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HB Markets Breakfast Today including: Burberry Group, Dixons Retail, Rio Tinto plus others
The markets
Market opening: FTSE futures (-14 points at 7.00 am UK time) indicate a lower opening for markets today as investors await the Portuguese debt auction.
New York: Better-than-expected Empire State manufacturing data lifted early trade, but dismal earnings from Citigroup caused the S&P 500 to give up gains and close 0.4% higher yesterday.
Asia: Investors appreciated positive economic data from Germany and the US, while eyeing Greece's talks with its creditors. The Nikkei ended 1.0% higher, while the Hang Seng was trading flat at 7.00 am UK time.
Continental Europe: Rising investor confidence in Germany and upbeat Chinese GDP data pushed the German DAX and French CAC 40 higher to close at 1.9% and 1.4%, respectively.
UK small caps: The FTSE AIM All-Share index advanced 0.3% yesterday.
Today's news
World Bank lowers global growth forecast
The World Bank sharply lowered the forecast for global economic growth to 2.5% in 2012 and 3.1% in 2013 vis-à-vis June's estimate of 3.6% growth for each year. The Bank advised that growth in developing countries could slowdown to 5.4% in 2012 and 6.0% in 2013 (previously estimate: 6.2% in 2012 and 6.3% in 2013), and Europe could have entered a recession due to debt crisis.
Greece, creditors resume talks today
Prime Minister Lucas Papademos told the New York Times that he could impose a legislation forcing private debt holders to write down debt if Athens does not receive 100% participation from creditors to voluntarily write down US$130bn of its US$450bn debt.
Company News:
Burberry (LON:BRBY)
Luxury retailer Burberry said total underlying revenues increased 21% y-o-y to £574m in Q3 2011 ended 31st December 2011. Underlying retail revenues grew 23% y-o-y to £417m; comparable store sales increased 13%. Underlying wholesale revenues grew 15% y-o-y to £130m and underlying licensing revenues increased 12% y-o-y to £27m. Management said that while they remained 'mindful' of the challenging market conditions, they will press forward with the plan to expand retail floor space by 13-14% in H2 2012.
Our view: Management noted that demand from Chinese consumers traveling in Europe has helped offset the weakness in local demand. We expect a pause in revisions over coming months, and after a 14% rally in the stock since mid-December, we are now downgrading our recommendation to a Hold.
Miner Rio Tinto released a Q4 2011 production update for the period ended 31st December 2011 yesterday. Attributable iron ore production increased by 2% y-o-y to 51m tonnes in Q4 2011 and by 4% y-o-y to 192m tonnes in FY 2011. Hard coking coal output increased 5% q-o-q and 16% y-o-y in Q4 2011, aided by soft comparables as Q4 2010 output was impacted by severe weather conditions. Copper production was in slightly lower than guidance at 519,700 tonnes down 23% y-o-y.
Our view: With expansion of operations in Australia's Pilbara region on track, the company will be able to increase capacity to 283 million tons per annum by 2013. Robust industrial production in the US, UK and China indicate that the demand for Rio's main products - iron ore and coal - will remain strong. We are optimistic about the company's growth potential and are buyers of the stock at the current level.
Dixons (LON:DXNS)
Dixons, the consumer electronics retailer, issued a trading update for the 12 weeks to 7th January 2012 yesterday. Totals sales declined 3% on an underlying basis and like-for-like sales decreased 5%. Gross margins remained stable y-o-y. Online sales increased 20% y-o-y and now contribute 19% of company's sales. Sales declined in all major areas except Northern Europe, where they increased 8% and comparable sales (like-for-like) increased 3%. Trading in Greece and Italy was impacted by the economic conditions in each case. Management's outlook for 2012 remained cautious, as consumer confidence in the company's markets remains weak.
Our view: Dixons has been able to maintain gross margins despite the heavy discounting, indicating a successful implementation of cost cutting programmes. However, we do not see a recovery in consumer demand in the near future and are very selective about investing in the retail sector. We have a Hold recommendation for the stock.
Taylor Wimpey (LON:TW)
Homebuilder Taylor Wimpey issued a trading update for the year ended 31st December 2011. H2 2011 operating profit is expected to grow 80% y-o-y (H2 2010: £49.1m). Consequently, full year operating profit is estimated to grow about 75% (FY 2010: £88.3m). Operating margin is expected to be better than both H1 2012 margin (+9.3%) and FY 2010 margin (+6.4%). The company completed 10,180 homes during the year, up 2% y-o-y. Proportion of affordable housing increased to 20% from 18% in 2010. The average selling price increased marginally to £185,000 from £184,000 in 2010. End of the year order book stood at £835m (FY 2010: £715m) and the company's land bank was stable at 6.4 years supply at the current completion levels.
Our view: The restructuring of the business by disposing of the company's American operations and use of land acquired at a discount has helped the company to improve its operating profit and margin. However, the economic environment the company's operating territories (the UK and Spain) continue to be characterised by falling housing prices, declining consumer incomes, and growing unemployment. Further, the stock is fairly priced with 2012 P/E of 13.1x compared to average peers' P/E of 13.3x. Considering these factors and our guarded approach to the housing sector we issue a Hold recommendation for the stock.
Experian (LON:EXPN)
Information services company Experian issued a trading update for Q3 2012 ended 31st December 2011 yesterday. Revenues increased 12% y-o-y; organic revenues increased 7% y-o-y. Organic revenue grew 15% at the Credit Services division; 3% at Decision Analytics; 7% at Marketing Services and declined 1% at Interactive. Geographically, North American revenues increased 3% (2% organically), revenues from Latin America increased 42% (27% organically), revenue growth in UK and Ireland was 10% (7% organic) and the EMEA/Asia Pacific region witnessed revenue growth of 19% (7% organic).
Pubs and restaurants owner Greene King released a trading update for the 37 weeks to 15th January 2012 yesterday. Better weather conditions boosted sales in the Christmas week; like-for-like (LFL) sales increase 17%. Trading at the company's three businesses improved. For the 7 weeks to 15th January, LFL sales at Greene King Retail increased 8.2%; the year to date (YTD)increase was 4.7%. LFL food sales grew 11.1% in the 7 week period contributing most to the increase in retail sales. YTD food sales increased 6.3%. At Pub Partners, average EBITDA per pub was up 5.9% in the eight weeks to 15th January resulting in a 3.4% growth YTD. At Brewing & Brands, the brewery division, own-brewed volumes increased 7.4% and YTD volumes grew by 2.9%.
Spread better IG Group released interim results for the period ended 30th November 2011. Net revenues increased 27.8% y-o-y to £195.5m. During the period, average revenue per client increased by 11% and the number of clients increased by 15%. The pre-tax profit increased 27.9% y-o-y to £103.2m and pre tax margin remained stable at 52.8% (H1 2011: 52.7%). Earnings per share increased 30.9%. The company declared an interim dividend of 5.75p, up 9.5% y-o-y. Management said the company benefited from the recent volatility in the markets which increased client activity.
Economic News:
UK Inflation
Inflation, measured by the consumer price index, decelerated to a 4.2% y-o-y increase in December following a 4.8% y-o-y rise in November, the Office for National Statistics said yesterday. Prices increased 0.4% m-o-m in December.
Our view: The easing of inflation was aided by ferocious discounting by retailers to attract holiday shoppers, and a drop in petrol prices. Both consumers and the Bank of England (BoE) will get some breathing space with the slowing of inflation. Prices are falling in line with the BoE's forecast. This raises expectations that the Bank will expand its asset purchase program in February.
Eurozone inflation
Inflation in the 17-member Eurozone eased to 2.7% y-o-y in December, revised downward from an earlier estimate of 2.8%, Eurostat said yesterday. The m-o-m rise in prices was 0.3%. In November, inflation increased 0.1% m-o-m and 3.0% y-o-y. Prices increased 3% y-o-y in the wider 27 member European Union (EU), retreating from the 3.4% rise in November.
Our view: Though inflation continues to be above the European Central Bank's (ECB's) targeted 2% level, the signs that it is declining boosts chances of an interest rate cut by the central bank.
US Empire State manufacturing survey
The Empire State index rose to 13.5 points in January, from a revised 8.2 points in December, the Federal Reserve Bank of New York announced yesterday. New orders increased to 13.7 points from 5.9 points in December and inventories expanded to 6.6 points from -3.5 points in December. The employment situation is improving as indicated by a rise in the index of number of employees to 12.09 from 2.33 in December and an increase in the average employee workweek index to 6.59 from -2.33. The outlook for the forward six months rose to 54.87 in January from 45.61 in December.
Our view: The index, one of the first indicators about the US manufacturing sector, outstripped expectation of a rise to 11.0. An increase in new orders and employment suggests that US manufacturing activity is stronger than the previous estimate. However, weakness in Europe would be one of the major risks for the sector.
EU25 car registrations
Car registrations in the 25 states of the European Union (excluding Cyprus and Malta) declined 6.4% y-o-y to 953,108 units in December, while full year registrations declined 1.7% to 13,111,209 in 2011, data released by the European Automobile Manufacturer's Association revealed yesterday. In December, car sales dropped the most in France (-17.7% y-o-y), followed by Italy, where car sales declined 15.3% y-o-y. Car sales in the UK declined 3.7% y-o-y in December and by 4.4% in 2011. The German car market remained vigorous, growing 6.1% y-o-y in December and 8.8% in 2011.
Germany ZEW Survey
The ZEW index, a gauge of investor confidence in Germany, rose to for the second consecutive month in January recording the highest increase since the survey began in 1991. The index of economic sentiment jumped 32.2 points to -21.6 in January from -53.8 in December. The measure of current economic conditions increased to 28.4 from 26.8 in December.
