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Dutch coalition government falls over budget cuts

Newsletter Update Tuesday, 24th April 2012

FTSE-100


Graph - 240412

Source: Bloomberg

FTSE-100 statistics


Yesterday: -1.9%
Latest: 5,665.6
High: 5,772.1
Low: 5,637.7
Top three: BSkyB +0.7%

Smiths Group +0.4%

Vodafone  -0.1%

Bottom three: Vedanta -6.7%

Intl Consol Air  -5.4%

Prudential  -4.9%

Source: Bloomberg

Analyst


Donald Linderyd

(t) +44 (0) 207 382 8421

(e) donald.linderyd@hbmarkets.com


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The Markets

Market opening: Markets are poised for a marginally higher opening as investors pause after yesterday’s fall. The FTSE futures were trading 19 points up at 7:00am.

_

New York: The political crisis in Europe coupled with the region’s worse than expected economic data pressured Wall Street. The S&P 500 closed 0.8% lower yesterday.

Asia: The Dutch government resignation increased uncertainty in the Eurozone, limiting Asian gains. The Nikkei closed 0.8% lower and the Hang Seng was flat at 7:00am.

Continental Europe: Weaker than expected economic data, the breakdown of the Dutch coalition and Hollande leading after the first round of the French election hit the sentiment causing a sharp sell-off in equities. The German DAX plunged 3.4% and the French CAC 40 shed 2.8%.

UK small caps: The FTSE AIM All-Share index ended 1.1% lower yesterday. To read our latest small cap research, click here.

 

Today’s breakfast menu:

- HB Markets on Greene King – Hold; Stagecoach – Hold; and Cable & Wireless Worldwide – Sell

- Eurozone PMI; Eurozone debt/GDP ratio; and German PMI

Today’s news

Dutch coalition government falls over budget cuts

Dutch Prime Minister, Mark Rutte, offered the resignation of his 18-month old minority coalition government to Queen Beatrix after the populist Freedom Party withdrew support over differences about budget cuts. The political vacuum could push the state into elections as early as June. The resultant uncertainty poses a threat to the nation’s AAA rating unless parties in and outside the coalition reach a consensus on budget cuts. The political paralysis in the Netherlands, which has been Germany’s closest ally in enforcing fiscal discipline in the Eurozone, could also affect implementation of EU’s fiscal compact. German Chancellor Angela Merkel’s fiscal compact seems to be in jeopardy with support from the Netherlands faltering and French presidential election frontrunner, Francois Hollande, vowing to renegotiate the agreement.

Argentina put on negative watch by S&P

S&P revised the outlook on Argentina’s credit to negative from stable, citing government policies since the October 2011 presidential elections, including the government’s latest act of expropriating energy company, YPF, from Spain’s Repsol.


Read the latest AIM Update now!

Company News

UK companies reporting today

 

Mkt. Cap.

(£)

Ticker

Sector

Period

Expected
sales (£)

Expected
pre-tax (£)

Filtrona

1.0bn

FLTR LN

Food

Q1 2012

-

-

Carpetright

410.9m

CPR LN

Retail

Trading update

-

-

ARM Holdings

8.3bn

ARM LN

Technology

Q1 2012

128.0

3.2

Associated British Foods

9.5bn

ABF.L

Food

H1 2012

5.7bn

33.50

Reed Elsevier

11.9bn

REL.L

Publishing

Q1 2012

-

-

888 Holdings

264.3m

888.L

Gambling

Trading update

-

-

Smiths News

161.9m

NWS.L

Media

H1 2012

-

-

BBA Aviation

958.9m

BBA.L

Aero & def.

Q1 2012

-

-

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts

Greene King (GNK.L, 517.5p) – Hold

Greene King issued a pre-close trading update yesterday. In the 50 weeks to 15th April 2012, retail like-for-like (LFL) sales rose 4.6%. LFL sales in the last 13 weeks were up 4.5%. Food LFL sales, a part of retail arm, increased 6.3% and 6.7% in the 50- and 13-week period respectively. Greene King acquired or developed 37 new sites for the retail expansion. The Hungry Horse retail brand now boasts of 180 outlets in the UK. At Pub Partners, the leased and tenanted pub operations, average EBITDA per pub in the past 48 weeks increased to 3.8% (from 3.0% in H1 2012) but LFL EBITDA was down 0.1%. Meanwhile, core estate LFL EBITDA increased to 0.5%. As a part of a strategic plan, the company disposed off 97 non-core pubs from this division. The brewing and brands division saw the re-launch of Greene King IPA, the cask ale brand, and introduction of two news beers – Greene King IPA Gold and Greene King IPA Reserve. A marketing budget of £4m was earmarked for the launch. In the 50-week period, core own-brewed volumes increased 0.8%. The company expects to benefit from the upcoming events in the summer such as the Diamond Jubilee, Euro 2012 and the Olympics, said Rooney Anand, the CEO.

Our view: Greene King witnessed a pick-up in LFL retail sales compared to 4.0% growth seen in H1 2012. Also, the disposals at Pub Partners seem to be improving profitability. However, at the current price, the share seems fairly valued. Seeing better opportunity elsewhere in the sector we reiterate our Hold rating.

Stagecoach (SGC.L, 247.6p) – Hold

Stagecoach released a pre-close trading update for the 48 weeks to 1st April 2012 yesterday. The company said overall profitability remained good. Like-for-like (LFL) revenue grew 2.7% at the UK bus operations and 8.8% at the UK rail operations. The Virgin rail group recorded LFL revenue growth of 7.9%. In the eleven months to 31st March, the LFL sales at the North American operations soared 14.0%. The management expects to maintain stable levels of operating profit in the next fiscal year.

Our view: The performance at the North American operations improved as the US economy picked up momentum. However, the growth at the UK operations has slowed over the past two months. In the 40-weeks to 5th February, the UK bus and rail operations grew 3.0% and 9.5%, respectively. Though the cost-saving initiatives are expected to help maintain current profitability, we expect overall profitability to stagnate until 2013. With little opportunities of growth in the offing, we don’t expect to see consensus estimates to improve and have a hold rating on Stagecoach.

Cable & Wireless Worldwide (CW.L, 35.9p) – Sell

Cable & Wireless Worldwide (CWW) announced the acceptance of the £1.0bn or 38p per share cash offer by Vodafone yesterday. This price represents a 107% premium on the average closing price of CWW share for the three months to 10th February 2012, when the news of the offer went public. However, the company’s top shareholder, Orbis Holdings, which holds 19% of the shares, said Vodafone’s offer does not appear to reflect Cable & Wireless inherent value. Vodafone needs 75% support from shareholders.

Our view: India’s Tata Communications had also expressed an interest in acquiring CWW, but withdrew their offer on Wednesday, as it could not reach an agreement on price. Cable & Wireless clearly does not have the strategy in place to capitalise on its assets, which leaves shareholders with few options. In the absence of a counterbid for a company which has issued three profit warnings since March 2010 and despite Orbis’ comments, we see limited upside. The current 5% discount to Vodafone’s offer represents the cost of carry until the deal closes and some uncertainty that Orbis may block the deal. However, Orbis blocking the deal would be another negative for CWW’s share price. Therefore, as Vodafone is dictating the terms, we advise investors to exit.


Make use of your 2012/2013 ISA Allowance now! Why wait?

Economic News

Economic releases due today

Region

Release

Indicator

Period

Previous

Expected

UK Public Finances (PSNCR) £bn March -7.8 13.0
UK PSNB ex Interventions £bn March 15.2 16.0
UK Public Sector Net Borrowing £bn March 12.9 14.2
US S&P/CS 20 City SA m-o-m % February -0.04 0.2
US S&P/CS Composite-20 y-o-y % February -3.8 -3.4
US S&P/Case-Shiller Home Price Index Index February 135.5 134.7
US Consumer Confidence Index April 70.2 69.7
US Richmond Fed Manufacturing Index Index April 7.0 6.0
US House Price Index m-o-m % February 0.0 0.1
US New Home Sales Thousands March 313.0 318.0
US New Home Sales m-o-m % March -1.6 1.6

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts

Eurozone PMI

The Eurozone preliminary composite purchasing managers’ index (PMI) shrank to a five-month low of 47.4 in April from 49.1 in March, market research firm Markit said yesterday. The manufacturing PMI hit a 34-month low of 46.0 in April from 47.7 in the previous month. The services PMI declined to 47.9, the lowest in five months, from 49.2 in March.

Our view: The decline in the composite PMI defies economists expecting a rise to 49.3. They were expecting the manufacturing PMI to improve to 48.1 and the service PMI to come in marginally better at 49.3. The reversal of the PMI indicates that economic activity in the Eurozone contracted more than expected and suggests that the double dip recession could extend into Q3 2012.

Eurozone debt/GDP ratio

Governments in the Eurozone cut the budget deficit to 4.1% of 2011 GDP after running a 6.1% deficit in 2010, the Eurostat reported yesterday. However, debt as a % of GDP increased to 87.2% (or €8.2tr) from 85.3% in 2010 as economic growth slowed.

Our view: The members of the Eurozone are still a long way from achieving EU’s target of limiting budget deficit to 3.0% and maintaining a debt to GDP ratio of 60%. Though the austerity plans by the governments in the Eurozone have been successful in reducing the deficit, the slowdown in growth seems to be pushing the region into a deeper recession causing the debt to GDP ratio to rise. Also, though the 17-member Eurozone agreed to stricter budgetary discipline by ratifying the fiscal compact, recently Spain said it will not be able to meet fiscal targets. Italy followed suit saying the worsening recession would mean it will have to keep its balanced budget plans on hold.

German PMI

The German manufacturing PMI slipped to a 33-month low of 46.4 in April from 48.4 in March, Markit said yesterday. The services PMI improved 0.5 points to 52.6 from 52.1 in the previous month. Consequently, the composite PMI dropped to 50.9 in April from 51.6 in March.

Our view:Services PMI increased more than the 52.3 expected by economists but the manufacturing PMI disappointed by failing to meet expectations of an improvement to 49.0. This suggests that the increase in trade with Asia and the US has not been able to compensate for the decline in orders from the Eurozone. The contraction in output not only raises concerns about Germany’s ability to drive growth in the Eurozone but also casts some doubt over the upbeat business confidence surveys.

Later this week…

Companies
reporting

 

Mkt. Cap. (£)

Ticker

Sector

Period

Expected sales (£)

Expected pre-tax (£)

Wednesday 25th April

 

 

DS Smith

1.6bn

SMDS.L

Basic mats.

Trading update

-

-

Talvivaara Mining Co.

521.2m

TALV.L

Mining

Q1 2012

54.0m

-

Sports Direct International

1.7bn

SPD.L

Retail

Trading update

-

-

Fenner

848.8m

FENR.L

Basic mats.

H1 2012

-

17.0

UBM

1.5bn

UBM.L

Advertising

Q1 2012

-

-

GlaxoSmithKline

72.2

GSK.L

Healthcare

Q1 2012

6.8bn

29.12

Standard Life

5.2bn

SL.L

Insurance

Q1 2012

-

-

 Polymetal Intl

3.8bn

POLY.L

Mining

FY2012

870.8m

69.81

Capital Shopping Centres

2.8bn

CSCG.L

Property

Q1 2012

-

-

Johnston Press

36.8m

JPR.L

Media

FY2011

-

-

Premier Foods

401.7m

PFD.L

Food

Q1 2012

-

-

Stagecoach

1.5bn

SGC.L

Transport

Trading update

-

-

Bodycote

794.4m

BOY.L

Industrials

Trading update

-

-

Thursday 26th April

 

 

Elementis

898.6m

ELM.L

Basic mats

Q1 2012

-

-

Senior

824.7m

SNR.L

Aero & def.

Q1 2012

-

-

Cobham

2.6bn

COB.L

Aero & def.

Q1 2012

-

-

Go-Ahead Group

489.7m

GOG.L

Transport

Q3 2012

-

-

Howden Joinery Group

760.1m

HWDN.L

Retail

Q1 2012

-

-

Unilever

97.3bn

ULVR.L

Cons. goods

Q1 2012

12.1bn

-

Barclays

26.0bn

BARC.L

Financials

Q1 2012

7.9m

12.05

Royal Dutch Shell

137.8bn

RDSA.L

Oil & gas

Q1 2012

US$98.3bn

US$1.10

AstraZeneca

35.6bn

AZN.L

Healthcare

Q1 2012

US$7.8bn

US$1.78

Shire

11.3bn

SHP.L

Healthcare

Q1 2012

719.1m

0.315

Admiral Group

3.3bn

ADM.L

Insurance

Q1 2012

-

-

Whitbread

3.3bn

WTB.L

Restaurants

FY2012

1.8bn

131.16

British American Tobacco

62.6bn

BATS.L

Tobacco

Q1 2012

-

-

Meggitt

3.1bn

MGGT.L

Aero & def

Q1 2012

-

-

Kazakhmys

4.5bn

KAZ.L

Mining

Q1 2012

-

-

Segro

1.7bn

SGRO.L

Property

Q1 2012

-

-

ASOS

1.2bn

ASC.L

Comm. servs.

Trading update

-

-

Taylor Wimpey

1.6bn

TW.L

Homebuilding

Trading update

-

-

McBride

232.4m

MCB.L

Cons. staples

Q3 2012

-

-

Jardine Lloyd Thompson

1.5bn

JLT.L

Financials

Trading update

-

-

Croda

3.1bn

CRDA.L

Basic mats.

Q1 2012

-

-

Friday 27th April

 

 

AZ Electronic Materials SA

1.2bn

AZEM.L

Basic mats

Q1 2012

-

-

Aegis Group

2.1bn

AGS.L

Advertising

Q1 2012

-

-

WPP

6.7bn

WPP.L

Advertising

Q1 2012

-

-

Pearson

9.2bn

PSON.L

Media

Q1 2012

-

-

Ultra Electronics

1.2bn

ULE.L

Aero & def.

Trading update

-

-

Colt Group SA

869.9m

COLT.L

Comm. servs.

Q1 2012

-

-

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts

Economic
releases

Region

Release

Indicator

Period

Previous

Expected

Wednesday 25th April      
UK GDP q-o-q % Q1 2012 -0.3 0.1
UK GDP y-o-y % Q1 2012 0.5 0.3
UK CBI Trends Total Orders Index April -8.0 -6.0
UK CBI Trends Selling Prices Index April 24.0 26.0
UK CBI Business Optimism Index April -25.0 -18.0
US MBA Mortgage Applications w-o-w % 20th April 6.9 -
US Durable Goods Orders m-o-m % March 2.4 -1.7
US Durables Ex Transportation m-o-m % March 1.8 0.5
US Cap Goods Orders Non-def Ex Air m-o-m % March 1.2 1.0
US Cap Goods Ship Non-def Ex Air m-o-m % March 1.4 1.4
US FOMC Rate Decision % 25th April 0.25 0.25
Thursday 26th April      
UK BBA Loans for House Purchase Loans March 33,103.0 34,000.0
UK CBI Reported Sales y-o-y % April 0.0 -4.0
UK Nationwide House prices SA m-o-m % April -1.0 0.5
UK Nationwide House prices NSA y-o-y % April -0.9 -0.3
UK Nationwide Consumer Confidence Index March 44.0 43.0
Eurozone Business Climate Indicator Index April -0.3 -0.3
Eurozone Consumer Confidence Index April -19.8 -19.8
Eurozone Economic Confidence Index April 94.4 94.2
Eurozone Industrial Confidence Index April -7.2 -7.0
Eurozone Services Confidence Index April -0.3 -0.5
Germany Consumer Price Index m-o-m % April 0.3 0.1
Germany Consumer Price Index m-o-m % April 2.1 2.0
Germany CPI – EU Harmonised m-o-m % April 0.4 0.1
Germany CPI – EU Harmonised y-o-y % April 2.3 2.2
US Chicago Fed National Activity Index Index March -0.09 -
US Initial Jobless Claims Thousands 21st April 386.0 375.0
US Continuing Claims Thousands 14th April 3,297.0 3,293.0
US Bloomberg Consumer Comfort Index 22nd April -31.4 -
US Pending Home Sales m-o-m % March -0.5 1.0
US Pending Home Sales y-o-y % March 13.9 7.3
US Kansas City Fed Mfg Activity Index April 9.0 7.0
Friday 27th April      
UK GfK Consumer Confidence Survey Index April -31.0 -30.0
Germany GfK Consumer Confidence Survey Index May 5.9 5.9
Germany Import Price Index m-o-m % March 1.0 0.9
Germany Import Price Index y-o-y % March 3.5 3.3
US Employment Cost Index Index Q1 2012 0.4 0.5
US GDP q-o-q % Q1 2012 3.0 2.5
US Personal Consumption % Q1 2012 2.1 2.3
US GDP Price Index % Q1 2012 0.9 2.1
US Core PCE q-o-q % Q1 2012 1.3 2.1
US U. of Michigan Confidence Index April 75.7 75.7

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts


Recommendations

During the three months to end-March 2012, the number of stocks on which HB Markets has published recommendations was 183, and the recommendations were as follows: Buy – 87; Speculative Buy – 2; Hold – 75; Sell – 19.

Full definitions of the recommendations used by HB Markets in its publications and their respective meanings can be found on our website here.

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