The Markets
Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 7.20points down at 7:00 am.
New York: Wall Street ended in the green amid marginal improvement in commodity prices and slight recovery in China’s stock markets. In addition, investors focussed on the Fed’s two-day monetary policy meeting. The S&P 500 advanced 1.2%, led by the energy sector.
Asia: Equities are trading mixed amid continued volatility in China’s stock markets. However, some steps undertaken by Chinese regulators and the central bank to address investors’ concerns positively impacted sentiment. The Nikkei 225 dropped 0.1%, whereas the Hang Seng was trading 0.2% up at 7:00 am.
Continental Europe: Markets ended higher, led by positive corporate earnings results. Germany’s DAX and France’s CAC increased 1.1% and 1.0%, respectively.
Crude Oil: Yesterday, Brent Crude Oil prices fell 0.3%, whereas WTI crude oil prices improved 1.2%. The spread between the two varieties stood at US$5.3 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.19% higher yesterday at 749.16. To read our latest research click here.
Today’s news
House prices at three-month high in England and Wales
House prices in England and Wales increased 5.4 % y-o-y in June after a 4.6% rise in May. Moreover, the prices jumped 1.1% m-o-m in June following a 0.1% m-o-m gain in the previous month. The average price for a property improved to £181,619 in June from £179,591 in May.
Gertjan Vlieghe appointed to BoE’s rate-setting panel
Chancellor George Osborne appointed Gertjan Vlieghe, a partner and senior economist at hedge fund Brevan Howard, as the new external member on the Bank of England’s (BoE) Monetary Policy Committee. Mr. Vlieghe replaces David Miles, who recently spoke in favour of a rise in rates.
Company News
Petards Group (LON:PEG) – Speculative Buy
Yesterday, Petards Group released its trading update for the half year ended 30th June 2015. The company’s profitability was in line with the Board’s expectations, with substantial improvement in margins in comparison to the previous year that may be ascribed to the modified product mix. Last year, the benefits from these changes were offset by lower margin hardware deliveries to the MOD in view of the RAF’s SMRE project. Further, Petards would declare its interim results for the first half on 8th September 2015.
Our view: Petards strong results complement its plans to become highly profitable and cash rich. The company’s performance follows its over 100% rise in orders from MOD, Siemens, Bombardier and Hyundai Rotem along with higher number of contracts from its existing and new customers. Petards received orders worth £3m after a five-year framework deal with Siemens Mobility for the supply of Petards train related products and services. Further, the company plans to avail new opportunities in its relatively small scaled division of Emergency Services. Petards’ expects its second half to be in line with its expectations largely due to its strength of contracts and pre-orders. Going ahead, we believe the company has bright prospects owing to its increased number of contracts and higher customer acquisitions. Therefore, we maintain a Speculative Buy rating on the stock.
Melrose Industries (LON:MRO) – Buy
Yesterday, Melrose Industries declared its interim results for the half year ended 30th June 2015. The company’s continued operations revenue decreased 28% to £117.7m. The continuing group (excluding Elster) made a pre-tax loss of £4.1m as compared to a profit of £12.2m in the previous year. Melrose net debt stood at £742m with 2.7 x leverage. The company also declared an interim dividend of 2.8p, to be paid on 3rd September 2015. On the operational front, Melrose proposed the sale of its Elster Business to Honeywell for a total consideration of £3.3bn, implying 3.1 times Elster’s 2014 revenue. Honeywell would be transferred extra £0.9bn in view of the pension obligations consisting of the company’s FKI UK and McKechnie UK defined benefit pension plans. The company plans to return over £2bn to shareholders with the proceeds from the sale.
Our view: Melrose proposed sale of its Elster Group is in line with its business strategy of buying, improving, and selling. The company’s Elster business was bought in August 2014 and underwent several operational changes since then. The deal seems attractive in view of the huge one-time payment to be received apart from earlier-than-anticipated return on investment. Over the past 10 years the company has created over £2bn shareholder value and plans to return more than £2bn to shareholders using the cash from the sale. Meanwhile, the company continues to invest in research and development to enhance the earnings from its Brush group. The first set of generators in China are nearing completion and testing phase for delivery is expected to be completed by this year. Going ahead, we expect Melrose to have better opportunities as it seeks its next acquisition and continues to increase the shareholder wealth. In view of the above argument, we reiterate a Buy rating on the stock.
Next (LON:NXT) – Buy
Yesterday, Next released its trading update for the half year ended 25th July 2015. Overall, the company’s sales were better than expected and slightly ahead of the 0%~ 3% range suggested in March. Next’s full price sales increased 3.5%, with 1.7% from the opening of profitable new space. During the period, full price sales for retail group moved up 0.8% and the directory division was 7.5% higher. The company’s total sales, including markdown, improved 3.3%, with the total stock for the end of season rising by 4.8% over the previous year. Next plans to pay a special dividend of 60p per share on 2nd November 2015. The company has also revised its full year (ending Jan 2016) sales guidance range to 3.5% to 6% from previous estimates between 0.4% to 6.7%,with the pre-tax profit to remain in the range of £805m~£845m. Further, Next would declare the interim results on 10th September 2015.
Our view: Next’s improved sales in the first half have laid the foundation for a solid financial year ahead. The company looks fundamentally strong as it upgrades its sales and profitability estimates for the full year ending January 2016. Over the past two years, the company has distributed over £1bn to investors in form of special dividends and share buybacks. Going ahead, the company is expected to further improve its earnings and boost shareholder value. Moreover, the improving macroeconomic factors, lower inflation and rising wages, resulting in higher disposable income, are also likely to favour the company’s outlook. Therefore, in view of the overall optimism, we retain a Buy on the stock.
Domino’s Pizza (LON:DOM) – Buy
Yesterday, Domino’s Pizza announced its interim results for the half year (H1) ended 28th June 2015. The system sales for the company increased to £426.7m from £375.0m (H1 2014) led by like-for-like (LFL) sales improvement of 10.3% in the UK to £378.8m. The app-based sales continued to advance and took over the desktop sales, recording 51.6% sales. During the period, the underlying operating profit rose 30% to £32.1m resulting in an underlying EPS of 15.3p against £11.6p last year. The net cash balance stood at £19.2m (loss of £3.7m in H1 2014) prompting a hike in the interim dividend per share to 9p from 7.8p last year. In addition, the statutory revenue for Domino’s increased 7% to £157.3m leading to statutory pre-tax profit to £25.4m from £19.7m previous year. On the operational front, the company opened 24 new stores with 21 of them in UK and 3 in Switzerland, taking the total store count to 916. Domino’s enhanced its performance in the international business by lowering the losses in Germany to £1.8m from £4.7m last year owing to the improving economic scenario and also made changes to the operations in Ireland. Further, the company made investments to upgrade its digital channels and online ordering systems.
Our view: Domino’s Pizza delivered outstanding results owing to record online sales and upsurge in LFL sales in UK and Switzerland. The company continued to expand through the opening of 21 new stores that are likely to provide a platform for future growth. Additional investments worth £1.4m to the digital platform proved fruitful for the company as the App based sales led the distribution channel. Recently, a new mobile web app was launched that is expected to enhance consumer experience with its responsive design, easy navigation, upgraded content and optimal viewing. The initial response to the same has been encouraging and Domino’s expects improvement in sales going ahead. In addition, Domino’s plans to come up with the feature of saved favourite baskets to reduce order taking time. Overall, Domino’s has good prospects as it takes continuous steps to improve customer usage and plans to come up with new stores this year. In view of the above developments, we reiterate a Buy rating on the stock.
Yesterday, GKN released its half yearly results for the six months ended 30th June 2015. During the period, the company’s organic sales increased 1% to £3,853m and the trading margin improved 10 basis points to 9%. Pre-tax profit for the period rose 4% to £307m and the earnings per share was up 1% to 14.5p. However, on reported basis, the pre-tax profit stood at £212m, down 5%. The company declared an interim dividend 2.9p for the period, up 4% while its free cash flow stood at £21 m. On the operational front, GKN Aerospace won new work packages exceeding US$2.3bn over contract lives. The commercial aerospace witnessed a growth of 2% while the military segment declined 4%. GKN Driveline got annualised new and replacement business worth £460m and enhanced its trading margin to 8.3%. In addition, GKN powder metallurgy won annualised new and replacement business worth £90m with a trading margin improvement to 11.8%. On the other hand, GKN Land Systems organic sales slid 8% primarily due to challenging agricultural equipment markets. In a separate announcement, the company informed about the acquisition of, Fokker Technologies, specialist aerospace supplier, from Arle Capital for an enterprise value of £499m.
Our view: GKN’s half yearly performance has been impressive and the strong commercial order book has set the momentum for the remainder of the year. GKN Aerospace’s 2015 organic sales are expected to be broadly flat with majority of growth coming from the commercial aerospace division. Its other divisions including, GKN Driveline and GKN Powder Metallurgy are expected to continue to grow organically owing to the expected expansion in the global light vehicle production. With all the major divisions exhibiting a good performance, the company remains well positioned to witness decent growth in the global markets. Thus in view of the above, we retain our Buy rating on the stock.
Provident Financial (LON:PFG) – Buy
Yesterday, Provident Financial declared its interim results for the half year ended 30th June 2015. The adjusted pre-tax profit for the company increased to £126.6m from £94.1m in 2014 leading to rise in adjusted EPS to 70.4p against 54.2p in 2014. The company’s Vanquis Bank steered the growth as it reported a pre-tax profit of £88.5m, up 29.6%, owing to customer numbers and average receivables growth of 15.5% and 23.2%, respectively. Provident successfully repositioned its Consumer Credit Division (CCD) and registered a 2.7% improvement in pre-tax profit to £38m. Provident’s smallest segment Moneybarn pre-tax figures stood at £9.4m, a 38.2% increase over the previous year, and a 44.4% rise in customer numbers. Meanwhile, the return on assets improved to 15.6% from 14.9% in 2014 primarily due to positive repositioning of the home credit business. Provident’s interim dividend per share rose by 15.0% to 39.2p. On the operational front, the company made investments to develop Satsuma, an online direct repayment loan product and also invested to improve its customer acquisition programme. Provident is fully funded till May 2018 with gearing remaining the same at 2.4 times as of December 2014.
Our view: Provident’s all the three segments delivering positive results helped them post increased first half profits. The company’s Vanquis Bank has helped it cement its position in the relatively under-served non-standard credit card market, by concentrating on returns instead of growth. The investment in customer acquisition programme has been successful with the first half new bookings 11.9% up compared to the previous year. Satsuma, latest product in the CCD segment has shown good development with a customer count of 45,000 and receivables order of £11.6m. Overall, the company is well placed in terms of both resources and capital generation and is expected to generate better results. Further, improving household incomes and better cost of living would complement the growth prospects of the company. Therefore, we reiterate a Buy rating on the stock.
Economic News
UK GDP
According to the Office for National statistics, UK’s GDP grew 0.7% in the Q2 2015, in line with the market expectations, following a rise of 0.4% in the previous quarter. On a y-o-y basis the GDP increased 2.6% matching street expectations. The expansion was attributed majorly to the services sector growth of 0.7% in Q2 2015.
US consumer confidence index
As per the Conference Board, US consumer confidence index declined to 90.9in July, from a downwardly revised 99.8 in June. Economists had forecasted an increase in the reading to 100.0.