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Northland Capital Partners View on the City: Churchill Mining, Anite Group, ARM Holdings, Computacenter and others

Last updated: 09:49 18 Oct 2013 BST, First published: 08:49 18 Oct 2013 BST

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MINING: CHURCHILL MINING (LON:CHL)

FROM YESTERDAY: FY13 RESULTS TO JUNE 2013

FINANCIAL

  • Group incurred a net loss of $11.6m in the year (FY12: $10.4m) with LPS of 9.5c (FY12: 8.6c). Adjusted net loss was $7.3m with Adj. LPS of 5.9c.
  • Cash position at 30th June was $4.8m which is anticipated to be sufficient to continue the arbitration process. 
  • The majority of spending ($4.2m) was on the ICSID arbitration process.
  • Underlying slimmed down operating costs included consulting directors and professional fees of $0.5m and PR and outreach programs of $0.6m.
  • Loss included non-cash impairments of $1.8m for EKCP port land and of $2.3m for the carrying value of financial assets. 

LEGAL CASE

  • International arbitration against the Republic of Indonesia (ROI) with the International Centre for Settlement of investment Disputes (ICSID) continues.
  • Churchill is seeking damages of $1bn and has engaged lawyers Quinn Emanuel Urquhart & Sullivan to pursue the arbitration on a fixed fee basis,
  • Company is awaiting the outcome of the ICSID Tribunal’s decision of jurisdiction objections raised by the ROI. 

NORTHLAND UK VIEW: Whilst spending on legal action has been significant, Churchill remains well capitalised for the arbitration proceedings. In May, the ICSID arbitration panel met in Singapore to hear the ROI’s challenge to jurisdiction in relation to Churchill’s claim. There is no fixed date for a decision. The outcome of this ruling will determine Churchill’s ability to continue to pursue its claim for financial redress under arbitration with its claim at $1bn.

 

Week Ahead (21/10/13)

View from the trading desk

Markets long suspected and priced-in a pull back from the US Debt Ceiling cliff and the can was duly kicked down the road until February 7th. Chastened Republicans may not be as keen to take discussions to the wire given an outpouring of criticism of their conduct but could also conclude that they were not aggressive enough. The S&P rose to its highest level on Thursday 1733. The FTSE has been more volatile within a range but overall saw a strong rebound this week, rising almost 4% from last week’s low on Thursday of 6330 to close at 6576 on Thursday. Underlying market sentiment remains relatively robust. Whilst UK investors may not yet have fully accepted BoE guidance, the mood seem less skittish about the potential for near term rate hikes and Wednesday’s jobs data brought the unemployment threshold no closer. Overall, though UK real earnings remain squeezed, UK consumers and investors may be feeling the confidence benefits from increasing house and asset prices, no matter how artificially stimulated.

Sales & Research thoughts

TMT – This week was notable for two substantial warnings among the larger TMT stocks. On Tuesday, SDL (LON:SDL), the provider of customer experience management software and services, warned that Q3 trading was below expectations and FY adj. PBT guidance was reduced to c. £8m (FY12: £35.5m) from c. £15m. The services business is showing signs of recovery but not as fast as hoped. Meanwhile a number of licence sales failed to materialise in the Technology division. The shares dropped an initial 22% before recovering to be down c. 9% from the start of the week. The reaction to the warning at Anite (LON:AIE), the provider of Handset and Network Testing hardware, was more extreme (off 32% on the day) as it guided considerably lower on the Handset Testing division, the recent engine of growth. Anite has been caught out by the consolidation and reorganisation amongst the handset and chipset manufacturers. Current levels are attractive for investors willing to look beyond the short term revenue opacity and recognise the mid-term drivers.

Next week sees a Q3 IMS from ARM (LON:ARM) on Tuesday. The shares benefited this week on news that Intel had pushed back the launch of Broadwell, its latest attempt to break Arm’s dominance in the low-power processor market. We will be looking for an update on Arm’s own attempts to expand into Intel’s core markets. Wednesday has a Q3 IMS scheduled from Computacenter (LON:CCC) and investors will be hoping for no more unpleasant surprises from the three onerous German contracts and the French division. August’s interims included impairment and provisions totalling £22.9m. Elsewhere trading has been encouraging and the company continues to return cash to shareholders. Finally, Thursday sees interims from Bloomsbury Publishing (LON:BMY). Trading is traditionally H2 weighted, particularly profits, but it reported a strong Q1 in July and we expect an update on September’s acquisition of Hart Publishing.

Retail: Shares in the retail sector have rallied strongly this year with FSTE All share retailers improving 38% on the year. On the surface the sector looks fully valued given a forward P/E of 15.6x against an average three year figure of 12.3x and compared to a market multiple of 14.5x. Much, of course, depends on the final quarter trading performance. Despite the decline in real wages putting a squeeze on consumers, the retail recovery persisted in September and the prognosis is for the best Christmas trading period for some years. September retail sales grew 0.6% against expectations of 0.4%. Some of this September performance was likely to be sales deferred from the previous month that retreated 0.9% with good weather holding back the sale of autumn clothing ranges. However underlying performance of the sector has been robust and sales have risen by 2.2% year to date.

Oil price: As expected, the EIA reaffirmed its $108/bbl Brent forecast for this year in its October Report. It has also maintained its $102/bbl FY14 target that we thought was more subject to a potential downgrade. We would not be surprised to see some downward revisions in the single digits in coming months, if expected additional supply comes on stream. Non-Opec supply is expected to uptick and the OPEC surplus (at five year lows) to return to normal levels. In addition, there are the wildcards of a pickup in Iraq supply, Iran (if very early talks continue positively) and Kazakhstan, where the massive 13bn barrel Kashagan field could meet its 800k bbl/d-1.5MMbl/d potential in the medium term. These factors could lead to the easing of oil price. Improving global economic activity and Middle Eastern geopolitical turmoil continue to provide the opposite driver.

 

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