is little to suggest that this time his demands will elicit a friendlier, more human, response.

Arm: not an economy set of wheels: Arm is, in effect, an outsourced research department for makers of low power semiconductors. Most smartphones and tablets contain Arm intellectual property — it has an 85.0% market share in mobile. It makes money by selling licences and collecting royalties. On Wednesday, Arm reported GBP1.30bn in revenues for FY14, beating expectations. Revenues and profits grew 16.0% and 13.0%, respectively. Is that enough to support the stock’s revved up valuation of 36 times forward earnings? The argument in favour is that Arm’s technology has become an industry standard — analogous to Qualcomm’s wireless technology, Microsoft’s operating systems, or Intel’s X-86 chips. Such businesses make very high, very steady profits for a very long time. The other worry is that Arm’s technology ceases to be the industry standard. Intel is challenging Arm in mobile, for example. So far, Intel — despite, in effect, unlimited funds — has failed. In FY14 Intel’s mobile segment had $202.00mn in revenue and $4.20bn in losses. If Intel soldiers on despite this, it could squeeze Arm’s revenues but — if the example of Qualcomm, Microsoft, and Intel are any indication — will not displace it. Arm is looking to new markets such as servers. These markets will be tough, making the mobile business look all the more expensive. But it shows no sign of slowing down. Vroom, vroom.

Reckitt Benckiser: soft soap: Congratulations to consumer goods group Reckitt Benckiser for taking corporate vagueness to a whole new level. Does “nice” mean 50 basis points? 100? 200? Or perhaps 10? Who knows. One can only hope that the targets applied to chief executive Rakesh Kapoor’s bonus are somewhat firmer. All this (and perhaps more) is necessary because top line growth in the sector has been slowing, according to data from Jefferies. Developed markets have been tough for a while, and emerging markets are no longer the saviour that they once were. While some of the smaller companies are growing nicely, the likes of Unilever and Procter & Gamble are making only slow progress. Sales at the former rose 2.0% last year (before the impact of currency changes); sales at the latter are growing at a similar rate. Reckitt Benckiser, with its focus on attractive markets such as health and hygiene, managed to eke out sales growth of 4.0% last year and is promising something similar in FY15. A little sales growth and a “nice” increase in margins (say 75 basis points, but really it could be anything at all) might add up to something decent. If Reckitt could do both, it might be producing net profits of about GBP1.75bn this year. That puts it on a prospective PE multiple of 24, not far out of kilter with other large consumer staples companies. But this is an industry for which cost cutting is an increasingly important part of the investment case. The sorts of multiples enjoyed by Reckitt and its peers no longer look quite so nice.

*Published with special permission by Anchor Capital (ACG)sOUTH a

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