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HB Markets Breakfast Today including: Carphone Warehouse, Playtech Limited, Sage Group plus others
The markets
Market opening: Shrugging off the disappointment from stalled Greece debt negotiations, markets look set to open higher, as the focus shifts to the US FOMC meeting today. The FTSE futures were trading 22 points higher at 7.00 am UK time.
New York: Despite Apple's stellar earnings, IMF's downward revision to the World Economic Outlook (WEO) dampened investor sentiment. The S&P 500 closed 0.1% lower yesterday.
Asia: Stabilisation in European money markets and Apple's strong earnings shifted focus to the US. The Nikkei hit a three-month high closing 1.1% up. The Hang Seng is closed today.
Continental Europe: Banking stocks plunged as Greek debt restructuring talks returned to the negotiation table. Germany's DAX closed 0.3% lower, while France's CAC 40 contracted 0.5%.
UK small caps: The FTSE AIM All-Share index closed 0.7% lower yesterday.
Today's news
Eurozone crisis weighing on global growth – IMF
The International Monetary Fund (IMF) revised down its global GDP growth forecast for 2012 to 3.3% (from 4% previously). It also warned that global economic growth could decelerate to 1.3% if the Eurozone crisis is not contained. The Fund said that quick and decisive actions, and a stronger firewall, were needed to counter the debt crisis. The Eurozone could contract 0.5% in 2012, it said. Growth in emerging markets could slow down to 5.4% in 2012 (versus an earlier estimate of 6.1%).
Japan sees a trade deficit for the first time in 30 years
Japan registered an annual trade deficit of US$32bn for the first time in 30 years, as the earthquake in March raised fuel costs and a strong yen impacted exporters. The deficit also highlights structural problems arising from an eroding competitive edge and a rapidly ageing population. However, the current account remains in surplus as returns on huge investments abroad outweigh the deficit.
Company News:
Chemring (LON:CHG)
Chemring, the defence equipment maker, released its preliminary results for the year ended 31st October 2011 yesterday. Revenues increased 25% to £745.3m. Organic revenues were up 9%. Underlying profit before tax increased 6% to £125.6m. The order book as at year-end stood at £878.3m, up 9% y-o-y. Revenues earned from non-NATO countries increased 81% and now formed 29% of total revenue, up from 21% in the previous year. The management also proposed to buyback shares worth £50m.
Our view: As mounting government deficits in western countries choke military spending, we expect future growth to slow markedly, despite the increasing exposure to non-NATO markets. We are leaving our negative recommendation unchanged.
PZ Cussons, the consumer products maker, issued a profit warning while releasing the results for H2 2012 ended 30th November 2011 yesterday. The management said that full-year profits could be at the lower end of analysts' expectations, as trading condition in Nigeria worsened due to the 'economic and social tensions'. Pre-tax profits for the year declined 13.0% y-o-y to £40.2m despite a 10.5% y-o-y increase in revenue to £414.0m, as the increasing cost of raw materials and negative trading conditions in Australia weighed on margins. The interim dividend was increased 5% to 2.23p per share.
Our view: In December, management had noted that the increased cost of inputs, adverse currency movements and heavy promotional activities were hitting margins in H2 2012. The management has now added Nigeria's socio-economic condition to this list. Further, contracting consumer discretionary spending will present tougher trading conditions. We believe tier-1 peers are better placed to handle these risks and reiterate our SELL recommendation.
Commercial property company Land Securities released a trading update yesterday for Q3 2012 ended 31st December 2011. The company signed £7.1m in new letting agreements during the period, and the average rental value increased 0.5% from September 2011. The voids declined to 3.1% from 3.3% in Q2 2012. The average debt maturity period for the company increased to 11.2 years after it signed a new £1.05bn revolving credit line. Management noted that the demand for new commercial space increased. Separately, the company announced that its CEO, Mr. Francis Salway would step down on 31st March 2012 and Mr. Robert Noel, who currently heads the London business, would take over.
Our view: Despite increasing demand for the company's property, the broader commercial real estate market is facing a challenging economic environment, where decelerating job growth is pressurising demand for both office and retail spaces. Our Hold recommendation for the stock is unchanged.
Carphone Warehouse, which holds a 50% stake in Best Buy Europe (CPW Europe) and a 47% stake in Virgin Mobile France, released an interim statement for Q3 2012 ended 31st December 2011. Like-for-like sales at CPW Europe declined 4.7% due to lower demand in the pre-pay market, while total connections decreased 16.6%. Sale of tablets and smart-phones categorised as 'non-cellular revenue', increased 15%; this represents less than 10% of total revenues. Revenues at Virgin Mobile France grew 15.3% y-o-y to €109m in the period. The customer base reduced slightly to 2.0m. Management was confident of meeting full-year earnings expectations.
Our view: We believe that the markets have recognised the positives in the company's performance. The stock is currently trading at a 2012 P/E of 28x which fully reflects the strong growth in some areas. It is this high valuation that prompts us to issue a Hold recommendation for the stock.
Sage (LON:SGE)
Sage, the software developer for small- and medium-sized businesses, released an interim statement for the period from 1st October to 24th January yesterday. The management said that trading has been in line with expectations. The company sold Sage Healthcare LLC to Vista Equity Partners for £200m. The cash is being used to buy back shares, and up to the present date, shares worth £50m have been bought back, the management advised. The net cash position as at 31st December 2011 was £149.8m compared to a net debt of £24.9m on 30th September 2011.
Our view: Growth in North America, South Africa, Australia, India and China could help offset any possible contraction in the UK and mainland Europe. We also like the company's revenue model, which consists mostly of dependable and recurring subscription revenues. The company has historically enjoyed high renewal rates, granting high visibility to future revenue growth. The cash-rich balance sheet is now an added sweetener. We maintain a BUY recommendation.
Playtech (LON:PTEC)
Playtech, the AIM-listed online gaming software provider, released a trading update for Q4 2011 and full-year ended 31st December 2011 yesterday. Total revenues increased 13% q-o-q and 89% y-o-y to €69.6m in Q4 2011 following a 79% y-o-y improvement in gross income to €78.4m from €43.9m in Q4 2010. During FY 2011, revenues increased 46% to €207.5m from €142.3m in FY 2010, while gross income increased 41% to €243.6m from €173.1m in FY 2010. The company announced the acquisition of a 49.9% stake in Gauselmann, a land-based gaming operator in Germany. The company also tool over Geneity, which will help it leverage the target's high quality sportsbook capabilities. In anticipation of revisions to South Africa's online gaming regulations, the company entered a 50:50 joint venture with Peermont, a casino and resort operator based in South Africa.
Economic News:
UK public sector net borrowings
Public sector borrowings in the UK fell £2.2bn y-o-y to £13.7bn in December, the Office for National Statistics reported yesterday. Borrowing totalled £17.9bn in November. Despite the fall in net borrowing, the UK's net debt crossed the £1trln mark, rising to £1003.9bn, or 64.2% of GDP.
Our view: In December, Britain’s public borrowings grew by less than the £14.9bn increase expected, as government spending declined and tax receipts increased. If the current pace of borrowings continues, the country’s finances are expected to be in a much better shape by March, when the fiscal year ends and the government could meet its revised target of capping borrowings at £127bn for FY2011-12.
Eurozone PMI
The preliminary Markit Eurozone purchasing managers index (PMI) unexpectedly increased to 50.4 in January from 48.3 in December. The Services PMI increased to 50.5 from 48.8 in December and the manufacturing PMI rose to 48.7 in January from 46.9 in December. The preliminary Markit German PMI climbed 2.7 points to 54.0 in January, the largest increase in seven months. The gauge of services activity in Germany increased to 54.5 in January from 52.4 in December. The measure for manufacturing activity crossed the 50-mark, indicating expansionary activity, to 50.9 in January from 48.4 in December.
Our view: Eurozone PMI rose to a five-month high, supported by expansion in activity in Germany and a modest increase business activity in France. The other regions of the Eurozone however, continued to witness a contraction in business activity, albeit at a slower pace. The Chief Economist at Markit said that the Eurozone seems to be stabilising in the first month of 2012 after contracting by about 0.5-0.6% in Q4 2011. An increase in business activity rekindles hope that the Eurozone may avoid an 'official' recession spurred, by growth of the services sector in two of its largest members – Germany and France.
Eurozone industrial new orders
Industrial orders in the Eurozone fell 1.3% m-o-m in November, following a rise of 1.5% m-o-m in October, Eurostat reported yesterday. New orders declined 2.7% y-o-y in the Eurozone. New orders for capital goods declined 2.1% m-o-m. However, orders for durable consumer goods increased 0.9% m-o-m. In Germany, new orders plunged 5.0% m-o-m in November.
Our view: The decline in new orders in the Eurozone, after rising briefly in October, suggests that demand in the Eurozone is pointing towards a contraction in Q4 2011. However, this data is substantially outweighed by the unexpected uptick in the PMI survey for January, indicating that the Eurozone economy could rebound in Q1 2012.
