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Northland Capital Partners View on the City: Imagination Technologies, SQS Software, SDL Plc, Plus 500 and others

Published: 08:18 28 Feb 2014 GMT

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Week Ahead (03/03/14)

View from the trading desk

The mid-week market positive outlook that saw multi-year highs came under pressure early Thursday as fears mounted that the political turmoil in Ukraine could deepen but also spread to create a wider regional instability. Perceived havens came back into favour as investors looked to book some profits but the US and UK shrugged off initial concerns. Meanwhile the euphoric first day of dealing in AO World (LON:AO.), that saw shares surge by as much as 44%, fuelled concerns of a return of dot.com fever. Wednesday’s closing price left the shares trading on c. 110x FY15 EBITDA, a substantial premium to the internet retail darling ASOS. Thursday saw something of a correction but the growth assumptions needed to justify the current price appear heroic.

The pace of IPO activity showed little sign of slowing, however (DX Group (LON:DX.) and McColl’s Retail Group (LON:MCLS) this week), and there was also some substantial secondary selling including the founders of Plus500 (LON:PLUS) selling £100m of stock. There is a strong pipeline of deals to come through and appetite looks sure to be tested with valuations looking stretched by many measures.

Sales & Research thoughts

Mining: This week saw iron ore prices reach their lowest levels since July last year (USD$117/t) following a further fall in Chinese steel prices. Steel prices have taken a battering with speculation that Chinese banks will begin to restrict credit to the construction and property sectors. Chinese imports of iron ore are down more than 10% this year resulting in increased non-Chinese stockpiles, swamping spot markets.

Copper (-1.7%), lead (-1.5%) and nickel (-2%) also suffered on fears of a slowdown in the Chinese property sector while gold (+1.5%) rose as investors speculate that a Chinese slowdown will result in run in on the precious metals.

Mining equities: The improvement in the performance of London listed mining and exploration companies seen in January (44%) continued in February with 42% of companies’ share prices moving in to positive territory since the end of January. This is a substantial improvement on 2013 where only 20% of companies finished the year with higher share prices than at the start of the year.

TMT: A reasonable number of TMT companies are scheduled to report and/or provide updates. Thursday sees an IMS from Imagination Technology (LON:IMG). The shares have been weak over the past year but the company had some welcome news at this week’s Mobile World Congress as Intel announced mobile products (Merrifield, Moorefield) that included the Imagination GPU – there had been a concern that Intel would drop Imagination in favour of its own GPU. This follows the announcement earlier in February that it had extended its multi-year, multi-use licence agreement with Apple for access to Imagination’s PowerVR graphics and video IP cores. With Apple accounting for around two thirds of Imagination’s royalties the licence extension was crucial and the explicit naming of Apple was unusual. That said, questions persist on the MIPS business and the shift towards mid to low-end smartphones, away from the high-end where Imagination is stronger. Otherwise the announcements out of MWC from UK-listed companies appeared incremental in nature.

Elsewhere SQS Software (LON:SQS) has FY results due on Wednesday. In December’s trading update, management reported that trading was in line with forecasts with growth in the majority of geographies and the integration of the Thinksoft acquisition was proceeding to plan. The acquisition process has been somewhat slower than anticipated and we will be looking for an update. The outlook for the core business remains positive as companies up IT spend. SDL (LON:SDL) has a capital markets event on Monday but results scheduled for the 18th and a pre-close in January, the focus will be on the new management structure and go to market plan.

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