Markets
Europe
The FTSE-100 finished yesterday's session 0.62% higher at 6,851.30, whilst the FTSE AIM All-Share index closed 0.58% better-off at 777.06. In continental Europe, markets ended in the green, led by better-than-expected corporate earnings releases. Additionally, positive economic data released in the region lifted investor sentiment. Germany’s DAX and France’s CAC 40 rose 2.5% and 1.2%, respectively.
Wall Street
Wall Street ended broadly flat, as investors digested a mixed set of corporate earnings releases and a decline in oil prices. The S&P 500 closed unchanged, with the healthcare sector leading gainers and energy losing the most.
Asia
Equities are trading lower, as investors focused on movements in oil prices and awaited key economic data from the US and China later this week. The Nikkei 225 fell 0.2%, as a stronger yen exerted pressure on export-driven stocks. The Hang Seng was trading 0.1% down at 7:00 am.
Oil
Yesterday, Brent oil prices decreased 0.9% to US$44.98 per barrel, while WTI prices dropped 0.6% to US$42.77 per barrel.
Headlines
Industrial output in UK rises in Q2 2016
As per the Office for National Statistics, the UK’s industrial output grew 2.1% in Q2 2016, the fastest quarterly increase since Q3 1999 and in line with preliminary estimates. The gain in output was ascribed to a 2.3% m-o-m jump in production in April. Industrial output in June rose 0.1% m-o-m after a 0.6% fall in May.
Company news
AstraZeneca (LON:AZN, 5,1777.0p) - Hold
AstraZeneca announced results from the Phase III SELECT-1 trial of the MEK 1/2 inhibitor, selumetinib, in combination with docetaxel chemotherapy as second-line treatment for patients with KRAS mutation-positive (KRASm) locally-advanced or metastatic non-small cell lung cancer (NSCLC). The results showed that the trial did not meet its primary endpoint of progression-free survival (PFS) and selumetinib did not have a significant effect on overall survival (OS).
Our view: AstraZeneca’s selumetinib cancer treatment failing to meet its primary endpoint in the trials is a disappointment. Selumetinib is being explored as a treatment option in studies in patients with differentiated thyroid cancer. The drug, combined with chemotherapy, failed to meet any of the goals sought in trials. Last month, AstraZeneca’s Phase III AURA3 trial met its primary endpoint, demonstrating superior PFS compared with standard platinum-based doublet chemotherapy. The trial assessed the efficacy and safety of Tagrisso as a second-line treatment in more than 400 patients with EGFR T790M mutation-positive. The results underpin Tagrisso as an alternative for EGFR T790M lung-cancer patients. However, AstraZeneca’s new drug zirconium cyclosilicate (ZS-9) recently failed to receive US FDA approval due to its high potassium levels. AstraZeneca paid US$2.7bn for ZS Pharma to gain access to the drug. Moreover, many of the company’s drugs are in the development phase. AstraZeneca is facing challenges, with some of its key drugs approaching patent expiry. In view of the mixed outlook for the company, we maintain a Hold rating on the stock.
boohoo.com (LON:BOO, 79.25p) - Buy
boohoo.com (‘boohoo’), one of the UK’s largest online own-brand fashion retailers, yesterday provided trading update ahead of the interim results. The Group said it has performed “well” for the first 5 months of the year and the August up to yesterday has been “encouraging”. Sell through of seasonal stock remain strong across Spring and Summer season. The Board upgraded its full year sales growth expectations to 28%-33% (previous guidance: 25%-30%) and currently anticipates EBITDA margins to improve for the full year. The Group will announce its results for the 6 months ended 31 August 2016 on 27 September 2016.
Our view: Yesterday’s announcement, coming hard on the heels of positive news from the British Retail Consortium (showing like-for-like sales growth of +1.1% in July, compared with a -0.5% fall in June, bolstered apparently by the warm weather and heavy discounts offered by the general retailers), confirmed that Brexit has neither hindered the UK consumer nor sapped their enthusiasm for purchasing online. This was especially relevant for the boohoo who, in its Q1 results, generated 64% of its revenue within the UK (though both UK and international growing well, latter expanding faster). The Group said the strong demand and sales momentum in the Q1 continuing into the current period. In the Q1, Group expanded revenue across all regions, with strategy to expand third party sales turning particularly positive, while the expansion in partner numbers helped to build the brand internationally and broaden customer reach. Management sees the positive trading environment continuing, which should be evident from them upgraded sales growth and EBITDA margins guidance for the year end. With the worldwide market for internet fashion sales continues to expand, as shopping preferences continue their shift towards the convenience and competitive pricing afforded by successful online retailers. boohoo is positioned for further upside, even given the exceptional share price performance of the past 18 months. Beaufort reiterates its Buy rating on the stock.
Legal & General (LON:LGEN, 206.0p) - Buy
Legal & General declared results for the half year ended 30th June 2016 (H1 2016). During the period, adjusted operating profit increased 10% y-o-y to £822m in H1 2016. Pre-tax profit attributable to equity holders increased 23% to £826m, resulting in an EPS of 11.27p, 24% higher than H1 2015. Adjusted EPS increased 14% to 11.20p. Return on equity (ROE) stood at 20.4% (H1 2015: 19.1%). Solvency II surplus amounted to £5.3bn (FY 2015: £5.5bn) and solvency II coverage ratio stood at 158% (FY 2015: 169%). Net cash generation increased 16% to £727m. Legal & General’s economic capital surplus stood at £8.1bn (FY 2015: £7.6bn), representing a coverage ratio of 235% (FY 2015: 230%). Legal & General Retirement annuity assets rose 18% to £51.0bn (H1 2015: £43.4bn), while Legal & General Investment Management AUM increased 18% to £841.5bn. The company has adopted a formulaic approach to setting interim dividend, which would be 30% of the previous year’s full-year dividend. Legal & General declared an interim dividend of 4.0p per share.
Our view: Legal & General delivered good performance in H1 2016 despite difficult trading conditions. The company’s growth was led by strong growth in its retirement business. Legal & General Retirement recorded a 44% y-o-y jump in operating profit to £406m in H1 2016. Legal & General Capital’s operating profit increased 17% to £135m and Legal & General America operating profit rose 8% to £43m. All the other divisions of the company reported a decline in operating profit, largely impacted by volatile market conditions. However, overall Legal & General recorded an increase in profit levels, cash generation and ROE. The company enjoys a healthy balance sheet, which provides it the flexibility and ability to invest in each of its businesses. Legal & General plans to focus on five established, long-term growth drivers: ageing populations; globalisation of asset markets; creating real assets; welfare reform; and the digital platform. We believe the company is comfortably placed with adequate funds and portfolios to mitigate the ongoing economic downturn. Therefore, we maintain a Buy rating on the stock.
Standard Life (LON:SL., 340.0p) - Buy
Standard Life declared results for the half year ended 30th June 2016 (H1 2016). During the period, fee-based revenue increased to £794m from £761m in H1 2015, while total operating income rose to £857m from £801m in H1 2015. Operating profit before tax soared to £341m from £290m in the same period last year, with diluted operating EPS up 16% to 13.5p. Profit for the period attributable to equity holders stood at £226m (H1 2015: £69m), leading to a basic EPS of 11.5p (H1 2015: 3.2p). Assets under administration increased 7% to £328.0bn (FY 2015: £307.4bn), with gross inflows into growth channels of £20.6bn (H1 2015: £20.5bn) and net inflows of £4.1bn (H1 2015: £7.4bn). Standard Life Investments, the fund management arm, had £269.0bn in assets under management (AUM) as at 30th June 2016, up from £253.2bn at the end of December 2015. Global institutional AUM increased to £78.1bn, with net inflows of £2.0bn, while Wholesale AUM rose to £47.3bn. Workplace and Retail net inflows stood at £2.8bn (H1 2015: £2.9bn). Underlying cash generation increased 10% to £254m. Solvency II capital surplus totalled £2.2bn (FY 2015: £2.1bn), representing a solvency cover of 154% (FY 2015: 162%). On the operational front, Standard Life increased its stake in HDFC Life from 26% to 35% for £179m. Earlier this week, HDFC Life announced a merger with Max Life. After approval of the merger, Standard Life would have a 24.1% stake in the enlarged HDFC Life. Standard Life declared an interim dividend of 6.47p, 7.5% higher than H1 2015.
Our view: Standard Life performed robustly in H1 2016, despite the ongoing volatility in the financial markets. The company benefitted from its diversification efforts. Standard Life’s AUM rose sharply, supported by a weak Sterling and drop in bond yields after the Brexit vote. The company’s customer base broadened with contributions from both large institutions and individuals. Standard Life’s workplace and retail products were boosted by Britain’s attempts to get more people saving for retirement through auto-enrolment. The company’s increased stake in HDFC Life and the proposed merger of HDFC Life with Max Life would enhance Standard Life’s presence in the fast growing Indian market. The company enjoys a strong and stable solvency surplus. Standard Life’s solid cash position paved the way for increased dividends payable to shareholders. We believe the company is well poised to mitigate the challenges and continue its growth momentum. Therefore, we maintain a Buy rating on the stock.
Economic news
UK manufacturing production
As per the Office for national Statistics, UK’s manufacturing output dropped 0.3% m-o-m in June, after a 0.6% decline in May. Output was forecast to fall 0.2% in June. On a y-o-y basis, manufacturing output gained 0.9%, slower than the 1.5% in May. Economists had forecast a 1.3% increase.
US wholesale inventories
US wholesale inventories rose 0.3% m-o-m in June, after gaining 0.2% in May, the US Commerce Department reported yesterday. The markets expected no change in inventories.