|Newsletter Update||Friday, 27th April 2012|
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Market opening: Markets could open lower following S&P’s rating cut for Spain. Early data showing consumer confidence in the UK did not improve in April could dampen the mood too. FTSE futures were trading 15 points down at 7:00 am.
New York: Wall Street inched higher despite thin trading volumes and lukewarm corporate earnings. Strong gains in the telecom and consumer discretionary sectors helped the S&P 500 index gain 0.6% yesterday.
Asia: Gains fuelled by BoJ’s decision to ease the monetary policy and upbeat results (including Samsung’s earnings which exceeded expectations) were capped after S&P cut Spain’s rating. The Nikkei closed 0.4% lower, while the Hang Seng was trading 0.3% up at 7:00 am.
Continental Europe: Data showing weakening confidence in the Eurozone weighed on the markets. The French CAC 40 ended 0.1% lower. However, the German DAX gained 0.5% after VW and Bayer reported better than forecasted earnings.
UK small caps: The FTSE AIM All-Share index closed 0.2% lower yesterday. To read our latest small cap research, click here.
BoJ expands asset purchase program to ¥70tr
In a widely expected move, Bank of Japan (BoJ) today stretched its limit on government bond purchases by ¥10tr, but reduced funds set aside for fixed-rate market operations by ¥5tr, effectively increasing its version of quantitative easing by ¥5tr to ¥70tr. This will also help the Bank achieve its inflation target of 1%. BoJ voted unanimously to keep interest rates unchanged at 0.1%.
S&P downgrades Spain second time this year
Yesterday, Standard & Poor’s (S&P) lowered Spain’s credit rating by two notches from A to BBB+ with a negative outlook as it anticipates government finances to deteriorate more than previously expected. The dire state of the country’s banking sector also influenced the decision.
Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts
Barclays (BARC.L, 213p) – Buy
Barclays released results for Q1 2012 ended 31st March 2012 yesterday. Adjusted pre-tax profit increased 22% to £2.4bn supported by growth at both the retail and business banking and corporate and investment banking divisions. Pre-tax profit at the retail and business banking grew 22% to £817m and that at the corporate and investment banking grew 10% to £1.5bn. Income, excluding own credit, rose 5% to £8.1bn as revenue at investment banking division, the largest contributor to profits, returned to growth. The investment banking division earned £3.5bn in Q1 2012, 3% higher y-o-y and 91% ahead of that in Q4 2011. Strong growth in Asia helped revenue from the fixed income, currency and commodities (FICC) division to increase 9% to £2.4bn. Adjusted return on equity improved to 12.2% from 10.2% in Q1 2011. Core tier 1 ratio edged lower to 10.9% from 11.0% in the previous period. EPS increased to 13.6p from 10.7p in Q1 2011. Dividend for Q1 2012 was maintained at 1.0p per share. However, the management said activity in April had weakened.
Our view: The debt crisis in Europe is showing signs of subsiding and exposure to Asia has enabled Barclay’s key FICC division to return to growth. This helped the bank beat analyst forecasts. Although the management said they saw growth slow down in April, the bank’s well capitalised and liquid balance sheet should shield it from most unexpected shocks. It should also provide a good position to capitalise on industry consolidation. Hence, we believe the valuation discount to peers (P/E of 8.4x compared to HSBC’s 9.4x and Stan Chart’s 11.9x) is unwarranted and that the stock has the potential to outperform.
British American Tobacco (BATS.L, 3,176.5p) – Buy
British American Tobacco released an interim statement that showed that revenue grew 6% in Q1 2012 ended 31st March 2012. Volume, including sales from Protabaco, which was acquired in October 2011, increased 1.3% to 166bn cigarettes. Organic volume growth was 0.7%. The emerging markets of Brazil, Gulf countries, Bangladesh and Vietnam drove the growth in volume while cigarette sales declined in Italy and South Korea. Volume of the four global drive brands improved 6%. Volume of Kent increased 7%. Lucky Strike was up 26% and Pall Mall grew 4%. Performance at Dunhill was in line with last year. The management said the group performed well in Q1 2012, when volume increased despite the industry declining. In Q1 2012, the company returned £150m to shareholders through the buyback of 5m shares
Our view: British American Tobacco is tapping into emerging markets to drive growth and has been quite successful with volume growth despite a decline industry-wide. Consumers in the developing markets see BAT’s brands as aspirational, which facilitates premium pricing. This has helped offset the impact of losing cash-strapped consumers in western economies to cheaper brands. Furthermore, with strong and reliable cash flow, the stock provides diversification benefits in most portfolios.
Unilever (ULVR.L, 2,135p) – Hold
Unilever reported Q1 2012 results yesterday. Sales rose 11.9% to €12.1bn as volume increased 3.5% and prices went up 4.7%. Underlying sales grew 8.4%. Growth in the emerging markets, which constitute around 56% of total sales, was 11.9%. Developed markets witnessed growth of 4.2%. The management expects input cost headwinds to persist, but was confident of delivering a modest improvement in full year core operating margin. Management proposed to hike dividend by 8% to €0.243 per share
Our view: We are impressed by Unilever’s ability to pass on higher input prices to consumers, which helped drive growth in Q1 2012. The decline in volume seems to have reversed after Q4 2011, when consumers moved away from pricier Unilever products to cheaper alternatives. The increased penetration of emerging markets should propel further growth. Considering these positives and the recent share price performance, the stock appears to be fairly priced, which warrants an upgrade to hold.
Royal Dutch Shell (RDSA.L, 2,195.5p) – Hold
Royal Dutch Shell announced its Q1 2012 results yesterday. Total revenue for the quarter increased 9.1% y-o-y to US$123.8bn from US$114.8bn in Q1 2011. Over the same period, earnings, on a current cost of supplies basis, grew 10.6% to US$7.7bn from US$6.9bn. Basic EPS, excluding identified items, stood at US$1.17 in Q1 2012 compared to US$1.02 in Q1 2011. Revenues were particularly strong in the upstream segment, growing 24.2% compared the 7.6% growth registered by the downstream segment, its biggest revenue generator. Portfolio developments in the upstream segment include the commissioning of the 4.3mtpa Pluto LNG project in Australia and start of production at the Caesar/Tonga deepwater project in the US. The company also informed that it recently made a US$1.8bn all-cash offer to buy London-listed Cove Energy, which owns stakes in various offshore and onshore oil blocks in Mozambique and Kenya. CEO Peter Voser, said that the company is developing a portfolio of 26 projects to help achieve its target of generating around US$175bn-US$200bn in cash flow for 2012-15. Shell announced an interim dividend of US$0.43 per ordinary share (both ‘A’ and ‘B’).
Our view: Shell delivered stellar numbers largely due to increased upstream volumes and strong oil prices. Therefore, we have revised our rating from sell to hold. Our rating takes into consideration the near-term volatility in energy prices due to fragile economic and political conditions and continued challenges in the North American natural gas market. With this background the stock looks fairly valued.
AstraZeneca (AZN.L, 2,666.5p) – Sell
Yesterday, AstraZeneca released results for Q1 2012 ended 31st March 2012. Revenue for the first quarter was down 11% y-o-y at constant exchange rates to US$7.3bn due to loss of exclusivity on several key brands such as Seroquel IR, Nexium and Arimidex. Revenues from the US and Western Europe fell 12% and 19%, respectively, while revenue from emerging markets were particularly encouraging. Gross profit fell 13% to US$5.9bn as margins contracted 250 basis points to 82% during the quarter. Core EPS at constant exchange rates declined 19% to US$1.81 and reported EPS dropped 39% to US$1.28. Earnings for 1Q 2012 were affected by the US$702m costs relating to third phase of the restructuring programme being undertaken by the company. Furthermore, in 1Q 2012, the company repurchased 22.6m shares for a total of US$1.1bn. AstraZeneca also announced that David Brennan, the CEO, would be stepping down 1st June 2012
Our view: AstraZeneca is clearly facing the heat. With patents on most of its top selling drugs expiring in the next four years and no promising replacements in the pipeline, there is little visibility for earnings growth. Though the exit of David Brennan, amidst rising investor discontent at the company’s performance, possibly makes way for a new CEO with a fresh R&D strategy to reinvigorate growth, we retain our sell rating for now.
Shire (SHP.L, 2,040p) – Buy
In an interim statement released yesterday, Shire reported a 24% jump in product sales to US$1.1bn as its attention deficit hyperactivity disorder (ADHD) drugs, Vyvanse and Intuniv, penetrated the widening US market. Operating profit grew 18% y-o-y to US$362m. Diluted earnings per ADS increased 20% to US$1.48. The management said Firazyr, which was launched late last year, is being received well in the US. The performance of drugs for the treatment of rare diseases was ‘strong’. The management is confident of robust earnings growth in FY2012, with product sales growing in mid-teens. However, revenue growth could decelerate to low teens as royalties and other revenue may decline 15–25%. Shire also announced the acquisition of FerroKin Biosciences, including its Phase II drug for treatment of iron overload in patients after numerous blood transfusions. It acquired Vascugel from Pervasis Therapeutics to complement its regenerative medicine business. Shire also acquired the US rights to prucalopride for the symptomatic treatment of chronic constipation. Separately, the company announced positive results from a Phase II study of Vyvanse for the indication of binge eating disorder in adults.
Our view: With the approval of Vyvanse for treatment of ADHD in adolescents and adults, the market for the drug has increased manifold. Shire expects sales of Vyvanse to cross the US$1bn mark this year. Additionally, Shire boasts of a deep portfolio of products at different points in a drug’s lifecycle. Its offering for rare diseases has performed well too. Shire has perfected the recent trend in the biopharma sector where companies focus on rare diseases with niche markets, thereby commanding premium pricing. The growing addressable market, Shire’s drugs pipeline and focussed strategy should enable it to outperform.
Kazakhmys (KAZ.L, 871p) – Hold
Kazakhmys issued production report and interim management statement for Q1 2012 ended 31st March 2012 yesterday. Copper ore extraction was up 8% y-o-y, benefiting from increased output from the Central and East regions. Yet, copper cathode equivalent production dropped 12.9% to 65kt in Q1 2012 from 74kt in Q1 2011 due to lower volumes of copper in concentrate output and planned repairs at the Balkhash smelter, which produces around two-thirds of the group’s finished copper cathode. Total copper products sales volumes higher by 5% to 61.3kt in Q1 2012 versus 58.4 in Q1 2011. However, average realised prices declined 12.5% y-o-y to US$8,599 per tonne in Q1 2012. Production of by products increased during the quarter. Gold output jumped 40%, zinc in concentrate production was higher by 22% and silver output increased by 20%. Sales of gold and silver increased strongly and Kazakhmys benefited from better prices of these precious metals. Further, the company informed that it completed buybacks of 10.6 m shares at a cost of US$150m since September 2011. Kazakhmys management gave guidance of being able to deliver annual target of between 285 to 295kt of copper cathode copper cathode this year
Our view: Kazakhmy’s first quarter production was hit by severe weather and transportation issues. The lower production in 1Q 2012 could result in higher cash costs further eating into the company’s profit margins. We also find the management’s stance of being able to deliver annual guidance on the optimistic side. Amidst fears of slowing economic growth in China, a major buyer of copper, we prefer to retain our hold rating for the stock.
Admiral Group (ADM.L, 1,195p)
In an interim statement for Q1 2012 ended 31st March 2012, yesterday, Admiral Group said it had a strong start to the year. Revenue for the quarter increased 9% y-o-y to £586m from £539m in Q1 2011. The group’s vehicle insurance count increased 17% y-o-y to 3.4m at the end of March 2012. Additionally UK car insurance vehicle count witnessed 5% annualized growth in Q1 2012 at 3m. International car insurance vehicle count increased 83% y-o-y to 0.4m. Furthermore, the company reported that there was no change in the insurance claim trend since Q4 2011. The management reiterated its positive outlook for the business for FY 2012
Cobham (COB.L, 233.6p)
Yesterday, Cobham issued an interim statement reporting modestly positive organic revenue growth for the first three months of 2012. At the end of Q1 2012, the order book increased marginally to £2.5bn at constant exchange rates. The company also remained on track to deliver the planned £8m of annualised y-o-y efficiency savings in 2012. The management said the proposed acquisition of Thrane & Thrane is likely to improve Cobham’s technology advantage and scale in maritime, land and airborne SATCOM systems. Cobham purchased 25.6% of the shares of Thrane & Thrane while the offer for the remaining shares expires on 21st May 2012. The company also informed that CFO Warren Tucker has resigned from his post.
Taylor Wimpey (TW.L, 50.35p)
In an interim announcement yesterday, Taylor Wimpey said it has had a strong start to 2012. The order book has increased 16% y-o-y to £1bn, driven by growing private reservations. The average private net reservation rate has increased to 0.62 sales per outlet per week in 2012 year to date, compared to 0.57 in 2011. Cancellation rates of 14.0% are below the long term average. Margins were at the upper end of management’s expectation as new sales outlets provided enhanced returns by better leveraging the existing land portfolio. The management believes the UK housing market conditions remain stable even though mortgage availability is a concern.
Whitbread (WTB.L, 1,921p)
Whitbread announced preliminary results for FY2011 ended 1st March 2011 yesterday. Revenue rose 11.2% y-o-y to £1.8bn, driven by substantial new openings as well as a 2.6% growth in like-for-like (LFL) units. The underlying profit before tax increased 11.3% to £320.1m as gross margins improved to 85.2% versus 83.8% in the previous year. Revenue from the Costa segment increased 27.5% to £541.9m due to opening of 332 net new stores across the globe. Revenue from the hotels and restaurants segment grew 5.3% to £1.2bn. The company proposed final dividend of 33.75p, taking the total dividend for the year to 51.25p, an increase of 15.2%. CEO Andy Harrison said that he expects continued expansions across segments to drive business growth. Mr. Harrison added that the company is on track to achieve its five year growth milestones of having 65,000 rooms and 3,500 Costa stores worldwide by 2015-16.
Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts
Eurozone consumer confidence
Consumer confidence in the Eurozone declined to -19.9 in April from -19.1 in March, the European Commission said yesterday. The measure of economic sentiment dropped to 92.8 in April from 94.5 in March. The index of industry confidence declined to -9 from -7.1 in March. The gauge of confidence among retailers decreased to -2.4 from 0.3 the previous month, while construction confidence index dipped to -27.4 from -26.77.
Our view: Spending cuts by governments across the Eurozone are prolonging recession in the single currency region. While this has helped rein in debt, it has also had a severe impact on labour markets and has caused unemployment to touch all time highs. Consumers facing the double whammy of joblessness and rising energy costs have cut back on spending, affecting demand and the overall industry morale.
UK Nationwide consumer confidence
Nationwide said its measure of consumer confidence surged from 44 in February to 53 in March, the highest reading since June 2011. The current economic situation index increased to 24 from 19 the previous month, while the gauge of consumer expectations from the economy rose 13 points to 73. The index measuring shoppers willingness to make big ticket purchases climbed to 86 from 78 in February.
Consumer prices rose 2.0% y-o-y in April after rising 2.1% y-o-y in March. On monthly basis, consumer prices grew 0.1% m-o-m after increasing 0.3% the previous month. Inflation, as per the harmonized index of consumer prices, rose 0.2% m-o-m and 2.2% y-o-y in April, after rising 0.4% m-o-m and 2.3% y-o-y in March.
US Bloomberg consumer comfort
The index of consumer comfort compiled by Bloomberg slipped to -35.8 in the week ended 22nd April compared to -31.4 the previous week. This is the largest weekly decline since March 2011. At current levels, the index is long way off from its long-term average of 15.3.
US pending home sales
The measure of pending home purchases rose 4.1% to 101.4 in March, the National Association of Realtors (NAR) said yesterday. NAR reversed the previously reported drop of 0.5% in February to a gain of 0.4%. The increase in March beat economists’ expectations of a 1.0% rise.
Aero & def.
Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts
|Monday 30th April|
|EU||M3 SA (3mths average)||%||March||2.3||2.7|
|EU||M3 SA||y-o-y %||March||2.8||2.8|
|EU||CPI Estimate||y-o-y %||April||2.6||2.6|
|Germany||Retail Sales||m-o-m %||March||-1.1||1.5|
|Germany||Retail Sales||y-o-y %||March||1.7||1.4|
|US||Personal Income||m-o-m %||March||0.2||0.3|
|US||Personal Spending||m-o-m %||March||0.8||0.4|
|US||PCE Deflator||m-o-m %||March||-||0.3|
|US||PCE Deflator||y-o-y %||March||2.3||2.2|
|US||PCE Core||m-o-m %||March||0.1||0.2|
|US||PCE Core||y-o-y %||March||1.9||1.8|
|US||Chicago Purchasing Manager||Index||April||62.2||60.5|
|US||Dallas Fed Manufacturing Activity||Index||April||10.8||-|
|Tuesday 1st May|
|UK||Halifax House Prices SA||m-o-m %||April||2.2||-|
|UK||Halifax House Price (3mths)||y-o-y %||April||-0.6||-|
|US||Construction Spending||m-o-m %||March||-1.1||0.4|
|US||ISM Prices Paid||Index||April||61.0||59.0|
|Wednesday 2nd May|
|UK||Net Consumer Credit||£bn||March||0.4||-|
|UK||Net Lending Sec. on Dwellings||£bn||March||1.2||-|
|UK||M4 Money Supply||m-o-m %||March||-1.9||-|
|UK||M4 Money Supply||y-o-y %||March||-3.4||-|
|UK||M4 Ex IOFCs 3mths Annualised||%||March||2.5||-|
|Germany||Unemployment Rate SA||%||April||6.7||6.7|
|US||Total Vehicle Sales||Millions||April||14.3||14.4|
|US||Domestic Vehicle Sales||Millions||April||11.1||11.2|
|US||MBA Mortgage Applications||w-o-w %||27th April||-3.8||-|
|US||ADP Employment Change||Thousands||April||209.0||178.0|
|US||ISM New York||Index||April||67.4||-|
|US||Factory Orders||m-o-m %||March||1.3||-1.5|
|Thursday 3rd May|
|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||Lloyds Business Barometer||Index||April||31.0||-|
|UK||Official Reserves (Changes)||US$bn||April||1.1||-|
|EU||Producer Price Index||m-o-m %||March||0.6||0.6|
|EU||Producer Price Index||y-o-y %||March||3.6||3.5|
|EU||ECB Announces Interest Rates||%||3rd May||1.0||1.0|
|US||Challenger Job Cuts||y-o-y %||April||-8.8||-|
|US||RBC Consumer Outlook Index||Index||May||46.6||-|
|US||Nonfarm Productivity||q-o-q %||Q12012||0.9||-0.5|
|US||Unit Labour Costs||q-o-q %||Q12012||2.8||2.7|
|US||Initial Jobless Claims||Thousands||28th April||388.0||-|
|US||Continuing Claims||Thousands||21st April||3,315.0||-|
|US||Bloomberg Consumer Comfort||Index||29th April||-35.8||-|
|US||ISM Non-Manufacturing Composite||Index||April||56.0||55.5|
|Friday 4th May|
|UK||New Car Registrations||y-o-y %||April||1.8||-|
|EU||Retail Sales||m-o-m %||March||-0.1||0.2|
|EU||Retail Sales||y-o-y %||March||-2.1||-0.6|
|US||Change in Nonfarm Payrolls||Thousands||April||120.0||175.0|
|US||Change in Private Payrolls||Thousands||April||121.0||178.0|
|US||Change in Manufacturing Payrolls||Thousands||April||37.0||20.0|
|US||Average Hourly Earning||m-o-m %||April||0.2||0.2|
|US||Average Hourly Earning||y-o-y %||April||2.1||2.1|
|US||Average Weekly Hours||Hours||April||34.5||34.5|
|US||Change in Household Employment||Thousands||April||-31.0||-|
|US||Underemployment Rate (U6)||%||April||14.5||-|
Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts
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.
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