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HB Markets Breakfast Today including: ASOS, St. James Place, William Hill plus others
The markets
Market opening: Despite optimism in global markets, the FTSE could open flat as worries about the domestic economy and Greek debt talks persist. FTSE futures were trading 0.5 points lower at 7.00 am UK time.
New York: A number of US banks unexpectedly reported healthy earnings, propelling the S&P 500 0.5% higher at the close yesterday.
Asia: Spain’s successful bond sale, progress on talks in Greece, and upbeat earnings from US banks boosted investor confidence, thrusting the Nikkei to a two-month high, up 1.5% today. The Hang Seng was trading at +0.4% at 7.00 am UK time.
Continental Europe: Markets reacted positively as investors lapped up Spain’s debt offering, while France paid less to raise funds despite the ratings cut. The German DAX rose 1.0% and the French CAC 40 closed 2.0% higher.
UK small caps: The FTSE AIM All-Share index gained 1.6% yesterday.
Today's news
Chinese factory activity declines, pace slows
The HSBC manufacturing purchasing managers index (PMI) improved slightly to 48.8 in January from 48.7 in December, indicating a slowing pace of contraction. However, it remained firmly below the 50-mark, which demarcates expansion from contraction. Despite a slowing pace, factory activity shrank for the third consecutive month, suggesting the central bank’s pro-growth measures are likely to continue.
Talks progress on Greece
With a Friday noon deadline to finalise the deal to wipe off €100bn from Greece’s debt, the government and private creditors said talks on Thursday were ‘productive’. The deal is a prerequisite for Greece to draw on the €130bn rescue fund and avoid a default on €14.5 of bond repayments due in March. Sources said the option of offering a variable coupon that rises after being stable for the first ten years is being evaluated. The coupon offered was the main issue parties disagreed on.
Company News:
Pearson, publisher of Penguin Books and the Financial Times, raised guidance for FY11 in an update yesterday. Adjusted earnings per share for 2011 are now expected to be 10% higher y-o-y at 85.25p. Digital services and emerging markets are driving the earnings expansion. The company expects to generate revenue of £2bn from digital services and £0.6bn from emerging markets.
Our view: This is the third time in the past seven months that Pearson has raised profit guidance. The company is growing rapidly in digital learning; education contributes 60% to total revenue and earnings. We believe the company's strategy of pursuing growth in emerging markets such as India and Brazil is helping the company offset the lacklustre publishing business in developed markets. As a part of its efforts to withdraw from the financial data-provision market, the company sold a 61% stake in Interactive Data Corp followed by the sale of its 50% stake in FTSE International. These disposals have left the company with headroom to make bolt-on acquisitions to pursue its growth strategies without over leveraging. We recommend a BUY.
AB Foods (LON:ABF)
AB Foods, owner of food brands including Twinings and retailer Primark, saw revenue grow 12% y-o-y during the first 16 weeks of its accounting year. A 21% sales growth from its Sugar division coupled with 16% expansion in Primark sales drove group revenue higher. The Agriculture division's sales grew 22% y-o-y. Among the divisions that lagged were Groceries (4% sales growth y-o-y) and Ingredients (2%).
Our view: Notwithstanding the double-digit growth in group sales, there remain parts of the business that are seeing compression of margins due to rising competition (in the bread-making business), "difficult" trading conditions (Australian division-George Weston Foods) and higher raw material costs (Primark). Furthermore the economic uncertainty in the Eurozone coupled with strained consumer purse-strings are overhangs on the entire sector. While the good level of diversification allows the company a certain balance, we do not think this is the best time to enter the stock. We keep our Hold recommendation unchanged.
SABMiller (LON:SAB)
Beverages company SABMiller released a trading update for Q3 2011 ended 31st December 2011. The company sold 3% more lager in the period than in the previous year; soft drink volumes increased 6% y-o-y. Organic volumes were up 7% y-o-y. Revenue per hectolitre increased 3% y-o-y, boosted by an increase in prices and better product mix. Performance in all geographies, except Europe, was in line with expectations, the management said. Volumes grew by 7% in the Asia Pacific region; by 11% in Africa and by 8% in Latin America. Volumes in Europe were down 2% as competition intensified and economic conditions remained weak. The company completed the acquisition of Fosters' for US$10.5bn.
Our view: Growth in emerging markets is driving SABMiller's growth, but beer sales declined in most of the geographies. We believe that the company paid a premium to acquire Fosters' despite a downward trend in beer consumption. We would prefer to adopt a wait-and-watch approach with the stock, till clear signs of positive synergies from the acquisition emerge.
William Hill announced a trading update for Q4 2011 and FY 2011 ended 27th December 2011 yesterday. Over-the-counter bets increased by 11% y-o-y in Q4 2011, but the gross margin declined 2% to 17%. Machine gross wins increased 7% y-o-y and gross wins per machine per week was £924. Online revenues also grew in the quarter. Annual revenues are estimated to have increased 6% y-o-y, and operating profits are expected to be about £274m, meeting expectations. Operating profits in 2010 were £276.8m, boosted by the Football World Cup 2010. Annual online revenue increased about 28%.
Our view: The market has already priced in the company's positive performance, as evident from the 19% rise in the share price over the last year. With limited further upside potential, we maintain a Hold recommendation.
Kesa (LON:KESA)
Electricals retailer Kesa issued a trading statement yesterday for Q3 2012 ended 8th January 2012. Total sales increased 1.1% y-o-y but declined 1.3% on a like-for-like basis. Online sales increased 18% y-o-y. The gross margin was 90 basis points lower than Q3 2011. Kesa said it would have to take £10-15m of additional charges to sell Comet to OpCapita after Comet's debt threshold overshot the limit earlier agreed with OpCapita. Poor trading conditions during the holiday season caused Comet's debt woes, Kesa said. The deal is expected to be completed in early February.
Our view: Comet's sale is proving to be unexpectedly thorny for Kesa. After taking over Comet's £50m debt, Kesa will now need to take a further charge to dispose of the UK chain, further impacting its balance sheet. We see Kesa having limited growth potential in the near future and reiterate a SELL.
Online retailer ASOS issued a trading statement for Q3 2012 ended 31st December 2011 yesterday. Retail sales increased 46% y-o-y. Sales in the UK increased 10% y-o-y and international sales increased 93%. Gross margins improved 300 basis points over Q3 2011. With expanding sales and improving margins, the management said that full-year performance should be in line with market expectations.
St. James Place (LON:STJ)
Wealth manager company St. James Place issued an update for the year ended 31st December 2011. Total business increased 10% y-o-y to £642.3m as new pensions business increased 20% y-o-y to £288.2. Net inflow to funds under management rose to £3.3bn from £3.0bn in 2010, and funds under management increased 6% to £28.5bn.
Economic News:
Eurozone current account
The Eurozone's current account deficit narrowed to €1.8bn in November from downwardly revised €6.6bn (€7.5bn previously) in October, Eurostat reported yesterday.
Our view: A persistent trade deficit in the Eurozone, which has historically been an export-oriented economy, suggests capital moving out of the region and could have a debilitating effect on the already weak euro.
US inflation
Consumer prices in the US were flat in December, mirroring the trend seen in November. Economists had expected to see prices edge up 0.1% y-o-y during December. Falling fuel prices were offset by higher food prices. Core CPI, which excludes food and energy, rose 0.1% in-line with expectations. For the full year consumer prices rose 2.2% y-o-y.
Our view: Inflation remaining flat while core CPI is relatively could leave scope for another round of quantitative easing. A bold move by the Fed would then provide a big fillip to business and market confidence.
US housing
Housing starts in the US dropped 4.1% to an annual rate of 657,000 in December, as per data released by the US Commerce Department. Meanwhile, growth in building permits remained flat during the month.
Our view: The dismal housing starts data indicates that the housing industry has still not recovered after its collapse helped spark the recession four years ago. 2011 is expected to have been the worst year ever for single-family home construction. Building permits are a proxy for future construction activity and the flatness seen in December paints a sorry picture. The glut of houses still available on the market has kept prices low and is preventing builders from pushing construction activity higher. In spite of the slow but steady recovery in other sectors, the US housing industry still has some way to go.
US Philadelphia Fed survey
This general business activity index, published by the Philadelphia Federal Reserve, increased to 7.3 points in January. The labour market improved; the index for employment rose slightly to 11.6, from 11.5 in December; and the work week index jumped to 5.0 in January from 2.8 in December. The index for new orders declined to 6.9 in January from 10.7 in the previous month and the index of shipments fell to 5.7 from 9.1, but both indices remained positive. The index for future activity increased to 49 in January from a revised 40 in December.
Our view: Though the pace of expansion in the Philadelphia region was moderate, the future business outlook reached the highest reading in ten months and the employment situation is also improving. This confirms our view that the US economy is gaining momentum.
