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HB Markets Breakfast Today including: Ryanair, International Airlines Group, Costain and ARM Holdings
The markets
Market opening: The futures market suggests a flat opening for European indices, including the FTSE-100, as the Eurozone debt crisis continues to play on the minds of investors.
New York: The S&P 500 gained 0.3% yesterday, as strong private sector employment data failed to lift the mood after worries about European debt resurfaced.
Asia: Traders ignored last night's positive data from the US, focusing instead on Europe's troubles with the euro remaining weak on fresh fears over Spain and Italy. The Nikkei shed 1.2%, while the Hang Seng was trading at -1.3% at 7.00 am UK time.
Continental Europe: European indices closed lower yesterday as focus once again shifted to the continent's debt woes and the vulnerability of its banking system. The German DAX closed 0.2% lower, while France's CAC 40 shed 1.4%.
UK small caps: The FTSE AIM All-Share closed 0.5% higher yesterday.
Today's news
Euro's depreciation against the dollar not worrying - Knot
European Central Bank Governing Council Member Klaas Knot said that the Euro's decline against the dollar was not extraordinary and was in line with the historical trend of movement between the two currencies. He also cautioned against expelling a member from the Eurozone, saying this would lead to the collapse of the single currency region.
Debt swap deal with private creditors by mid-January
A source in the Greek Finance Ministry has said that a deal with private holders of Greek debt could be completed by mid- January. This would enable Greece to draw a part of the second €130bn bailout package and avoid defaulting on €14.5bn in debt repayments due in March.
Company News:
IAG (LON:IAG)
IAG, the parent company of British Airways and Iberia (Spain), released traffic statistics for the month of December yesterday. Revenue per passenger kilometre increased by 12.2% y-o-y and capacity measured in available seat kilometres increased 11.5%. The airline's premium and non-premium traffic increased by 13.6% and 12.0% respectively. Iberia's pilot union called a strike on 18th and 29th December, limiting operations to 68% and 64% of normal capacity on the two days. The management said the increasing pressure due to the UK Air Passenger Duty will reduce job- creation at British Airways to 400 instead of the previously estimated 800.
Our view: Growth is flattered by weaker prior-year numbers, due to the severe weather in December 2010. The company has been plagued by strikes at Iberia. On 22nd December, IAG beat Virgin Atlantic to win an agreement to acquire BMI from Lufthansa for £172.5m. The deal is under regulatory review and if cleared could help British Airways introduce services to the lucrative emerging markets. Given the negative economic impact on the aviation sector, we are nevertheless cautious on the shares.
Low-cost carrier Ryanair reported traffic statistics for the month of December yesterday. Number of passengers carried dropped 5% y-o-y to 4.8m from 5m in December 2010. In the twelve months ended 31st December 2011, the airline carried 76.4m passengers. The plane load factor, which measures seat utilisation, was 79% in December and 82% for the full year.
Our view: The drop in number of passengers is not a surprise considering the airline grounded 80 aircrafts on unprofitable routes against a backdrop of rising fuel prices. Being a low-cost carrier, the airline is expected to perform better than its peers in the current economic conditions where consumer spending is constrained. We like the stock on a medium-term view.
Chip designer ARM Holdings led technology stocks higher yesterday; gaining 2.6% in yesterday's trading session. The rally followed a short-term buy recommendation from one major European investment bank, which believes the company's Q4 2011 earnings will exceed analysts' expectations.
Our view: Our own recommendation on this stock was published on 5th December ("High-quality growth stocks") at a significantly lower price. For those who missed out, we think there's plenty more to aim for: our target is 685p.
Construction contractor, Costain, released a trading update for the year ended 31st December 2011 yesterday. The company's forward order book stood at £2.5bn, slightly ahead of the order book at the beginning of FY2011. Of the current work secured, £650m would be recognised in 2012 while revenues of £1.8bn have been locked for 2013 and beyond. Costain has more than £100m cash at bank and its credit facility was recently extended by £30m to £465m with a maturity expansion to September 2015. New contracts won during the year included London Bridge Station redevelopment for Network Rail, Crossrail Paddington Station and advanced works at Crossrail Bond Street and the A465 Heads of the Valleys road for the Welsh Government.
Economic News:
UK services PMI
The Markit/CIPS Services Purchasing Managers' Index increased to a five-month high of 54.0 in December following a reading of 52.1 in November. New business and business activity both rose by the most since July. Expectations, however, declined to a two-and-a-half year low
Our view: : The index rose unexpectedly, defying expectations of a fall to 51.5. The services sector contributes about 70% to GDP, and December's expansion in activity raises expectations for the economy. Perhaps we may avoid a recession after all.
Eurozone industrial new orders
Industrial new orders in the Eurozone increased by 1.8% m-o-m in October following a revised 7.8% decline in September (6.4% previously), Eurostat reported yesterday. In the European Union, comprising 27 countries, new orders increased 0.5% m-o-m in October after shrinking 2.1% in September. Orders for intermediate goods, non-durable goods and durable consumer goods declined 0.2%, 0.5% and 2.3% in the Eurozone respectively. Orders for capital goods, however, increased 1.6% in the Eurozone and by 1.4% in the wider EU.
Our view: : The increase in industrial new orders was softer than the 2.5% expected. The declining orders for intermediate goods, non-durable goods and durable consumer goods signal a weakening Eurozone economy in Q4 2011.
German retail sales
Retail sales in Germany declined by 0.9% m-o-m in November, the second consecutive monthly fall, after decreasing 0.2% in October, Destatis data showed. Compared to a year earlier, retail sales declined 0.8% in November. According to the statistical agency's preliminary estimates, retail sales grew between 1.1-1.3% in 2011 for the year as a whole.
Our view: The fall in retail sales came in spite of gains in employment and industrial activity, which leads us to believe that the decline originates in the contagion effect on consumer confidence due to the Euro debt crisis rather than a genuine weakening in the domestic demand.
US ISM Non-manufacturing survey
The Institute of Supply Management (ISM)'s Services Purchasing Managers' Index (PMI) rose to 52.6 in December, up 0.6 points from the 52.0 reading in November. The new orders component of the index improved to 53.2 in December from 53.0 in November. The employment Index increased 0.5 points in December to 49.4. The pace of price increase slowed, as indicated by the decline in the Price index to 61.2 points in December from 62.5 in November.
Our view: Though a figure above the neutral 50 mark indicates that the services sector expanded in December, the increase was lesser than the 53.0 expected by economists. The weak showing in the services sector is particularly surprising, considering the recent slew of positive US economic data.
US ADP employment survey
The ADP Employment data released yesterday showed that the US private sector added 325,000 jobs in December. Jobs created in November were revised downwards to 204,000 from 206,000 previously reported.
Our view: The improvement in the US labour market was significantly above economists' expectations of 178,000 job additions. The unexpected increase sets a positive tone for non-farm payrolls due to be released today and suggests that the decline in unemployment rate in November could continue in December. The increase in employment level is also expected to boost consumer spending (70% of the US GDP) and spur economic growth.
