The Markets
Market opening: Markets are likely to open higher today. FTSE 100 futures were trading 14 points up at 7:00 am.
New York: Wall Street traded lower after the Federal government’s partial shutdown entered the second day. Investors also seem to be concerned about the political impasse resulting in a delay in raising the debt ceiling. S&P 500 fell 0.1%, led by selling in industrial stocks.
Asia: Markets are trading mixed as President Obama’s meeting with Congress leaders on reopening of the government and raising the debt ceiling failed to break the logjam. The Nikkei lost 0.1%, while the Hang Seng was trading 0.9% up at 7:00 am.
Continental Europe: Equities traded lower even after ECB left its key interest rates unchanged, much in line with market expectations. France’s CAC 40 and Germany’s DAX declined 0.9% and 0.7%, respectively.
UK small caps: Yesterday the FTSE AIM All-Share index closed 5.61 points (-0.71%) lower at 782.00.
Today’s news
China official services PMI reaches a six-month high
China’s official services Purchasing Managers Index (PMI) rose to a six-month high of 55.4 in September from 53.9 in August, the National Bureau of Statistics (NBS) said today. The sub-index measuring new orders rose to 53.4 from 50.9, while the sub-index for new export orders climbed to 50.5 from 49.6 over the same period.
Company News
Domino (LON:DOM)
Yesterday, Domino’s Pizza released its interim management statement for the 13 week period ended 29th September 2013. System sales increased 10.4% to £140.9m, with year to date (YTD) system sales up 11.1% to £437.9m. UK like-for-like (LFL) sales rose 4% with YTD LFL sales growing 5.6%. Total online sales increased 19.8% to £72.3m, boosted by mobile sales which jumped 102.5%, and now account for 29.3% of total online sales. Share of digital sales in the total online sales grew to 61.4% from 58.4%. On YTD basis, total online sales reached £230.7m. During the period, eight new stores were opened in the UK while in Switzerland, the store count reduced to 10 from 12. In UK, the launch of a new store design earlier in the year delayed the opening of many stores. The store count in the UK rose to 750 from 700 last year, with the company targeting 50 new stores in the UK for the year. The company plans to transfer most of its German corporate stores to the franchisees, as soon as practicable. In the UK, Domino’s undertook some key marketing initiatives, including the launch of an advertising campaign and a major TV sponsorship deal.
Our view: Domino’s sales majorly come from the UK market itself, wherein it has recorded good sales growth. UK LFL sales have risen 4% despite an unfavourable weather. Mobile sales continued to register a solid growth (102.5%), pushing the total online sales significantly higher. The company has taken a wise decision to hand over most of its German operations to the franchisees. Since high labour costs had stalled Domino’s expansion plans in the country, this model is likely to help the company in developing its footprints in this market further, while also ensuring the benefits from the experience and knowledge of the local franchisees. The company was on track to the meet its full year targets. Considering the resilient performance delivered by the company amidst unfavourable weather conditions and the prospective benefits from an aggressive marketing and expansion strategy in the UK, we see immense potential for Domino’s Pizza going forward. We remain Buyers of the stock.
Ophir Energy announced the completion of the Pweza-3 appraisal well and flow test in Block 4 in Tanzania, yesterday. A Drill Stem Test (DST) on the Pweza-3 appraisal well exhibited an equipment constrained flow rate of 57 million standard cubic feet per day (mmscfd), with minimal drawdown and no observable depletion after 5 days of flow. The unconstrained flow rate is estimated at 150 mmscfd. Now, the Deepsea Metro I drillship would move on to drill Mzia-3 appraisal well on block 1, followed by drilling at the Mlinzi prospect in block 7. Drilling at the Mzia-3 well is designed to confirm the current resource estimates and to target the potential upside in the Middle Sand package, which was earlier encountered in the Mzia-1 discovery well. Owing to the early completion of the Pweza-3 programme, Mlinzi Mbali-1 well on the Mlinzi prospect, targeting mean recoverable prospective resources of 10 trillion cubic feet (tcf), has marked further progress. The spudding on this well is likely to start in November. Ophir holds 40% of blocks 1, 3 and 4 and BG Group is the operator with 60% interest.
Our view: Ophir Energy has reported strong flow testing results from the Pweza-3 appraisal well. The unconstrained flow rate is expected to be much higher than the current flow rate. The reservoirs match the excellent characteristics displayed by other lucrative assets in the area. These encouraging results have reduced the number of development wells required on the block, thus resulting in significant cost savings. The recently commenced drilling operations in Ghana would enable the company to further expand its geographical footprint. The recent gas discovery at Ngisi-1 well and observation of gas pay at the Chewa-1 well have significantly added to the company’s productive resource base. Considering Ophir’s strong position in deep water acreage in the African region and recent drilling successes, we retain our Buy rating for the stock.
Yesterday, J Sainsbury released its second quarter trading update for the 16 week period ended 28th September 2013. Total sales increased 5% y-o-y, while like-for-like (LFL) sales were up 2.1%. For H1 2013, total sales rose 4.4%, while LFL sales increased 1.5%. The company said it was benefitting from the continuing growth in its own-label brands, particularly ‘Taste the Difference’ and ‘by Sainsbury’s', which saw strong growth in recent years. The non-food business saw twice the growth compared to the food business. The company recently re-launched its Tu clothing brand at over 400 stores. The last quarter also saw the company’s biggest ever Back to School event, resulting in sales of over one million polo shirts and more than half a million pairs of school trousers. The online groceries business saw growth of more than 15% y-o-y to over £1bn, while the convenience business grew 20% y-o-y. The company opened 31 convenience stores and five new supermarkets in H1 2014, adding about 307,000 square feet to the estate. Sainsbury remained on track to achieve its target of one million square feet for the year. The company launched a joint venture named ‘Mobile by Sainsbury’s’ with Vodafone to offer value-for-money mobile services with clear and simple tariffs.
Our view: Sainsbury continues to benefits from its focus on quality, while also offering value proposition to the customers. With the dawn of economic recovery in the UK, the consumer spending level is expected to rise going forward. The firm enjoys a sixth of the share of the grocery market currently; encouraging outcome of its pricing initiative, growth in the own-brand sales and a stronger presence in the non-food segments give a positive indication about its underlying growth prospects. Sainsbury has managed to increase its market share over the period, outperforming its close competitors including Tesco. The management is confident that its unique promotional strategies, high quality own-label products, and outstanding customer service, will place the company in a good position to record strong sales coming into the important Christmas period. We maintain our Buy rating on the stock.
Yesterday, Tesco issued an interim management statement for 26 weeks ended 24th August 2013. Group sales were up 0.5% including petrol at constant exchange rates (CER) and rose 0.9% excluding petrol at CER. On a like-for-like (LFL) basis, sales fell 2% including petrol and 1.8% excluding petrol in the view of lower net new space contribution as planned. In the UK, total sales including VAT and petrol increased 1.1% and by 1.7% excluding petrol. However, LFL sales excluding both VAT and petrol declined 0.5%. In the UK, LFL sales in the food business, the main focus of the company’s six-part plan, rose 1%. The online grocery business also delivered sales growth of 13% in the UK and 54% overseas. The clothing segment continued to outperform the market with 8.6% LFL sales growth in the second quarter. However, LFL sales in general merchandise segment was lower amid the ongoing transformation work. Total sales in Europe, excluding petrol, dropped 3% at CER, while LFL sales fell 5%. In Asia, total sales, excluding petrol, rose 2% at CER. The company sold off majority of its stake in the Fresh & Easy business to Yucaipa, a US-based investment company. Tesco entered into a partnership with China Resources Enterprise Ltd to gain a 20% stake in Chinese food retailer. The interim dividend was kept at 4.63p.
Our view: Trading performance of Tesco has been subdued during the period, given the tough market conditions in Europe, with marginal sales growth and shrinking margins. The performance of the company has also been impacted as discount supermarkets are eating up the market share. The company is in the process of migrating towards higher-margin and higher-growth categories. However, the potential impact of these initiatives remains to be seen. The recent deal with the Chinese food company provides opportunities for further expansion in the country. Given the weak sales and margin performance across all the key markets, amid hopes of a major turnaround through the organisational revamp and the Chinese deal, we receive mixed signals about the future prospects of the company. We maintain a Hold rating for the stock.
Economic News
Eurozone ECB announces interest rates
The Governing Council of the European Central Bank (ECB), yesterday, decided to keep the key interest rates at the record-low level of 0.5% in line with the market expectations. The deposit rate and the marginal lending rate were retained at 0% and 1%, respectively. Interest rate on refinancing was also held constant at 0.5%.
US MBA mortgage applications
Applications for US home mortgages fell 0.4% in the week ended 27th September, the Mortgage Bankers Association said yesterday. The applications for home mortgages had increased 5.5% in the preceding week. The refinance index climbed 3%, while the seasonally adjusted purchase index fell 6%. The refinance share of total mortgage activity increased to 63% of total applications from 61% the previous week.
US ADP employment change
Jobs in the private sector increased by 166,000 in September, missing the consensus estimate of an 180,000 increase, the ADP reported yesterday. The number for August was revised down to 159,000 jobs from 176,000 reported initially. Trade/transportation/utilities witnessed the maximum increase in headcount, up 54,000 during the month. It was followed by Professional/business services (27,000) and Construction (16,000). Employment in financial activities was down by 4,000.