The Markets
Market opening: UK markets are expected to start the session marginally lower this morning. FTSE 100 Futures were trading 8.3 points lower at 7:19 am.
New York: Wall Street ended in the green amid mixed economic data released yesterday. Investors await the outcome of Federal Reserve Policy meeting starting today. The S&P 500 advanced 1.3%, led by the industrial sector.
Asia: Equities are trading higher, taking cues from global markets. Investors closely eyed the developments surrounding a possible interest rate hike by the Fed. The Nikkei 225 added 0.8%, while the Hang Seng was trading 1.2% up at 7:00 am, tracking the Chinese market.
Continental Europe: Markets ended positive after a volatile trading session yesterday. The improvement in oil prices gave a boost to energy stocks. However, investors remained concerned about the economic slowdown in China. France’s CAC 40 and Germany’s DAX rose 1.1% and 0.6%, respectively.
Crude Oil: Yesterday, WTI and Brent oil prices increased 1.3% and 0.6%, respectively. The spread between the two varieties stood at US$2.0 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.65% higher yesterday at 736.70.
Today’s breakfast menu:
– Beaufort Securities on Rockhopper Exploration – Speculative Buy; Condor Gold – Speculative Buy; London Stock Exchange Group – Buy; ARM Holdings – Buy; and Kingfisher – Hold
– UK CPI, UK PPI, Germany ZEW Survey, US retail sales advance, US empire manufacturing, US industrial production
Today’s news
Eurozone trade surplus reaches record high
According to data from Eurostat, the trade balance in the Eurozone advanced to €22.4bn in July from €21.4bn in June. The improvement was led by a 7% y-o-y growth in exports.
UK house prices rise fastest in July
As per data from the Office for National Statistics, house prices in the UK jumped 2% in July, with the east and southeast witnessing the greatest growth. Average house prices increased £5000 during the month to a new all-time high of £282,000 in July, 16.7% above the peak in 2007.
Company News
Rockhopper Exploration (LON:RKH) – Speculative Buy
Yesterday, Rockhopper Exploration (Rockhopper) declared its results for the half year ended 30th June 2015. Revenues advanced to US$1.8m in H1 2015 from US$0.8m (six months to September 2014). However, pre-tax loss widened to US$5.1m from US$3.2m mainly due to higher cost of sales. Cash resources at the end of period stood at US$160m. On the operational front, the company commenced operations in the North Falkland Basin in March, and has already made two material oil discoveries from the first two wells. Rockhopper received Environment Impact Assessment (EIA) approval for Ombrina Mare project in Italy. The company is on track to start the gas production from Civita onshore gas field in Q4 2015. Additionally, Rockhopper was granted a 40% interest in offshore Block 9 in Croatia in partnership with Eni. Post the first half, the company started production at the Guendalina gas field located in the Northern Adriatic. Rockhopper also acquired non-operated production and exploration assets from Beach Energy Limited in Egypt.
Our view: Rockhopper showcased resilient performance in the first half despite challenging trading conditions. The company took a series of steps including acquisitions and new explorations to cope with the tough situation. Rockhopper recently discovered substantial amount of oil in the North Falkland Basin. The Zebedee oil field is expected to have around 50 million barrel (mmbbls) of oil and the Isobel Deep exploration well is estimated to have more than 400 mmbbls. Further, commencement of Ombrina Mare project would provide the company access to a prospect with around 26.5 mmbbls of oil. Going forward, Rockhopper plans to invest in the Greater Mediterranean and North Africa region, which would further enhance the company’s resources. We believe Rockhopper is well placed with strong assets and resources to maintain its momentum for the entire year. In view of the above argument, we maintain a Speculative Buy rating on the stock.
Condor Gold (LON:CNR) – Speculative Buy
Yesterday, Condor Gold (Condor) released results on the study of structural geology of the La India Gold District undertaken by Dr Tony Starling from Telluris Consulting Ltd. The La India Project is fully owned by the company with a resource estimate of around 18.1 million tonnes at 4.0g/t gold comprising of 2.32 million ounces of gold. As per the results, a Total of 33 exploration targets were found, 23 of them having gold veining at the surface. The results of the study would be combined with the recently found data on soil geochemical composition, to carry out future exploration.
Our view: The discovery of potential targets in the La India Project enhances Condor’s resource potential. The company is moving in the right direction to leverage on the huge prospects available in the region. The study not only encourages Condor to continue future exploration but also increases its knowledge on the structural framework to monitor the flow and deposition of epithermal gold. Recently, Condor planned a drilling programme at the Real de La Cruz Concession to test for low-grade and high-grade mineralization and is awaiting approval. Additionally, the geological setting from Tierra Blanca remains highly prospective and we expect the company to witness growth through the extension of high-grade gold mineralization. In view of the overall developments, we remain optimistic over the company’s future prospects and retain a Speculative Buy rating on the stock.
London Stock Exchange Group (LON:LSE) – Buy
Yesterday, London Stock Exchange Group (LSE) informed that it sold Proquote, its market data vendor and retail trading provider, to IRESS, an Australian based financial technology company. The agreement also includes sale of LSEHub, an order-routing business that acts as a link between institutional investors and brokers. The transaction is expected to complete in Q4 2015. No financial terms were disclosed.
Our view: The aforementioned sale of Proquote is in line with LSE’s plan to focus on information services. Last month, the company reported solid first half results with overall revenues jumping 90% to £1,164.9m and Total income rising 83% to £1,208.7m, as compared to H1 2014. The company’s acquisition of Frank Russell turned fruitful as it entered into an agreement with CME to launch US futures contracts on FTSE Russell indexes. The company benefited from higher activities in the primary market, which continued to bloom with record fund listings from a diverse range of international issuers. In terms of business growth, Turquoise, LSE’s trading platform entered into exclusive discussions with Plato Partnership, to collaborate on market structure initiatives in Europe. The company also started the transition to include China A shares in its global benchmarks. Given the above, LSE is well-positioned to leverage its international open access market infrastructure to steer innovation and bring market efficiencies. In view of the overall optimism, we maintain a Buy rating on the stock.
ARM Holdings (LON:ARM) – Buy
Yesterday, ARM Holdings released a trading statement ahead of its investor day presentation. The company expects the current trading and operating expenses for the quarter in line with previous guidance. ARM Holdings expects to continue investment in future technologies for smart mobile devices and technologies for networking infrastructure. The company also plans to invest in complementary technologies. The above investments are expected to add US$40m to revenues in 2016, and increasing to around US$200m in 2020. The company expects to incur expenses of around £40m in 2017.
Our view: The trading statement highlights ARM Holding’s future plans to invest in various technologies to expand its portfolio of services. The aforementioned update would enhance the long-term revenues of the company. As per the first half results, the company made significant investments to enhance its operations. ARM Holdings signed 54 processor licenses to implement biometric sensors for mobile payments. The company subscribed to a new licence with a major Chinese OEM, signed 7 ARMv8-A processor licences, 9 Mali™ multimedia processor licences and 5 POP IP licences to keep it updated the latest technology in the market. These measures boded well for the company as it reported revenues of £456m, 22% higher than H1 2014. We expect the royalty revenue to grow faster owing to company’s recent signing of new licenses and the rise in royalty per chip in mobile devices. ARM Holdings is likely to meet its full year revenues guidance if the macroeconomic changes do not hold back consumer spending. In light of the company’s proposed investments and growing market, we maintain a Buy rating on the stock.
Kingfisher (LON:KGF) – Hold
Yesterday, Kingfisher declared its unaudited interim results for the half year ended 1st August 2015. Total sales fell to £5,382m in H1 2015 from £5,605m in H1 2014. However, sales improved 3.5% on a constant currency basis and 2.0% on Like-for-like (LFL) basis. Pre-tax profit decreased to £384m from £393m in H1 2014, mainly due to adverse foreign exchange movements. During the period, EPS remained flat at 12.3p and net cash stood at £435m (H1 2014: £496m). On the operational front, the company continued to progress on its ‘ONE’ Kingfisher Plan. The company remains on track to close 15% of its underperforming B&Q stores and exiting the leases secured on 26 of the stores. Kingfisher informed that it would add another 200 Screwfix UK outlets. Additionally, the company has returned £160m via a share buyback programme. Kingfisher declared an interim dividend of 3.18p, 1% higher than H1 2014 to be paid on 13th November 2015.
Our view: Kingfisher delivered below par half yearly results. However, the company made significant progress to ‘ONE’ Kingfisher plan to unify the company, giving priority to customer needs. In view of the same, Kingfisher plans to spend around £350m to kick-start with the Goods Not For Resale (GNFR) programme. Going forward, the company’s plans to increase the number of outlets and expand the Screwfix stores. Kingfisher faces challenges at the macro level, especially because the long term prospects of the housing sector do not appear promising. The company’s important market, France, reported a weak consumer confidence and a decline in the housing and construction market. Furthermore, the macroeconomic conditions in the UK have also been swinging in the past few months. We would like to wait and watch the company’s progress in terms of its expansion and performance for the full year. We reiterate a Hold rating for now.
Economic News
UK CPI
The UK consumer price index (CPI) rose 0.2% m-o-m in August, after a 0.2% dip in July, as per the data released by the Office for National Statistics (ONS) yesterday. This was in line with the market expectations. On y-o-y basis, CPI remained flat in August, after a 0.1% rise in the previous month. Core consumer price inflation improved 1.0% y-o-y in August, following a 1.2% rise in July.
UK PPI
The UK producer price index (PPI) output slipped 0.4% m-o-m in August, following a 0.1% drop in July, as per the data released by Office for National Statistics yesterday. The market expectations were -0.2%. On y-o-y basis, output prices fell 1.8% in August, following a 1.6% dip in July. The markets expected a fall of 1.7%.
Germany ZEW survey
The Centre for European Economic Research/ZEW reported that the German economic sentiment slipped to 12.1 in September from 25.0 in August. The actual missed the market expected reading of 18.3. Meanwhile, the gauge of current situation increased to 67.5 in September from 65.7 in the previous month, exceeding the market expectations of 64.0.
US retail sales advance
US advance retail sales increased 0.2% m-o-m in August after an upwardly revised increase of 0.7% in July, the Commerce Department said yesterday. The reading lagged the market expectations rise of 0.3%. Excluding the sales of motor vehicle and parts, retail sales moved 0.1% up in August, following an upwardly revised growth of 0.6% last month.
US empire manufacturing
The US Empire State manufacturing index for general business conditions improved to -14.67 in September from -14.92 in August, the manufacturing survey by the Federal Reserve Bank of New York revealed yesterday. Economists had expected a reading of -0.5.
US industrial production
Industrial production in the US fell 0.4% m-o-m in August, after an upwardly revised increase of 0.9% in July, the Federal Reserve announced yesterday. Markets were expecting output to decrease by 0.2%. The capacity utilization slipped to 77.6% in August compared to 78.0% in July.