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HB Markets Breakfast Today including: Halfords, Tesco, Booker Group plus others
The markets
Market opening: Spain’s untroubled bond auction indicating increased risk appetite could push markets higher today. FTSE futures trading 44 points up at 7.00 am UK time concur.
New York: Investors ignored disappointing retail data focussing on the positive debt auction by Spain and Italy instead, helping the S&P 500 close 0.2% higher.
Asia: Asian stocks followed US markets higher closing at one-month highs today. Euro debt fears receded after the successful bond auctions in Europe. The Nikkei closed 1.4% higher, while the Hang Seng was trading at 0.4% at 7.00 am UK time.
Continental Europe: The better than expected Spanish and Italian bond auctions also buoyed European markets. The German DAX rose 0.4% and French CAC 40 closed 0.2% higher yesterday.
UK small caps: The FTSE AIM All-Share index closed 0.7% higher yesterday.
Today's news
Impact of cheap 3-year loans positive - ECB
The European Central Bank (ECB) left interest rates unchanged while highlighting the positive impact of previous measures. The money from the ultra-cheap three-year loans it offered in December was impacting the economy by easing the credit crunch, the Bank added while concluding its monthly policy meeting.
Spanish, Italian debt offers successful
Spain successfully raised €10bn yesterday at rates 1% lower than a month ago. The yield on Italy’s one-year paper declined to about half of December’s levels. Today, Italy will again offer up to €4.75bn of debt, including three-year benchmark issues.
Silver lining to UK economy cloud - Osborne
UK's Finance Minister George Osborne said factors such as easing inflation, low interest levels and government's initiative to build fiscal discipline will help the economy in 2012.
Company News:
Tesco released a trading update for Christmas and New Year sales yesterday. Excluding value-added tax and fuel, Tesco's UK same-store sales declined 2.3% in the six weeks to 7th January 2012, despite a major price-cutting campaign. Group sales, however, rose by 5.2% including petrol and by 4.0% excluding petrol. Tesco stated that it would invest in its online business and price-cuts to win back sales and that the hypermarket segment will be scaled back. More importantly, Tesco also warned of that it now expects "minimal" profit growth in 2012-13 compared with its earlier forecast of around 10.0% profit growth.
Our view: While its UK difficulties affected its sales, international operations perform better. The US is still a problem region though. In the near term we believe that the company will face significant headwinds with falling consumer income and increasing competition. The mega-price discounting drive is also expected to eat into the company's margins, without much signs of volume compensation. We expect the stock to experience volatility in the near term and lower our rating to Hold, in anticipation of a better entry point.
Booker (LON:BOK)
Food wholesaler, Booker, released a Q3 2012 trading statement for the 16 weeks period to 30th December 2011. Total sales increased 7.0% y-o-y and like-for-like sales increased 6.5%. Sales including tobacco rose 6.5% y-o-y while like-for-like sales increased 5.8%. Sales were buoyed by a 17% increase in sale of fresh fruits and vegetables. Management said the group's performance remained in line with expectations.
Our view: The company's product line of essential foodstuff will be among last items to feel the pinch of the consumers' tight budgets. Further, the company is expanding aggressively in the fast growing Indian market. However, we believe that the market has priced in these positives and issue a Hold recommendation
FirstGroup (LON:FPG)
Transport company FirstGroup issued a interim statement for Q3 2012 ended 31st December 2011. Management said trading has been in line with expectations. The company will generate between £100m to £115m in cash during the year as it failed to complete its asset disposal program due to lack of adequate value recognition. Like-for-like passenger revenue at UK Rail operations increased by 8%, while that at UK Bus increased 1.8%. Operations in the US continued to expand with like-for-like Greyhound sales increasing 5.9%; First Transit and First Student performance was also in line with expectations during the period
Our view: Management said the economic conditions present a challenging trading environment. The company's UK operations are concentrated in the northern part of the country. This area has been particularly hit by rising unemployment. A revival in the US markets could compensate for the lack of growth in the UK but we do see the company offering near term growth and put investment decisions in the company on Hold.
Asset management firm, Ashmore released a trading update for the Q2 2012 ended 31st December 2011. Assets under management (AUM) increased 2.5% to US$60.4bn due to a positive investment performance of US$1.1bn and net cash inflows of US$0.5bn. Performance fees in H1 2012 are expected to be about £23m.
Our view: The Group's exposure to the emerging markets provides growth opportunities. We see Ashmore offer tangible growth in the long term and reiterate our BUY recommendation.
SIG (LON:SHI)
Building products group SIG issued a trading update for the year ended 31st December 2011. Revenue from continuing operations increased 8.0% y-o-y to around £2.7bn. In Europe, which accounts for 56% of sales, revenues grew by 11%, with France particularly strong, up 14%. In the UK & Ireland, which accounts for around 44% of group's sales, revenues were up around 3.5%. SIG expects its 2011 gross margin to be maintained at a similar level compared to 2010. Group's net debt stood at £120m, compared to £163m at 30th June 2011 driven by tight management of working capital.
Barratt (LON:BDEV)
Home builder Barratt released a trading update for the half year ended 31st December 2011. Revenues increased 8% y-o-y to £950m with total completions of 5,198 units in H1 FY2012. The average price increased 3.0% y-o-y to £181,000 as the company built more single-family houses than apartments. Barratt expects operating profit of around £61m in the H1 FY2012, a 40.0% y-o-y (H1 2011:£43.5m). The increase in the revenue allowed the group to reduce its debt to £550m by the end of the year, which is below its previous guidance.
Automotive and leisure products retailer, Halfords issued an interim statement on its trading performance for the 13 and 39 week periods to 30th December 2011. Total revenue for the group fell 2.1% y-o-y in the 13 weeks to 30th December, compared to a 1.1% y-o-y drop in the 39 weeks to the same date. Sales of car maintenance products declined 12.8% and 7.0% y-o-y respectively during the same period, mainly affected by milder weather. Looking ahead, Halfords expects its UK retail gross margin to decline by 130-150 basis points, in line with market expectations. Halfords also bought back 16.9m of its own shares between 7th April 2011 and 30th December 2011 for a total consideration of around £58.5m.
IT services provider, Computacenter released a trading update for the year ended 31st December 2011 yesterday. Total group revenue increased 7%, driven by strong growth in Germany, which offset a challenging year in the UK. Net cash excluding customer-specific financing (CSF) stood at £132.8m at the end of 2011, as compared to £139.4m in 2010. Including CSF, net cash was £111.5m and £111.0m in 2011 and 2010 respectively. The Group contract base rose by 6%, to stand at an annual value of around £565m by the end of 2011. The Company stated that it expects a double digit adjusted earnings per share growth and adjusted profit before tax for FY2011.
Home Retail (LON:HOME)
UK based home and general merchandise retailer, Home Retail Group issued an interim statement for the 18 weeks starting 28th August 2011 to 31st December 2011. Home Retail reported that sales at its Argos store chain's sales declined 7.8% to £1.72b, while sales at the Home base store chain stood at £475m, a decline of 2.5% during the same period. The fall in Argos sales was driven by weakness in the consumer electronics market, particularly in video gaming and audio, partly offset by strong demand for laptops and tablets. Despite the decline in sales, it expects its full year pre-tax profits to be in the range of £78m-125m. The company anticipates a significant cut in its full year dividend.
Economic News:
UK monetary policy
The Bank of England (BoE)'s Monetary Policy Committee (MPC) has left the monetary policy unchanged at its meeting yesterday, with the key lending rate at 0.5% and the asset purchase programme at £275bn. In a brief statement, the MPC added that the asset purchase programme is under review.
Our view: : The MPC decision was largely expected, following December's PMI numbers that indicated the pace of contraction in the economy has slowed, and the economy may manage to escape with stagnation, rather than a contraction. The MPC extended the asset purchase programme by £75bn in October, which is expected to be completed in February. There is widespread expectation that the programme will be extended further in the next BoE meeting in February.
UK industrial production
Industrial production in the UK shrank 0.5% m-o-m and 3.1% y-o-y in November, the Office of National Statistics (ONS) reported yesterday. The data for October were revised downwards to show a 1.0% m-o-m (0.7% previously) and 2.1% y-o-y (1.7% previously) drop in industrial production. The second consecutive contraction in industrial production came as manufacturing output fell 0.2% m-o-m and 0.6% y-o-y.
Our view: Both monthly and annual data were considerably worse than expected. Manufacturers have been hit by waning domestic demand as consumers and the government tighten budgets, and by the euro debt crisis affecting demand in the Eurozone, UK's largest trading partner. Contraction of industrial production, which contributes about 15% of UK's economy, provides further indications that UK's economy was under considerable strain in Q4 2011.
German inflation
Inflation measured by the consumer price inflation rose 0.7% m-o-m and 2.1% y-o-y in December, Destatis said yesterday. In November, inflation was flat m-o-m and grew 2.4% y-o-y. However, the cost of living has been on an upward trend, rising 2.3% in 2011, 1.1% in 2010 and 0.4% in 2009.
Our view: Inflation in Germany is higher than the European Central Bank's (ECB's) preferred level of less than 2.0%. However, inflation in the Eurozone has shown signs of easing recently, which enabled the ECB to cut interest rates in each of the last two months.
US retail sales
Retail sales in the US rose 0.1% in December following an upwardly revised 0.4% (0.2% previously) in November, the US Department of Commerce estimated yesterday. Core retail sales, excluding volatile items like cars and petrol, declined 0.2%. Sales of electronic appliances fell 3.9% and that at department stores declined 0.2%. Decreasing petrol prices impacted collections (-1.6%) at petrol pumps.
Our view: Retail sales were expected to increase by 0.3%. The upward revision to November's numbers indicates that most of the shopping for the holiday season took place early as stores discounted heavily and remained open longer hours after Thanksgiving. The slowdown in retail sales and the contraction of core retail sales suggests that consumers have curtailed spending in the face of slow growth of real income.
US business inventories
Business inventories increased 0.3% in November after increasing 0.8% in October, the US Department of Commerce said yesterday. Inventories increased 8.5% y-o-y while the inventory to sales ratio was stable at 1.27, implying that at the current sales pace it will take 1.27 months to clear inventory. Total sales of business also increased 0.3% after rising 0.6% in October.
Our view: The rise in business inventories is slightly less than the 0.4% increase expected. Inventory numbers confirm the widely-expected faster pace of growth during the last quarter of 2011. However, this recovery remains shaky as evident in disappointing retail sales numbers.
