The Markets
Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 127 points down at 7:00 am.
New York: Wall Street declined amid increasing growth concerns over China’s economy and a sharp fall in oil prices. The S&P 500 shed 3.2% on Friday, with information technology and energy stocks leading the laggards. The index fell 5.8% during the week.
Asia: Equities are trading lower, tracking losses in global markets. Furthermore, the continued rout in China’s markets impacted investor sentiment. The Nikkei 225 fell 4.6%, while the Hang Seng was trading 4.7% lower at 7:00 am.
Continental Europe: Markets ended sharply lower on worse-than-expected Chinese PMI data. In addition, the uncertainty in Greece following the resignation of Alexis Tsipras concerned investors. France’s CAC 40 and Germany’s DAX dropped 3.2% and 3.0%, respectively.
Crude Oil: On Friday, Brent and WTI oil prices decreased 2.5%, and 1.7%, respectively. The spread between the two varieties stood at US$5.0 per barrel.
UK small caps: The FTSE AIM All-Share index closed 1.50% lower on Friday at 732.40.
Today’s news
UK’s economy to grow at faster pace
According to the Confederation of British Industry (CBI), the UK’s economy is expected to grow 2.6% in 2015 compared with the earlier estimate of 2.4%. Furthermore, the agency revised the growth forecast for 2016 to 2.8% from 2.5%. The improvement in economic outlook is ascribed to growth in household spending, better wages, low inflation and higher investments.
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Company News
Starcom (LON:STAR) – Hold
On Friday, Starcom announced its interim results for the six months ended 30th June 2015. Revenues for the period remained flat at US$2.64m (H1 2014: US$2.63m) owing to a low sales of the new products and tougher price competition on existing products. This also resulted in a modest decline of the gross margin to 44% from 48% in H1’2014. Loss for the period, however, improved by 30% to US$691,000 from $985,000 H1 2014 amid the Group’s on-going effort to reduce its operating expenses. Total operating expenses fell by US$130,000 and management expects to save a further US$400,000 in the second half. Starcom raised US$701,000 from a placing of 11,875,000 new ordinary shares in June 2015 to provide additional working capital. Re-engineering of its Watchlock developed in partnership with Mul-T-Lock is in line to be launched in Q4 2015, for which the Group has entered into a new distribution arrangement with a large Middle Eastern organisation.
Our view: Given such an innovative and seemingly unique product portfolio, together with obvious international need for such offerings, it remains a surprise that Starcom has not been able to achieve and sustain quite significant sales growth. Valuable as it is, at this stage of the Group’s evolution, investors most certainly do not want to learn that cost elimination was the principal feature of the reporting period. While the business model generally appears sound, as evidenced by its high margin SAS revenue stream accounting for almost one-third of Total during the first half, the key to much greater product familiarity and widespread adoption can only be marketing and distribution. New arrangements in the Middle East are likely to boost sales in 2016 while others in Asia, perhaps bearing fruit a year or two later, suggest some positive steps are being taken. That said, the fact that the Watchlock JV with Assa Abloy (Mul-T-Lock) has failed create the bonanza opportunity anticipated suggests that the international buyers, despite very obvious benefits, still need convincing of the need for new technologies within their security equipment purchases. While Starcom is likely to continue to introduce exciting new product ideas and refinements to its range, management might also recognise that its limited budgets create a need to re-invent its approach to market. Rather than the traditional build and sell model it could, for example, concentrate instead on offering design and manufacturing rights to larger industry players with significant market reach, in exchange for royalty plus share of web-based service fees. This could be one means by which the Group might capture its much larger international product opportunity before the regular flood of copy-cat producers saturate buyers with more competitive pricing. Never simple to effect, but such an initiative could revitalise a share price that otherwise may be stuck in the doldrums for an extended period. Beaufort retains its ‘Hold’ Recommendation.
GlaxoSmithKline (LON:GSK) – Buy
On Friday, GlaxoSmithKline (GSK) entered into an agreement with Novartis Pharma AG, a subsidiary of Novartis AG, for divestment of its rights in ofatumumab for auto-immune indications. Novartis Pharma had previously acquired the rights to oftatumumab for oncology indications. As per the terms agreed on Friday, Novartis Pharma will pay a Total of US$1.03bn to GSK for the transaction. Novartis Pharma would make an upfront payment of US$300m, followed by US$200m on commencement of phase III and remaining payments of US$534m on realization of other milestones. Novartis Pharma would also pay royalties up to 12% to GSK on future net sales of ofatumumab in auto-immune indications. The deal is subject to regulatory norms and is expected to complete by the end of 2015.
Our view: GSK is focusing on main therapy areas comprising HIV, vaccines, oncology, cardiovascular, immune-inflammation and respiratory diseases, to drive future growth. The divestment of rights in oftatumumab was in line with the above strategy, and would help the company generate sufficient funds and enhance shareholder value. GSK has also been making good progress; the company recently received approval for mepolizumab as a supplementary maintenance treatment for severe asthma with eosinophilic inflammation. GSK also delivered solid half year results led by strong performances in all its three segments. Owing to the expected increase in demand particularly in the emerging countries and the recent streamlining of company’s portfolio, we expect GSK to improve its earnings and generate stable returns for shareholders. We maintain a Buy rating on the stock.
Economic News
US manufacturing PMI
The final Markit PMI for the US fell to 52.9 in August, the lowest reading since October 2013. The economists’ had expected a reading of 53.8, unchanged from July.
Eurozone consumer confidence
The gauge of Eurozone consumer confidence increased to -6.8 in August, after a reading of -7.1 in July, the European Commission said on Friday. The markets had expected a reading of -6.9.