HB Markets Breakfast Today including: QinetiQ, ASOS, Booker, United Utilities, and others


The Markets

Market opening: Markets consolidating after yesterday's rise could open lower today. FTSE 100 futures were trading 23.5 points down at 7:00 am. 

New York: Wall Street saw choppy, range-bound trading as investors fretted about Greece's future in the Eurozone. The S&P 500 tipped into the green to close 0.1% higher yesterday. 

Asia: Markets started on a positive note following a higher close on Wall Street. However, concerns about the global slowdown and the worsening situation in the Eurozone weighed on sentiment. The Nikkei 225 closed 0.2% up, while the Hang Seng was trading 0.3% down at 7:00 am. 

Continental Europe: Dismal data showing weakening economic activity in the Eurozone did not stop investors searching for a bargain, especially in the energy, banking and utilities sectors, after Wednesday's steep fall. Consequently, the German DAX and French CAC 40 ended 0.5% and 1.2% higher, respectively. 

UK small caps: The FTSE AIM All-Share index gained 0.6% yesterday. 

Today's news

Credit off-take in China slows 

Some of the biggest banks in China could undershoot this year's lending targets as demand for credit shrinks amidst cooling economic activity, three bank officials in the know said today. Demand for new loans was lower in April and May, and officials estimate banks could miss the government's ¥8-8.5tn target by about ¥1tn. 

ECB's Draghi urges 'courageous leap' 

European Central Bank President Mario Draghi called for a 'courageous leap of political imagination' while speaking at Rome's Sapienza University on Thursday. He urged governments not to undermine the importance of the growth pact while they focus on the fiscal compact to instil budgetary discipline. 

Company News

United Utilities (LON:UU.)

United Utilities announced results for the year ended 31st March 2012 yesterday. Revenue increased 3.4% to £1.6bn thanks to a 4.5% nominal increase in regulated prices offset by customers switching to meters and lower commercial volumes. However, pre-tax profit declined 14.3% to £280.4m, as the company increased investment in water and wastewater treatment facilities. Regulatory capital investment grew 12% to £680m. Underlying pre-tax profit dipped by £2.2m to £327m. EPS fell to 46.4p from 67.2p. The management aims to enhance efficiency to achieve the targeted dividend growth rate of 2% above RPI inflation, at least until 2015. Final dividend increased 6.7% to 32.01p per share. 

Our view: The utilities sector is not expected to be impacted by the on going weakness in the economy. Also, despite the drop in profits, the company has been able to keep its commitment of dividend growth. Attracted by the company's ability to deliver real return and higher yields compared to peers, we remain buyers of the stock. 


SABMiller said revenue grew 11% to US$31.4bn in FY2012 thanks to strong growth in the Latin American and African markets. Lager and soft drink volumes increased 3% and 7% respectively, on an organic basis. Organic revenue was up 7%. EBITDA swelled 12% (8% organic) to £5.6bn. EBITDA margin improved 10 basis points to 17.9%. Pre-tax profit soared 55% to £5.6bn. EPS grew 74% to US$2.66. The management expects a mid-single digit increase in input costs. They anticipate modest growth in consumer spending in the developed markets and continued robust growth in the developing markets. Dividend for the year was hiked by 12% to US$0.91. 

Our view: SABMiller's success is mainly due to its presence in emerging markets, where a younger population with rising disposable income is trading up to premium brands offered by SABMiller, spurring growth. The inclusion of Foster's has helped the Asia Pacific segment to report a 13% growth in volumes. The management said the integration was progressing well. However, it highlighted the growing trend of customers in the developed markets choosing trading down to value brands as rising inflation and low real wage growth constrain personal budgets. North America and Europe contribute about a third to SABMiller's EBITA. This, coupled with the expected increase in input cost, limits the upside potential for forecast revisions. At a premium valuation to peers, we see better value elsewhere in the sector. 

QinetiQ (LON:QQ.)

QinetiQ released results for the year ended 31st March 2012 yesterday. Underlying operating profit increased 10.9% to £161.3m despite a 13.7% fall in revenue to £1.5bn. Underlying profit margin improved to 11.0% from 8.5% in FY2011 helped by strong margin expansion at the UK service division and the global products division. Underlying pre-tax profit was up 3.2% to £118.3m. However, the management warned that the presidential election in the US could result in contract delays and reiterated that as governments re-balance budgets with spending cuts, the defense market is expected to remain challenging. Nevertheless, dividend for the year was increased to 2.9p per share from 1.6p per share. 

Our view: The restructuring plan is clearly yielding results in the form of margin improvements, despite a fall in revenue. Though the US and the UK defence budgets are expected to shrink, the alteration of the Ministry of Defence (MOD)'s veto rights could give the company more leeway in choosing clients and increase competitiveness. Also, the recent deal with Shell to supply the oil major with monitoring equipment for its natural gas fracking operations seems to be the next logical step of CEO Leo Quinn's turnaround plan for opening up another avenue for growth. 

Booker (LON:BOK

Booker said FY2012 total sales for the 53 weeks ended 30th March 2012 rose 9.4% to £3.9bn, driven by an increase in the number of customers and a 21% growth in internet sales. Like-for-like sales increased 6.1%. Operating profit jumped 17% to £89.6m. Pre-tax profit was up 27% to £90.8m and EPS grew 0.93p to 4.83p. The management said that the food wholesale market remained challenging with intensifying competition. However, a 'good' start to the current year makes them confident in meeting full year expectations. Total dividend increased 37% to 2.28p per share. 


ASOS released final results for the year ended 31st March 2012 yesterday. Revenue surged 46% to £494.9m, driven by a doubling of international retail sales which closed at £283.7m. Gross profit increased 51% to £251.9m implying a margin enhancement of 180 basis points to 50.9%. Retail sales margin improved 290 basis points to 49.5%. Pre-tax profit soared 93% to £30.4m. EPS doubled to 29.3p from 14.6p in the previous year. The management maintained a positive outlook for FY2013 which is expected to bring the company nearer to its target of £1bn in sales by 2015. 

Economic News


The Office of National Statistics (ONS) revised its Q1 2012 GDP estimate downwards to show a contraction of 0.3% deeper than the 0.2% reported previously. Construction activity shrank 4.8%, significantly more than the 3.0% decline reported initially. Industrial output fell 0.4% while manufacturing output remained flat. Service sector activity increased 0.1%. Personal consumption gained just 0.1%. A 1.6% increase in government spending added 0.4% to output. On an annual basis, GDP declined 0.1%. 

Our view: Economists, already sceptical about the ONS' earlier reading, were not expecting a downward revision to the GDP growth. Earlier in the week, the IMF urged the BoE to pursue a more accommodative monetary policy and expand its asset purchase programme to stimulate the stuttering economy. The BoE's minutes released on Wednesday revealed that though majority of members decided against stretching the quantitative easing programme, they were open to embarking on one, if the situation worsened. With recent inflation data showing inflation is at least not accelerating at the moment, the poor GDP data may heightened expectations that the BoE will pump in more fresh money in the near future, which in the long-term is bound to be inflationary. 

German IFO

Business sentiment index in Germany slumped 3 points to 106.9 in May, the IFO institute's survey showed yesterday. The gauge of current conditions dropped to 113.3 from 117.5 points in April touching its 21-month low. The measure of outlook for the next six months declined to 100.9 from 102.7 the previous month. 

Our view: The business climate index fell more than that expected by economists. The decline in the headline index is consistent with other morale measuring surveys. This indicates that the uncertainty in the Eurozone periphery is breaching German borders too. Though the German economy dodged a recession after recording growth of 0.5% in Q1 2012 (see below), the eroding business confidence suggests businesses expect activity to slow in the near term. 

US durable goods

Orders for durable goods grew 0.2% in April after declining 3.7% in March, the US Department of Commerce said yesterday. A 2.1% increase in orders pertaining to transportation offset the 2.8% fall in orders for machinery and a 34% drop in orders for military aircraft. Commercial aircraft orders, a very volatile series, rose 7.2% after dropping 46.6% in March. Orders for autos and auto parts increased 5.6%. Orders for durable goods, excluding transportation, dipped 0.6% after falling 0.8% in March. Orders for non-defense durable goods, excluding aircraft, a close lead indicator of business investment, declined 1.9% in April after declining 2.2% in March. 

Our view: The increased demand for durable goods is in line with economists' expectations. Buoyant orders for autos and auto parts suggest consumer demand is still strong. However, core durable goods orders, a proxy for business investment, dropped for the second month in April, suggesting factory activity was subdued as Q2 2012 commenced, which is a concern for a continued US recovery. 

Eurozone PMI

The flash composite purchasing managers' index (PMI) fell to 45.9 in May from 46.7 in April, index compiler Markit said yesterday. Economists' expected the reading to edge lower to 46.6. The index for services shrank to 46.5 from 46.9 in April, larger than the expected decline of 46.7. The manufacturing PMI slipped to 45.0 from 45.9 the previous month confounding economists forecasting a slight rise to 46.0. 

German GDP

The German economy expanded 0.5% q-o-q in Q1 2012 reversing the 0.2% contraction in Q4 2011, Destatis said yesterday. A 1.7% growth in exports and 0.4% increase in personal consumption contributed to the expansion. In Q1 2012, GDP grew 1.7% y-o-y following an increase of 1.5% in the previous quarter. The results were largely in line with market expectations. 

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