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HB Markets Breakfast Today including: Burberry, Great Portland Estates, FirstGroup, and Telecom Plus
The Markets
Market opening: Markets could open higher today, after falling yesterday, as investors hunt for bargains. FTSE 100 futures were trading 45.5 points up at 7:00 am.
New York: Wall Street recouped early losses amid rumours that EU leaders would agree on a concrete plan to stabilise Greece and an EU-wide bank deposit guarantee. The S&P 500 recovered a little more than 1.5% to close up 0.2% yesterday.
Asia: Contraction in the Chinese manufacturing sector for the seventh month following yesterday's dismal data from Japan fanned fears of a slowdown in Asia. Inaction at the EU summit also weighed on the sentiment. The Nikkei 225 closed 0.1% up, while the Hang Seng was trading 0.2% down at 7:00 am.
Continental Europe: Markets closed deep in the red as hopes of EU leaders outlining any new plans to tackle the region's crisis at the Brussels summit faded and the World Bank lowered China's economic growth forecast. Both, the German DAX and French CAC 40 slid 2.3% and 2.6%, respectively.
UK small caps: The FTSE AIM All-Share index shed 1.7% yesterday.
Today's news
Chinese manufacturing sector may have shrunk in May
The preliminary reading of the Chinese manufacturing purchasing managers' index stood at 48.7 for May compared to the final reading of 49.3 in April. This is its longest run of sub-50 reading since the global crisis, HSBC/Markit said today.
EU in favour of Greece's stay, but plans for exit
At the informal summit in Brussels, EU leaders backed retaining Greece in the Eurozone, but want Athens to keep its commitment of implementing the bailout terms. However, the Eurogroup Working Group, comprising senior officials aiding Eurozone finance ministers, has been asked to draw up contingency plans in the eventuality of Greece's exit. Leaders also failed to present new measure to stimulate the region's flagging economy and support job creation as France and Germany differed on the issue of joint Eurobonds and aggressive policy.
Company News
Burberry (LON:BRBY)
Burberry announced preliminary results for the year ended 31st March 2012 yesterday. Total revenue grew 24% to £1.9bn driven by a 32% growth in retail revenue. Retail sales now contribute 68% of total revenue up from 64% in FY2011. Comparable store sales growth was 14% as the strong momentum of H1 2012 (16%) waned in H2 2012 (12%). Wholesale revenue increased 9% to £478.3m. Operating margin expanded to 16.4% from 15.6% in the previous year. Adjusted pre-tax profit was up 26% to £376.2m and reported pre-tax profit increased 24% to £366.0m. EPS improved to 59.3p from 46.9p in FY2011. The company plans to expand retail space by around 12-14% with a bias towards large store formats in core markets of London, Chicago and Hong Kong. The capital expenditure is expected to be around £180-200m. The phasing of revenue and investment is expected to impact operating margin in H1 2013, but the management expects to deliver a modest margin improvement for the year. They proposed a 25% hike in dividend to 25p per share.
Our view: Burberry's sales, which were resilient till H1 2012, wobbled in the last two quarters as the impact of slowing global economic conditions affected growth in the Asia Pacific, where Burberry generates around a fourth of its revenue. Growth in Asia Pacific helped the retailer offset decline in sales in the US and Europe. Tourists are a major source of revenue for the luxury retailer and the grim outlook for global economic growth is expected to dampen tourism activity too. Additionally, the management's warning on short-term pressure on margins is likely to put any upward revision to forecasts on hold. This leaves the shares that have appreciated 12% since the beginning of the year, fairly valued.
Yesterday, FirstGroup released preliminary results which showed FY2012 revenue advanced 4.1% to £6.7bn and operating profit surged 45.2% to £448.0m. Pre-tax profit more than doubled to £279.9m from £126.5m. EPS saw a similar increase to 42.7p from 20.0p. The substantial jump in profit was due to easy comparisons thanks to a one-time £147.8m charge in 2011. Excluding this loss, pre-tax profit dropped 1.1% y-o-y. The company is accelerating the disposal of some UK bus division assets as low demand, high fuel cost and shrinking subsidies impact profitability. The operating profit at the bus business fell to £134.4m from £148.8m in FY2011 and the operating margin contracted to 11.6% from 13.1%. The management expects the performance at First Transit to improve and expects continued growth and margin improvement at Greyhound. The management re-iterated its commitment to increasing dividend by 7% in FY2013. Management proposed increasing full year dividend by 7% to 23.67p per share.
Our view: Around 60% of the UK bus revenue is generated in the northern part of the UK, which has been particularly vulnerable to rising unemployment and cut in government spending. Falling margins at the division, which contributes a third of total operating profit, has been a drag on the group's profits and the repositioning of the portfolio could help margins to expand. Though the recovery in the US and repositioning of the UK bus portfolio could help the business, the near term outlook remains uncertain, prompting us to retain our hold rating.
Great Portland Estates (LON:GPOR)
Great Portland Estates released preliminary results for the year ended 31st March 2012 yesterday. Net asset value increased 11.9% to 403p per share as the underlying value of its portfolio grew 9.2%. The company signed 88 new leases which will generate a rent of £25.2m per year. Pre-tax profit fell to £155.2m from £261.0m. EPS plunged to 50.2p from 83.8p in the previous year. The management does not expect the turmoil in the UK and Eurozone markets to affect the London commercial property market, given the low supply of new space. The management increased total dividend by 2.4% to 8.4p per share.
Telecom Plus released final results for the year ended 31st March 2012 yesterday. Pre-tax profit increased 11.8% to £30.7m on a 12.6% increase in revenue to £471.5m. The customer base expanded to 415,000 from 371,000 in FY2012. EPS was up 12.3% to 33.8p. The number of services supplied grew 18% and average number of services availed by customers increased to 3.63 from 3.43 in FY2011. The number of customers requesting four or more services doubled. The management expects to increase the number of services supplied by around 20% in FY2013, but profit growth is expected to be limited to 10%. In FY2014, the management expects to see the benefits of current investments with a pre-tax profit growth of around 18%. The management proposed a 23% increase in dividend to 27p per share.
Economic News
UK Bank of England minutes
Minutes of Bank of England's Monetary Policy Committee (MPC) released yesterday showed members unanimously agreed to keep interest rates at record lows of 0.5%. However, David Miles was the lone voter in favour of increasing the Bank's asset purchase programme by another £25bn. While the other eight members voted against such an expansion, many said the decision was 'finely balanced'.
Our view: Though the MPC does not seem to be in favour of lowering rates further, it kept the option to pump more fresh money into the economy open. The larger than expected deceleration in inflation in April should give the BoE more leeway to consider stimulating the economy with additional asset purchases after the UK reported a GDP contraction of 0.2% in Q1 2012. On Wednesday, the IMF urged the BoE to consider lowering interest rates and embark on more quantitative easing as the economy had not responded as expected and the risks of stagnation remained high.
UK retail sales
Retail sales in the UK fell 2.3% m-o-m in April reversing the upwardly revised 2.0% (1.8% reported initially) increase of March, the Office of National Statistics said yesterday. Heavy rains in April caused a 5.2% decline in sales of clothing and footwear and fuel sales declined 13.2%. On an annual basis, retail sales contracted 1.1%. In the three months to April, sales slowed to 0.2% from 0.7% in Q1 2012.
Our view: The drop in retail sales was significantly worse than the 0.8% decline expected by economists. Warm weather in March and panic buying of fuel, ahead of the fuel-tanker drivers' strike had buoyed sales in March. However, adverse weather conditions coupled with continued high unemployment, inflation, falling real wages and an uncertain economic outlook seems to have weighed on consumers making them reluctant to spend and could put the UK at risk of an extended recession.
US house price index
The Federal Housing Finance Agency (FHFA)'s home price index indicated that home price in the US increased 1.8% m-o-m and 2.7% y-o-y in March. In Q1 2012, home prices rose 0.6% vis-a-vis Q4 2012 and 0.5% y-o-y.
Our view: The rise in home prices was better than the 0.3% increase expected by economists. Rising property prices add to the string of other housing sector indicators suggesting a firming recovery in the sector. Rising employment and lower mortgage rates has brought houses within reach of a larger proportion of the population, which should help consumer sentiment and spending.
US new home sales
Sales of newly built homes in the US grew 3.3% m-o-m to an annual rate of 343,000 in April, the US Department of Commerce said yesterday. This beats economists' expectations of the sale pace increasing to 335,000. New home sales surged 9.9% y-o-y.
