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Beaufort Securities Breakfast Today Royal Mail, Rio Tinto, Dixons Retail and Ocado

Published: 08:36 17 Jan 2014 GMT

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The Markets

Market opening: Markets are likely to open higher today. FTSE 100 futures were trading 17 points up at 7:00 am.

New York: Wall Street closed slightly lower amid reports of disappointing earnings from multiple banks and weak sales from retailer Best Buy. Financials lost 0.6% to lead the losses on the S&P 500, which edged down 0.1%.

Asia: Markets witnessed subdued trading this morning. Japanese stocks saw some amount of profit taking, while reports of negative consumer sentiment in the country added to the losses. The Nikkei lowered 0.1%, while the Hang Seng was trading 0.8% up at 7:00 am.

Continental Europe: Equities declined owing to poor earnings updates from multiple retailers, including the likes of Carrefour and Ahold. However, strong gains in mining stocks limited the decline. France’s CAC 40 and Germany’s DAX inched down 0.3% and 0.2%, respectively.

Crude oil: Brent Crude Oil prices remained broadly flat, while WTI crude oil prices declined 0.2% yesterday. The spread between the two varieties stood at US$13.1 per barrel.

UK small caps: Yesterday the FTSE AIM All-Share index closed 0.91 points (+0.10%) higher at 884.11.

Today’s news

Japanese government raises assessment of the economy

The Cabinet Office, in its monthly report, revised the assessment for Japan owing to recovery in the economy for the first time in six years. This upgrade was chiefly led by robust consumer spending and improvement in business investment. The report also stated that in the recent months, exports had been weak, while industrial output witnessed a modest increase. Another Cabinet Office report revealed that the consumer confidence index in Japan declined to a seasonally adjusted 41.3 in December from 42.5 in November, contrary to the forecasted increase of 43. The employment index edged up to 48.2 in December from 48.1 in the preceding month.

NEW: Beaufort’s Tips for 2014

Twelve months ago we recommended 7 stocks we expected to do well during 2013 and £1,000 invested in each would have returned £8,738 from an initial investment of £7,000. A Capital Return of 24.8% (26.7% total return including dividends). In this report Harry Stevenson, our research analyst, outlines 11 buy recommendations for the coming year. Click here to read the full report now.

Company News

Dixons Retail (LON:DXNS)

Dixons Retail announced trading update for the period from 1st November 2013 to 4th January 2014. The underlying group sales increased 2% on a constant currency basis. UK & Ireland registered like for like (LFL) sales growth of 5% with further market share gains and a strong post Christmas sale period. In the region, well-established multichannel offerings with internet-led sales recorded a solid 23% gain. In northern Europe, LFL sales were up 2%, amid stiff competition, with an impressive performance across Sweden and Finland. Retail LFL sales in Greece dropped 8% as consumer climate remained weak. However, Dixons’ success in the wholesale business led to overall sales rising 7% on a constant currency basis. Gross margins dipped 0.5% during the period. The completion of the sale of Pixmania on 31st December 2013 marked Dixon’s major success towards the target of three disposals. Chief Executive Sebastian James expects the company’s performance in the remaining year to be more modest than the year to date performance.

Our view: Dixon exhibited robust trading during the Christmas period with a good growth in total sales and LFL sales. Online shopping seemed to be the major driver for this growth, shooting up 23% from last year. Dixon’s portfolio of popular brands like Currys and PC World, and increasing use of technologies should be able to support a decent pace of sales growth going forward. However, the still recovering UK economy and a late Easter this year present a dim picture about the company’s near term growth prospects. In light of these factors and a ~80% jump in the share price over the last one year, we feel that the stock is currently trading close to its fair value. We assign a Hold rating to the stock.

Ocado Group (LON:OCDO)

Ocado Group released its trading update for Q4 2013 and for Christmas period. Gross retail sales for the 16 weeks to 1st December 2013 were up 20.1% to £271m. Average orders per week advanced 19.1% to 151,743, with the average order size (retail) growing 0.8% to £111.6. For FY2013, gross retail sales rose 17.2% to £843m and the group gross sales increased 18.6% to £852.5m. For the Christmas period, i.e. six trading weeks to 5th January 2014, the retail sales (gross) were up 21.3% to £111.1m on account of extra capacity and strong trading in the seven days up to Christmas. Ocado successfully launched Morrisons.com with first deliveries made on 10th January 2014.

Our view: Ocado seems to have capitalised well on the festive shopping period to register a significant sales growth of 29% for the seven days before Christmas. The launch of Morrisons.com also augurs well for the company’s growth. However, Ocado continues to face headwinds from a fragile consumer outlook and general weakness in the UK economy. Ocado shares had shot up more than 500% last year to lead the gainers on the FTSE 350 Index after it bagged a 25 year contract with William Morrison Supermarkets in May to start an online grocery service. Given the above, we feel that the positives are already factored into the current stock price. Thus, we recommend a Sell rating for the stock.

Rio Tinto (LON:RIO)

Rio Tinto released an operations overview for Q4 2013 yesterday. Global iron ore production for the full year stood at 266 million tonnes (mt), 5% higher than the previous year. Rio Tinto contributed 209 mt to overall production. Rio Tinto’s production share from the Pilbara mine in Australia rose 5% to a record 250.6 mt. With completion of infrastructure works associated with the project, the company was on track to ramp up of shipments to 290 million tonnes per annum (Mt/a) nameplate capacity across mines, rail and ports by the end of H1 2014. Total mined copper production for 2013 was 15% higher than in 2012 due to ramping up of production at Oyu Tolgoi to full capacity and continued improvement in grades and throughput at Kennecott Utah Copper. In Q4 2013, iron ore production rose 6% to 70.4 mt. In the quarter, total mined copper production was up 5%, while refined copper production dropped 6%. Bauxite production was up 7%, while aluminium production dropped 4% on a y-o-y basis. Rio Tinto Alcan’s alumina production declined 1%, while aluminium production was up 2% with a lower base in 2012 owing to the impact of Alma lockout. The production of semi-soft and thermal coal lowered 9% due to mine sequencing at Mount Thorley Warkworth and Hunter Valley Operations and the closure of the Blair Athol mine in November 2012. Meanwhile, hard coking coal’s production jumped 25% with reduced impacts from maintenance and upgrade stoppages. Rio Tinto provided a standby commitment for the US$2.4bn rights issue by Turquoise Hill Resources. Pre-tax and pre-divestment expenditure on exploration and evaluation reduced to US$948m versus US$1,971m in 2012. The stock was up 2.5% yesterday.

Our view: Rio Tinto delivered strong production volumes for the year, with ramping up of iron ore production owing to a notable progress towards achieving the nameplate capacity of 290 Mt/a. The higher recovery rate of copper volumes and solid annual production for bauxite and thermal coal further highlight the group’s improved performance for the period. The group beat the exploration and evaluation cost reduction targets and divested US$3.5bn worth of non-core assets during the year. Rio Tinto’s iron ore business suffered a jolt from the cyclones in Western Australia in last few days of December and weakening demand for steel from its key market– China. Yet, Rio Tinto managed to register increase in the overall global production and shipments for the year to 266 mt. Despite some degree of volatility in the global markets, especially China, Rio Tinto is likely to outperform its peers on the back of ongoing productivity gains and expansion of its low-cost and high-margin Pilbara operations. Besides, improvement in relevant macro economic factors like urbanisation and income growth, especially in Rio Tinto’s key markets like China and India, seem to be supportive for its future business prospects. We remain Buyers of the stock.

Royal Mail (LON:RMG)

Our view: Last October’s IPO of Royal Mail plc captured the investor’s imagination. Here was a somewhat bloated publically-owned enterprise awash with assets, a dominant national role in a growing UK market, strong international operations and a venerable brand name. Highly visible cash flow also promised a healthy dividend payout. Discounting the government advisors’ apparent pre-occupation with historic industrial relations, both retail and institutional investors bought heavily into its clearly undervalued offering, which was then further bolstered by index buying as the shares succeeded into the FTSE-100. The net result has been for an impressive 75% relative outperformance of the shares since October. But while its business plan most certainly remains intact, with its core UK door-step operations, UKPIL, Parcelforce Worldwide and GLS continuing to deliver as expected, there appears little left in the way of new excitement to sustain this. Anticipating dull key seasonal parcels volumes growth during the final quarter, whereby Royal Mail looks set to report only a marginally improved figure for the whole nine months to December 2013 as competitors took market share, a 16.6x forward earnings multiple is no longer cheap. Active investors should look to lighten overweight holdings.

Economic News

Eurozone CPI

Consumer price inflation (CPI) in the Eurozone expanded 0.3% m-o-m in December after a 0.1% drop in November, but in-line with economist’s projections, as per final data from the EU’s statistical office Eurostat declared yesterday. On y-o-y basis, inflation eased a little to 0.8% in December from 0.9% in November, unchanged from the flash estimates and matching the market forecasts. Core inflation, excluding energy, food, & tobacco, grew at a slower pace of 0.7% compared to 0.9% in the prior month, as expected by the economists.

US CPI

US consumer price index (CPI) grew a seasonally adjusted 0.3% m-o-m in December after a flat reading the previous month, the US Bureau of Labour Statistics stated yesterday. The reading matched the economists’ expectations. CPI excluding food and energy was up 0.1% in December following a 0.2% increase in the preceding month and came in-line with the market forecasts. On y-o-y basis, CPI advanced 1.5% in December after rising 1.2% in November, while core prices maintained last month’s pace of growth at 1.7%.

US initial jobless claims

Initial jobless claims in the US declined 2,000 to a seasonally adjusted 326,000 in the week ended 11th January, the Labour Department said yesterday. The previous week’s claims were revised downwards to 328,000 from the prior reading of 330,000. Economists expected a reading of 328,000 for the week. The four-week moving average declined to 335,000 from previous week’s 348,500.

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