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HB Markets Breakfast Today including: Greggs, SuperGroup, Yule Catto plus others
The markets
Market opening: FTSE futures (+26 points) at 7.00 am UK time indicate the market could open higher today. Investors will be keeping an eye out for the Spanish bond auction, Italian Treasury bill auction and more Christmas trading updates from retailers, including Tesco.
New York: Hopes of healthier corporate earnings due to positive domestic economic data were offset by worries about the Euro crisis. Consequently, the S&P 500 closed flat (+0.03%).
Asia: Investors eyeing results of the Spanish bond auction saw a subdued trading day today. The Nikkei closed lower (-0.7%), while the Hang Seng was trading at -0.1% at 7.00 am UK time.
Continental Europe: Eurozone worries lingered, preventing European markets from extending Tuesday’s rally. The German DAX and French CAC 40 each closed 0.2% lower yesterday.
UK small caps: The FTSE AIM All-Share index closed flat (0.1%) yesterday.
Today's news
Tamed inflation raises hopes of monetary easing in China
China's inflation rate slowed to 4.1% in December, raising hopes of a pro-growth shift in monetary policy. China's GDP growth is likely to slow sharply to 7.5% in Q1 2012 as exports shrink in the backdrop of the global economic slowdown.
Greece's deal with private bondholders souring
Greece's failure to reach a deal on the voluntary write down of its debt with private creditors may require Eurozone nations to increase their contribution to its bailout fund. Reuters quoted IMF sources saying the Fund is reluctant to increase its contribution to Athens's aid package. Extension of funds to Greece will be a politically uphill task for governments in stronger Eurozone countries.
Fitch wants ECB to do more
David Riley, the head of sovereign ratings for Fitch, said the European Central Bank should support Italy's bond auction more actively and lend directly to the European Financial Stability Fund (EFSF) so that it does not have to borrow from the markets.
Company News:
J Sainsbury (SBRY LN, 302.1p) - Hold
J Sainsbury, the retailer, reported an increase in like-for-like sales (ex-VAT) of 2.1%, while total sales (ex-VAT) grew 4.5% in Q3 2011 (to 7th January 2012). Customers responded well to the store's discounting and promotional activities; transactions in the week to Christmas increased by 1.5m to reach 26m. Online grocery sales increased 20%. Sales of general merchandise and clothing increased more than the food sales. The retailer added almost 600,000 sq. ft of new space in the quarter. Management remained cautious about trading in 2012 and expected consumers to further rein in their budgets post-Christmas, while hoping that events such as the Queen's Diamond Jubilee and the London Olympics and Paralympic Games, in the later part of the year, will boost growth.
Our view: Sainsbury's sales came in ahead of analysts' expectations, and helped the grocer to improve its market share (according to a report by Kantar).However, its operations are UK-focused and lack geographic diversification. We prefer Tesco for its wider geographic spread, and maintain a Hold recommendation on Sainsbury.
Recruitment firm Michael Page released a trading update for Q4 2011 and FY 2011 to 31st December 2011 yesterday. Gross profit for the year increased 25.2% y-o-y to £553.7m (2010: 25.7% y-o-y increase to £442.2m) and pre-tax profit increased some 18% y-o-y to aaround £85m. The year-end cash balance stood at £60m (2010: £80.5m). Gross profit in Q4 2011 rose 13.4% to £135.9m. The ratio of permanent to temporary recruitment was steady at 78:22. Geographically, gross profit from the EMEA region, 45% of the group total, increased 15.3% y-o-y to £60.9m in Q4 2011 and 26.9% to £239.5m for the full year (2010:15.3% increase to £188.7m). Trading in UK remained challenging, as the company cut headcount.
Our view: The growth in full-year pre-tax profits was below the consensus estimate of £88.4m, and near the lower end of expectations. The recruitment business could continue to face a hostile economic climate for some time. Given the lack of visibility for job creation in many key markets, we are neutral on the stock.
Yule Catto, producer of specialty chemicals, said results for FY 2011 will be in line with analysts' expectations. Management noted that demand for chemicals waned in Q4 2011, and consequently, the rate of decline in volumes accelerated to the mid-teens. The acquisition of German rival PolymerLatex is expected to contribute £14m more to 2012 profits.
Our view: Management said that the decline in volumes will be offset by cost control measures and should have little impact on margins. The acquisition of PolymerLatex has strengthened the group's position in Europe and Malaysia and has helped scale up Yule Catto's latex business. We are buyers of the stock, which is currently trading at a forward P/E of 7.8x compared to the average for its peer group of 11.5x.
Supergroup (LON:SGP)
Clothing company Surpergroup reported Christmas trading figures for the nine weeks ended 1st January 2012 yesterday. Sales increased 22% y-o-y to £79m. Retail sales increased 28% y-o-y to £66m and wholesale sales declined 4% y-o-y to £13m. Like-for-like sales increased 5.8% in the period and 9.3% in December. Management said the positive sales figures indicate that the decision to not join in any price war has paid off.
Baker Greggs released a trading update for the five week period ended 7th January 2012 and the year ended 31st December 2011. Sales increased 10.8% in the Christmas trading season; like-for-like sales increased 5.1%. In 2011, total sales increased 5.8% and like-for-like sales increased 1.4%. Management expects full year results to be in line with expectations. Like other retailers, the company expects trading conditions to be challenging in 2012, despite the opening of 90 new shops.
N Brown (LON:BWNG)
N Brown, the owner of internet and catalogue home shopping retailer JD Williams, released an interim statement for the 19-week period to 7th January 2012. Group sales increased 2.3% y-o-y and like-for-like sales increased 2.0% y-o-y. Online sales, which now contribute 50% of revenue, increased 9% y-o-y. Price discounts offered during the holiday season are expected to lower annual gross margins by almost 1% compared to 2010. However, management was confident of meeting full-year expectations for the year ending 3rd March 2012.
Economic News:
UK trade balance
In November, exports from the UK fell 1.5% m-o-m and imports increased 1.1% m-o-m, causing the trade deficit to widen to £8.6bn, the Office for National Statistics said yesterday. The trade deficit in October had narrowed to £7.9bn.
Our view: The trade deficit increased more than the expected £8.4bn as exports to non-European countries plunged. The decline in exports is a serious blow to the government's expectations of replacing sluggish domestic growth with higher exports growth.
Eurozone GDP
The final estimate of Q3 2011 GDP growth in the Eurozone was unexpectedly revised downwards to 0.1% y-o-y, from the preliminary estimate of 0.2% y-o-y by Eurostat. GDP grew at 0.8% y-o-y in Q2 2011.
Our view: A downward revision for France's Q3 2011 GDP growth to 0.3% from 0.4% had a major impact on cumulative GDP of the single currency region. The Eurozone is among the worst-performing economies in the developed world; during the same period, the US grew 0.5% and Japan's economy expanded by 1.5%.
German GDP
Germany's economy shrank 0.25% in Q4 2011, Destatis reported yesterday. The growth for 2011 was estimated at 3.0% compared to 3.7% in 2010. Growth in H1 2011 propelled overall growth for the year. Private consumption grew 1.5% in 2011, increasing from 0.6%in 2010. Growth in exports, which grew 13.7% in 2010, slowed to 8.2% in 2011.
US MBA mortgage applications
The Mortgage Bankers Association (MBA) said mortgage applications increased 4.5% w-o-w in the week ended 6th January despite the rising interest rate. Fixed 30-year mortgage rates increased 0.4 basis points to 4.11%. Applications for refinancing and new purchases increased 3.3% and 8.1% respectively. Applications for refinancing dropped to 80.8% of total applications from 81.9% the previous week, indicating an improvement in the housing market and household incomes.
