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Beaufort Securities Breakfast Today including Provident Financial and


The Markets

Market opening: Markets are likely to open higher today. FTSE 100 futures were trading 28.5 points up at 7:00 am.

New York: Wall Street witnessed an upswing, as positive corporate earnings results from large firms (including Google and Morgan Stanley) and speculations over continuance of the Fed’s stimulus programme led the markets higher. Investors are focusing on a series of crucial jobs’ data releasing later this week after a delay due to the government shutdown. The S&P 500 advanced 0.7% for the day, posting 2.4% weekly gains.

Asia: Encouraging earnings data from Japan-based companies, a statement from the Bank of Japan Governor Haruhiko Kuroda about moderate economic recovery and positive cues from the US lifted the Nikkei 0.9% higher. The Hang Seng was trading 0.5% up at 7:00 am.

Continental Europe: Equities gained, as luxury goods and mining stocks rose on strong growth data from China, one of the main export markets. Germany’s DAX and France’s CAC 40 jumped 0.6% and 1.1%, respectively.

UK small caps: On Friday the FTSE AIM All-Share index closed 5.91 points (+0.74%) higher at 799.14.

Today’s news

UK housing sector rebounds in October: Rightmove

Based on a survey, Rightmove reported today that UK house prices rebounded in October, driven by a sharp increase in London house prices. Average property asking prices in the UK advanced 2.8% m-o-m to £252,418 after dropping 1.5% in September. On y-o-y basis, prices were up 3.8% compared to 4.5% in the prior month. In London, asking prices jumped 10.2% m-o-m to £544,232, moving up 13.8% from last year.

Japan’s September trade deficit contracts

The Ministry of Finance revealed that Japanese trade deficit in September narrowed to ¥932.1bn from a revised ¥962.8bn. Exports expanded 11.5% y-o-y to ¥6.0trln, while imports grew faster at 16.5% to ¥6.9trln, the ministry reported. Separately, the leading economic index for Japan declined to 106.8 in August from 107.9 in July. The coincident economic indicator inched down 107.6 from 107.7, while the lagging index improved to 114.4 from 113.1.

Company News

Anglo American (LON:AAL)

Anglo American issued its production report for the quarter ended 30th September 2013 on Friday. Iron ore production dropped 24% y-o-y to 9.5 million tonnes (mt), largely due to multiple disruptions at Sishen. Output of manganese alloy rose 5% to 54,800 tonnes, recouping after the temporary closure of production at TEMCO in 2012. Manganese ore production lowered 8% to 788,000 tonnes, due to the planned shutdown at Hotazel in South Africa and lower recoveries at GEMCO in Australia. Production of metallurgical coal increased 9% to 4.9 mt. However, output in Q4 2013 would be affected by planned longwall moves at Moranbah and Grasstree, the company informed. Export thermal coal production in South Africa edged down 1% y-o‐y to 4.5 mt and domestic thermal coal output totalled 9.1 mt. Copper production improved 32% to 207,300 tonnes, reflecting an improved operating performance and higher metal grades at Los Bronces and Collahuasi. Nickel production grew 7% to 9,600 tonnes despite a permanent cessation at Loma de Niquel due to higher output from Barro Alto. The refined platinum production gained 3% y-o-y. Production of diamonds jumped 21% to 7.7 m carats in response to the full recovery of the Jwaneng mine from the slope failure in June 2012. Exploration and evaluation operating expenditure for three months totalled US$131m, down 47% y‐o‐y, due to a cut down in both activities. The company also announced multiple iron ore and copper projects.

Our view: Anglo American delivered a drop in production volume for its prime offerings – iron ore and manganese ore. The manganese alloy output gained only because of a temporary suspension of activities last year, while diamond segment rose on restoration of operations at the mine. Though few of the segments, including copper, recorded an increase in production volumes, the poor performance of key segments is concerning. The company has been contracting its mining operation with a target to divest up to 15 assets. In comparison, Rio Tinto, a close competitor of Anglo American, posted a robust set of results a few days ago. Given the challenging operational and political environment in South Africa, where Anglo American has majority of its operations, we downgrade our rating on the stock to a Sell.

Provident Financial (LON:PFG)

On Friday, Provident Financial released its interim management statement for the period 1st July 2013 to 17th October 2013. Vanquis Bank delivered strong growth and margins, pushed up by stable, record low delinquency levels. The number of customers rose 26% y-o-y to 1,051,000 by September end and the average receivable climbed 39%. The pilot credit card operation in Poland delivered positive results and the company made further progress in refining the credit tools relevant to the target customer segments. The Consumer Credit Division (CCD) continued to witness weak demand in H1 2013. In Q3 2013, trading results were lower than last year, but the cost savings implemented in July end and an improved collection performance in September limited the downfall. The company expects to generate cost savings of £10m in H2 2013 and £18m in 2014. The annualised revenue yield increased to 94.3% in September 2013 from 92.4% in June 2013 and the deterioration in the arrears profile caused the annualised ratio of impairment to revenue move up to 38.1% from 36.8%. The company made steady progress towards repositioning the division over next 18 months with a special focus on increasing returns in the core home credit business and broadening the customer and product proposition through investment in roll-out of online direct repayment lending. Provident plans a full-fledged roll out of the ’24/7′ prepaid reloadable MasterCard and an online customer portal by Q1 2014, while the smart phone collections app for agents has already been rolled out to 1,000 agents with roll-out across the agency force planned for 2014.

Our view: The strong growth and margins at Vanquis Bank has been the major driver for Provident Financial during the period. The number of customers and the average receivables jumped up significantly over the last year, outperforming the internal plans. The pilot project in Poland also marked good progress. The CCD division, which was hit by a weak market environment last year, has shown signs of recovery in the quarter, driven by the implementation of cost saving measures and the ongoing product and customer related initiatives. Going forward, the successful Poland pilot programme is expected to translate into a solid business plan, while the CCD division is likely to realise further benefits from the recently implemented cost savings and strong marketing initiatives for brand repositioning. We reiterate a Buy rating for the stock.

Important Risk Warnings and Disclaimers 

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