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HB Markets Breakfast Today including: WH Smith, Weir Group, BTC, Aegis plus others
The markets
Market opening: Markets are set to open higher on hopes of the BoE initiating further quantitative easing measures. The FTSE futures were trading 35 points up at 7.00 am UK time.
New York: Markets reversed early losses to end near the day's highs after the US FOMC said interest rates could remain low until at least 2014. The S&P 500 closed 0.9% higher yesterday.
Asia: Markets were mixed as news of the US Fed's pledge to cap interest rates until 2014 was offset by profit-taking. The Nikkei closed 0.4% lower. The Hang Seng, which re-opened after a 3-day break, was trading 1.5% up at 7.00 am UK time.
Continental Europe: Persistent fears over Greece's debt talks and a worse-than-expected earnings update from Ericsson kept sentiment subdued. The German DAX closed flat (+0.04%), while the French CAC 40 ended 0.3% lower.
UK small caps: The FTSE AIM All-Share index ended 0.1% lower yesterday.
Today's news
Greece expects to conclude debt negotiations this week
The Greek government expects to reach a deal with its private creditors by the end of this week, an official spokesperson said. Charles Dallara, head of the Institute of International Finance (IIF) representing private lenders, said that the talks will be informal in nature and aim at finalising the legal and technical aspects of the debt swap. The parties returned to the negotiating table after Eurozone finance ministers rejected the private debt-holders' demand for a 4% coupon rate on the swapped bonds.
BoE thinks more QE
According to the minutes of the BoE's 11-12th January meeting, the Bank of England (BoE) was considering the expansion of its asset purchase programme to help the UK's fragile economy face the increased risks from the global slowdown. We expect the Bank to announce the injection of at least another £50bn in February.
Company News:
Renishaw, the maker of electronic measurement instruments, released interim results yesterday for H1 2012 (to 31st December 2011). Revenues increased 11% y-o-y to £147.1m; however, pre-tax profits declined 11% to £31.2m as investments in staff and infrastructure increased and a slump in the electronics market reduced demand. Consequently, earnings per share declined to 34.7p from 39.0p in H1 2011. The interim dividend was unchanged from last year at 10.3p. Geographically, European sales grew 25% while North and South America grew 23%. Except for Japan, where revenues grew 12%, Asian revenues including China declined 17%. However, management offered an upbeat outlook for the remaining year as the investment in production systems increased and the electronics sector recovers. The restructuring of the healthcare business has also resulted in improved profitability, the management added.
Our view: The stock is currently trading at about 40% off its six month high. The company could see growth in earnings as the management anticipates a recovery in the electronics market and a rebound in demand in the automotive and civil engineering sectors. This leaves a healthy upside potential for the stock and prompts us to issue a BUY recommendation.
Bookseller and newsagent, WH Smith, released a trading update yesterday for 21 weeks ended 21st January 2011. Sales declined 3% y-o-y during the period and like-for-like (LFL) sales decreased 5%. Sales at the Travel business, which sells newspapers and magazines at airports and railway stations, rose 2% y-o-y, but were down 3% on a LFL basis At the High Street division, sales shrank 5% (down 6% LFL). Despite declining sales, tight cost controlling measures ensured that gross margins were in line with expectations, management said.
Our view: Declining sales as consumers cut spending is no surprise in the current economic environment. The key point, however, is that WH Smith may actually be increasing its profit despite these declining sales. The company has gradually shifted to selling higher-margin products at more profitable outlets at airports and railway stations, and away from the high street stores. International expansion in India and Australia will help the company offset a decline in sales in the UK. Astute and proactive management decisions have generated an increase in value to shareholders. We issue a BUY recommendation.
BTG (LON:BGC)
BTG, the healthcare firm, released an interim statement of activities between 1st October 2011 and 24th January 2012. The management said that revenues will be between £160m-£165m and in-line with expectations. Voraxaze, a drug that helps patients with impaired renal functions eliminate the toxic chemotherapy drug methotrexate, was granted approval by the US Food and Drug Authority on 17th January. The management anticipates peak sales to reach US$15m per annum. Results of the Phase III trails of Varisolve are expected in H1 2012. The company has set up a direct sales team to distribute LC Bead in the US, following the expiration of the distribution contract with AngioDynamics.
Our view: BTG's management reiterated that revenues will meet expectations. Though Voraxaze's approval is expected to add to the incremental revenues, we believe the current market price factors in this positive as indicated by the 9% rise in share price over the past six months. We issue a hold recommendation.
Aegis (LON:AGS)
Aegis, the media and digital communications company, announced that its Carat arm has won a US$3bn -a-year global advertising contract from General Motors. Carat was previously handling GM's European operations.
Our view: The deal will boost the company's image as a global player in the mass media industry and enable it to pitch to other major global giants. The win will also translate to higher earnings at Aegis. Given the positive impact of the deal on the company, we are revising our recommendation to Hold (previously Sell).
Weir (LON:WEIR)
Weir, the provider of engineering services to the minerals, oil and gas, and power sectors, announced the acquisition of Novatech LLC, a US-based manufacturer, for £113m in cash. Subject to regulatory approval, the acquisition will be finalised in February.
Our view: This is the second acquisition of a US-based company for Weir, following the take-over of Seaboard Holdings for £430m in September. The move will help the company expand its product portfolio and service offerings in the shale oil and gas market in the US. The share price has lost about 13% in the past six months, which we think is unjustified. With this further new opportunity for growth in the company, we reiterate our BUY recommendation.
Economic News:
UK GDP
The UK's economy contracted 0.2% q-o-q and increased 0.8% y-o-y in Q4 2011, according to the preliminary data released by the Office for National Statistics (ONS). For FY 2011, GDP rose 0.9% following an increase of 2.1% in FY 2010. The services sector, which contributes the most to GDP, was flat q-o-q, while construction activity fell 0.5% in Q4 2011 after rising 0.3% in Q3 2011. Industrial output shrank 1.2% due to a 0.9% drop in manufacturing activity and a 4.1% drop in utilities output.
Our view: A larger contraction than the 0.1% expected fuels fears of a recession in the UK. As the coalition's austerity drive continues, and with no end in sight for the Eurozone debt crisis, the economy is not expected to fare better in Q1 2012. Two consecutive quarters of contraction will mean an 'official' recession in the UK. Bank of England (BoE) governor Sir Mervyn King said that the economy's path to recovery would be 'arduous' and with inflation easing, the Bank had room for expansion of the £275bn asset purchase programme.
UK CBI business optimism
The index of factory orders improved to -16 in January from -23 in December, the Confederation of British Industry (CBI) said yesterday. The index of export orders increased to -26 from -32 in December. The measure of future expectations for output volumes jumped to 15 from -8 in December. Expectations for selling prices increased to 13 in January from 7 in the previous month.
Our view: The stemming of a decline in factory orders suggests that the manufacturing sector could recover a bit in Q1 2012. The increase in expectations for the future supports this view. A stronger-than-expected recovery in the US could have boosted confidence about the future. However, the uncertainty from the debt crisis in the Eurozone, the UK's largest trading partner, is still eroding manufacturers' confidence.
Germany IFO Survey
The IFO business climate indicator increased for the third consecutive month to 108.3 in January, following an upwardly revised 107.3 reading in December. The current situations index slid slightly to 116.3 from 116.7 in December; however, the expectations index improved to 100.9 in January from 98.6 in December.
Our view: The reading beat expectations of 107.6 and soothes fears that the debt crisis will take too much of a toll on German growth. The positive expectations index suggests that the German economy has shrugged off the contraction in Q4 2011, and could continue to be the engine that powers growth in the Euro region.
US FOMC meeting
The US Federal Open Market Committee (FOMC) kept benchmark interest rates unchanged at 0.25% and maintained its target range at 0 to 0.25%. Most importantly, the FOMC said that interest rates are unlikely to rise until at least 2014 (mid-2013 previously). In a historic change, the FOMC also set a formal inflation target of 2%.
Our view: The decision to maintain rates and keep them low at least until 2014 seems to be inspired by the need to keep the nascent US recovery going, especially in light of the threats from a possible recession in Europe. Low interest rates and the possibility of further quantitative easing should help not only those parts of the economy that have recovered, such as household spending, but also those that have proven difficult to revive, employment being the most important. The announcement of a formal inflation target is a further step towards greater transparency.
