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HB Markets Breakfast Today including: Kingfisher, Cable & Wireless Worldwide, African Barrick Gold plus others

Published: 10:41 17 Feb 2012 GMT

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The markets

Market opening: Optimism sparked by hopes of Greece securing a rescue package by Monday and avoiding a messy default could help markets open firmer today. FTSE futures were trading 19.5 points higher at 7.00 am this morning.

New York: Wall Street cheered better-than-expected data on initial claims, housing starts and the Philly manufacturing survey indicating a strong and sustainable recovery in the US. The S&P 500 reversed Wednesday's losses and closed 1.1% higher yesterday. 

Asia: Buoyant US economic data and brightening chances of Greece avoiding bankruptcy lifted market sentiment. The Nikkei closed 1.6% higher today, while the Hang Seng was trading at +0.7% at 7:00 am UK time.

Continental Europe: Finance ministers postponing a decision on Greece's bailout until Monday caused markets to remain cautiously range bound. The German DAX closed 0.1% lower, while the French CAC 40 ended +0.1% higher yesterday. 

UK small caps: The FTSE AIM All-Share index closed 0.1% lower. 

Today's news

Greece bailout likely by Monday 

Greece's rescue package could be approved by the Eurogroup (group of Eurozone finance ministers) on Monday, exactly a month before its €14.5bn bond repayment falls due. Athens finally accepted the EU's latest demand of identifying another €325m in savings, but only after the EU dropped the idea of part payment of the bailout. Earlier, growing doubts about Greece's commitment to implement stringent reforms had led some members to suggest that only a part of the money be given to Greece to help it avoid a default in March, and the balance delivered after the elections in April. 

Company News:

Reed Elsevier (LON:REL)

Reed Elsevier released results for FY2011 ended 31st December 2011 yesterday. Despite revenue being almost flat (-0.9%) at £6.0bn, adjusted operating profit increased 4.5% to £1.6bn, as operating margins improved to 27.1% in FY2011 from 25.7% a year earlier. Adjusted pre-tax profit increased 9% y-o-y to £1.4bn. At the Elsevier division, which contributes about 47% of the total adjusted operating profit, revenue increased 2% y-o-y to £2.1bn in 2011. Revenue at the LexisNexis Risk Solutions division (which contributes about 22% to adjusted operating profit) declined 2% y-o-y to £908m, as demand for screening services slowed in H2 2012. Management announced that it will not consider selling off any of the company's core businesses, though some small disposals could happen. The board also declared an annual dividend of 21.55p per share, a 6% y-o-y increase.

Our view: The strategic shift from print to digital media is improving operational performance. Also, we believe that the market has been particularly harsh while discounting of value of the company's LexisNexis business in the aftermath of the 2008 financial crisis. The firm commitment not to sell off any core businesses indicates that management is confident about the businesses growth, and it lends credibility to our view that the shares are currently undervalued. We have a buy rating on the stock, which was one of our picks for 2012 and was covered in the research note 'A dozen for twelve' on 17th January 2011.

BAE Systems (LON:BA) 

BAE Systems, the defence contractor, released FY2011 results yesterday. During the year to 31st December 2011, revenue declined 14.0% to £19.2bn and operating profit declined 1.3% to £1.6bn. However, net profit attributable to shareholders increased 17.9% to £1.2bn. The order book shrank 8.4% to £36.2bn. Management said that sales are likely to be flat in 2012, given the economic environment, but underlying earnings per share are expected to increase on successful re-negotiation of the terms of the Salam programme (delivering fighter-jets to the Royal Saudi Air Force). The annual dividend per share increased 7.4% to 18.8p.

Our view: The company is trying to shift its focus towards newer nations with expected robust defence budgets like Saudi Arabia, Australia and India. However, its core markets remain the US (47% of revenue) and the UK (29% of revenue). The US government has announced capping of defence expenditure for 2012 at 2011 levels, and the UK government targets reducing defence spending. Under these conditions, the management's expectation of sales remaining flat in 2012 is realistic. We expect the growth for the company to remain subdued in the near-term and have a hold rating on the stock.

Kingfisher (LON:KGF

Kingfisher, the home improvement retail group, released a trading update yesterday for Q4 2011 ended 28th January 2011. During the quarter, revenue increased 2.2% y-o-y to £2.4bn and like-for-like (LFL) sales increased 0.9%. Sales in UK and France increased 1.5% y-o-y and 4.6% y-o-y to £968m and £938m respectively. Other international sales declined 1.3% to £449m and LFL sales were almost flat (+0.1%). Management said that adjusted profit for FY2012 is expected to meet analyst expectations of a 20% increase. 

Our view: The business is expected to benefit as tight consumer budgets means consumers choose a DIY route to re-decoration rather than investing in a new house, as indicated by improving LFL sales in FY2012 compared to FY2011. We believe, however, that the current share price adequately reflects this positive trend. Also, the economic outlook in the company's main countries of operation, France and the UK, remains uncertain, making any prediction about the direction of the business risky; we maintain a hold rating on the stock.

Cable & Wireless Worldwide (LON:CW)

Cable & Wireless Worldwide, a provider of telecom services, released a trading update for Q3 2011 ended 31st December 2011, yesterday. Trading has been in line with management expectations during the period. Profitability of voice services declined and the growth in data services was slower, as contracts are being re-negotiated. Management said that though the company’s addressable market is growing by 12% per annum, pricing pressures and capacity constraints are negating the increasing demand for the company’s services. The new CEO, Gavin Darby, cited underinvestment as the cause for the company’s problems, especially in the lucrative and high growth hosting market. The trading update was surprisingly silent on Vodafone’s expression of interest in the company.

Halma (LON:HLMA)

Halma, a technology company, released an interim statement from the period from 2nd October 2011, yesterday. Management was confident of meeting market expectations (EBITDA range £118.8m to £122.5m; consensus £120.6m). Growth was strong in the US, Europe and the emerging markets, while that in the UK slowed down. Separately, Halma said that the integration of two recently acquired businesses, Kirk Key Interlock and Avo Photonics, was on track.

African Barrick Gold (LON:ABG)

African Barrick Gold yesterday declared preliminary results for Q4 2011 and FY2011 to 31st December 2011. Production of gold decreased by 2% y-o-y to 688,278 ounces, and sales declined 3% y-o-y to 699,539 ounces. However, the 28% increase in the average realised price per ounce to US$1,587 from US$1,240 in 2010 helped the company to grow its revenues by 25% to US$1.2bn. The cash cost per ounce increased 22% to US$692. Management estimates production to be in the range of 675,000-725,000 ounces in 2012, and the cost per ounce to be between US$790 and US$860 per ounce, as labour and energy costs increase. The annual dividend was increased three-fold to US$0.163 per share from US$0.53 per share in 2010. African Barrick Gold’s shares plunged 13.6% yesterday, after investors realised that the company’s future profits will be dependent solely on the increase in gold prices, given its largely flat production target for 2012 and the increasing cost of producing gold.

Economic News:

UK consumer confidence

Consumer confidence increased in January, according the Nationwide's consumer confidence index, which rose 9 points to 47. However, compared to January 2011, the index is down 2 points and about 30 points below its long-term average, Nationwide added. The index for current situations increased to 21 points from 19 points in December, and the index for expectations from the economy jumped 14 points to 64. The sub-index measuring consumers' willingness to make big-ticket purchases like cars or houses, increased to 78 in January from 77 in December. 

Our view: This increase in consumer confidence looks like better news for the economy, as buoyant consumer confidence precedes an increase in consumer spending. BoE Governor Mervyn King is counting on strengthening consumer spending (as falling inflation increases real income) to support economic growth. However, Nationwide said the increase could be a 'temporary bounce' as the economy remains on shaky ground in the near term.

Eurozone new car registrations

New car registrations in the Eurozone declined 10% y-o-y but increased 2.8% m-o-m in January, the Association of European Automobile Builders (ACEA) reported yesterday. About 758,000 new cars were registered during the month, the ACEA added. Germans bought about 700 cars less than in January 2011, keeping the annual growth flat, while the French shied away from car purchases as indicated by the 20.7% y-o-y drop in number of new car registered in January. New car registration across the twenty-six of the 27-member European Union (except Malta, for which numbers were not available) declined 7.1% y-o-y to 968,769 in January. 

Our view: The debt crisis in the Euro region and the governments' response by cutting spending is affecting household income as employment declines. A closer look into the data reveals that demand for small cars plunged, which depicts the impact of the economic situation on the middle-class families, the major buyers of this segment.

US Philadelphia survey

The Federal Reserve Bank of Philadelphia's general economic index improved to 10.2 points in February from 7.3 points in January. The index for new orders increased to 11.7 points from 6.9 in January and the gauge of shipments increased to 15 from 5.7 in the previous month. The employment sub-index, however, plunged to 1.1 in February from 11.6 in January. The general economic index measures manufacturing activity in the Philadelphia region. 

Our view: The Philly index was largely in line with New York’s Empire State manufacturing survey, which indicated a healthy increase in new orders and shipments. Both indices grew by more than economists had expected, suggesting that the momentum in the manufacturing sector is strengthening. The indices, though not always accurate, provide an early indicator of the Institute of Supply Management (ISM) index for manufacturing activity in the US as a whole. As manufacturing activity gains momentum, the employment situation is also expected to improve, which will place the US on a firmer path to recovery, unless something unexpected happens in Europe.

US producer price index

Producer prices in the US rose by 0.1% m-o-m in January, following a 0.1% m-o-m decline in December, the US Labor Department said on Thursday. Wholesale prices increased 4.1% from January 2011. Core producer prices, which exclude volatile food and energy prices, increased 0.4% m-o-m and 3.0% y-o-y. 

Our view: Producer prices grew at a slower-than-forecast pace, while core producer prices, the number the US Federal Reserve watches, increased the most in six months. Wholesale prices are an early gauge of inflation (measured by consumer prices) in the economy. The US Fed expects the slowing global economy to keep commodity and energy prices in check in 2012. The Fed estimates inflation in 2012 to be about 1.6%, well below its target of 2.0%, which will give the Fed enough room to launch another round of quantitative easing, if necessary. Lower inflation will also enable the Fed to keep the interest rate low.

US housing starts

US housing starts increased 1.5% m-o-m in January, the US Department of Commerce said yesterday. Favourable weather helped builders achieve an annual rate of 699,000 homes in January, up from the revised 689,000 (earlier 657,000) in December. The increase surpassed the consensus of 675,000 construction starts in January. Building permits, a pointer of housing construction in the future, increased to an annual rate of 676,000, up 0.7% m-o-m. Building permits in December were revised downwards to 671,000 from 679,000 reported earlier. Improving housing starts and building permits provide further evidence that the housing market in the US is stabilising.

US jobless claims and continuing claims

The US Labor Department said initial jobless claims fell by 13,000 to 348,000 in the week ended 11th February. The claims for the prior week were revised upwards to 361,000 from 358,000. Analysts had expected claims to decrease to 365,000. Continuing claims declined 100,000 to 3.4m during the week ended 4th February, the lowest level since August 2008. As the labour market strengthens, consumer spending, which forms about 70% of the US GDP, is expected to pick up. Stabilising housing markets, strong activity in the manufacturing sector and an improving labour market all indicate to the US economy regaining its momentum.

 

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