Market opening: Markets are likely to open flat today. FTSE 100 futures were trading unchanged at 7:00 am.
New York: Wall Street ended in the red amid speculations that the Fed could increase rates sooner than expected. Concerns over valuation of equities added to the losses. The S&P 500 fell 0.4%, with small-cap companies declining the most.
Asia: Markets are trading marginally lower this morning. Volumes remained muted ahead of the US earnings data. In Japan, gains from positive trade surplus data were offset by decline in nuclear and power stocks and weaker-than-expected earnings guidance by Samsung. Nikkei fell 0.4%, and Hang Seng was trading 0.1% lower at 7:00 am.
Continental Europe: A sharp drop in Germany’s industrial output weighed on the indices. Germany’s DAX declined 1%. With shares of blue-chip firms Total and Sanofi decreasing 2% and 1.2%, respectively, France’s CAC 40 fell 1.4%.
Crude Oil: On Monday, prices of Brent and WTI crude oil fell 0.4% and 0.5%, respectively. The spread between the two varieties stood at US$6.7 per barrel.
UK small caps: Yesterday the FTSE AIM All-Share index closed 2.47 points (-0.31%) lower at 788.15.
UK’s economy to grow robustly
Today, a quarterly survey conducted by the British Chambers of Commerce (BCC) maintained the growth forecast for the UK at 0.8% for Q2 2014 and 3.1% for 2014. However, exports and business investment declined during the quarter. The agency warned a slowdown in business growth increased the risk of a downgrade in these estimates.
Japan’s current account surplus increases in May
Data from the Ministry of Finance indicated current account surplus in Japan rose to ¥522.8bn in May from ¥187.4bn in April, exceeding economists’ estimates for a surplus of ¥429.9bn. Trade deficit fell to ¥675.9bn from ¥780.4bn in April. Exports advanced 2% y-o-y to ¥5.72trln, whereas imports fell by 0.4% y-o-y to ¥6.39trln in May.
Legendary Investments (LON:LEG)
Legendary Investments announced an update for its portfolio company – Bosques Energeticos EBE S.A. de C.V. The company announced that since last November, the investee firm had secured additional seven hectare (ha) of land in the State of Morelos, which neighbours the state of Puebla to the West (hosting its initial 11 ha plantation). The land is being used exclusively to grow G4J jatropha, with approximately 8,000 G4J jatropha plants already growing on the land. Currently, Bosques has 18 ha of land under cultivation, comprising of: 16,000 pongamia, of which 300 are GP2 pongamia; 28,000 jatropha, of which 14,000 are G4J jatropha; and 3,000 castor. The stock climbed 4.8% yesterday.
Our view: An encouraging progress of activities at Bosques, towards the development of elite plants, bodes well for Legendary Investments. The G4J jatropha plant, developed in November 2013 as an early and high yielding non-toxic jatropha, has exhibited multiple branching and would start yielding seeds in as early as six months. It is projected to yield over 6,000 kg of seeds per ha in the fifth year. Owing to its edibility, this class of jatropha can also be used as animal feed. In light of these positives and further commercialisation opportunities for Legendary’s other investee firm Virtualstock Holdings, we maintain a Speculative Buy.
Beaufort Securities Limited acts as corporate broker to Legendary Investments plc.
Yesterday, Orogen Gold said that it has mobilised a drill rig to commence the current year’s diamond drilling programme at the Mutsk gold project, Armenia. The company has planned a minimum 3,000m of drilling under the programme. The drilling would target extensions of previous gold intercepts and multiple large geophysical anomalies identified recently. Orogen has an exclusive deal with Georaid CJSC to earn 80% interest in the project through a total investment of US$2.5m by the end of August 2016.
Our view: Orogen continues to register further progress at the Mutsk gold project. In the past, positive results from drilling campaign in 2013 and recent geophysical studies that extended the target zone at Mutsk to 2.4km, is indicative of the programme being highly fruitful. The results received to date suggest that Mutsk project has a strong potential for discovery of shallow gold mineralisation at relatively low exploration costs. The deal with DEM Geosciences SAL, earlier this month, is expected to boost the company’s upcoming diamond drilling activities at Mutsk and Deli Jovan Gold projects. In light of these positives, we reiterate a Speculative Buy rating.
Yesterday, SABMiller decided to sell off its shareholding in Tsogo Sun Holdings Limited, a gaming, hotel and entertainment group, after a strategic review of the investment. The disposal would be through two transactions. SABMiller would sell approximately 305 million shares in a secondary placing to certain South African and international institutional investors and Tsogo Sun would buy-back approximately 130 million shares for ~ZAR2.8bn (US$260m). SABMiller currently holds an effective 39.6% stake in Tsogo Sun, amounting to ~ZAR11.7bn (US$1.1bn).
Our view: Disposing of stake in Tsogo Sun will help SABMiller concentrate on its core growth businesses, including the African operations. Proceeds could also help the company towards production capacity improvements and strong commercial execution of existing and new consumer offerings. Besides, increased pricing and favourable brand mix, with a deliberate move towards high-margin brands, is likely to continue to enhance SABMiller’s margins. Attractive business prospects in emerging markets like Asia and Africa, improving operational efficiencies through cost-saving programmes, and a portfolio of strong brands such as Peroni, Pilsner Urquell and Grolsch, provide a meaningful upside to the stock. We remain buyers of SABMiller.
Taylor Wimpey provided a trading update for the half year ended 29th June 2014. During the period, the average private net reservation rate improved to 0.71 per outlet per week from 0.67 in H1 2013. The number of completed homes increased 11% to 5,766, with private completions up at 4,755 from 4,229, and 940 affordable homes. The average selling price (ASP) of completions edged up by 9.6% y-o-y to £206,000. With an increased share of better quality locations and overall improvement across the UK housing market, the average selling price on private completions was up 9% to £224,000. As on 29th June, the total order book, excluding completions to date and joint ventures, stood at £1.6bn as against £1.3bn on 30th June 2013. Around 42% of private homes were completed through the UK government’s ‘Help to Buy’ scheme. Currently, Taylor Wimpey is operating from 308 outlets (including joint ventures) vis-à-vis 322 last year, with the number of outlets declining as a result of a rapid pace of sales. In Spain, the company completed 20 homes at an ASP of €254,000. Operating profit margin for the period is expected to improve to 16% from 13.1%.
Our view: Taylor Wimpey exhibited strong performance in the first half of 2014, with sales rates and pricing touching the upper end of Taylor Wimpey’s expectations. Sales rates majorly benefitted from strong spring selling season. Besides, the UK government’s mortgage financing scheme ‘Help to Buy’, that assists buyers of newly built homes, added to the sales momentum. However, we feel that the current scenario of robust growth and healthy future projections are mainly attributable to the recovery of the UK housing market, an improved consumer confidence and easy access to mortgage. Taylor Wimpey seems suitably priced at the current market price and therefore, we reiterate a Hold rating.
Germany industrial production
Germany’s industrial production slipped 1.8% m-o-m on a seasonally adjusted basis in May, after a revised decline of 0.3% in April, the Ministry of Economics and Technology said yesterday. Economists had expected output to remain stable in May. Capital goods production grew 0.3%. On y-o-y basis, after working-days adjustment, production improved 1.3% during the month, maintaining the pace from last month. Economists had forecasted production to increase 3.6% in May.