Source: Bloomberg

FTSE-100 statistics

Source: Bloomberg

Analyst

Company News

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

Aegis Group (AGS.L, 177.3p) – Buy

Aegis released a trading update for Q1 2012 ended 31st March 2012 on Friday. Revenue grew 17% y-o-y and 16.3% on a constant currency basis. The group’s organic revenue increased 8.1% supported by growth at Aegis media and Aztec. Geographically, Aegis media organic revenue expanded 20.3% in the Americas, 12.5% in Asia Pacific and 1.7% in the EMEA. During Q1 2012, the division signed on new business worth US$2.9bn compared to US$1.6bn in Q1 2011. The US$2.5bn contract with General Motors was noteworthy. Other wins include Philips TV in France, Bulgari in Italy, Lenovo and Pfizer in Russia, Woolworths in South Africa, Kraft in East Africa and Beiersdorf in China. The management is considering acquisitions particularly in North America and other fast growing markets. During Q1 2012, the digital business was fortified through bolt on acquisitions including Roundarch in North America, Upper Storey in Singapore, eLink in China. The company also acquired an out-of-home agency, PPI, in Hungary. The management remained confident about growth in FY2012 as clients’ marketing and adverting budgets continue to grow.

Our view: Aegis reported its first quarterly results as a pure-play media company. The stellar performance in Q1 2012 and the expansion into recovering markets of North America and growing markets in Asia quell doubts about growth. After signing on a big contract like that of General Motors, the ensuing boost to goodwill could help the company gain a larger pie of the marketing and advertising market. This justifies an upward revision to forecasts and creates room for share price improvement. Despite a rich valuation, that undoubtedly includes some takeout premium; we upgrade Aegis to a buy.

AZ Electronic Materials (AZEM.L, 319.8p) – Buy

In an interim statement released on Friday, AZ Electronic said the difficult trading conditions seen towards the end of FY2011 are continuing and affecting performance. In Q1 2012, revenue declined 4% y-o-y to US$184.0m. Revenue at the integrated circuits (IC) division, constituting 70% of total revenue, shrank 4% to US$127.9m. The Optronics division witnessed a revenue drop of 1% to US$51.7m. Customers transitioning to new printing technology caused revenue at the printing and other division to decline 36% to US$4.4m. Nonetheless, group EBITDA was in line with the management’s expectations. Further, the management said trading conditions have looked up since the beginning of Q2 2012. Customers have reported increasing wafer capacity and utilisation. This is expected to spur growth at the IC division from Q2 2012 onwards. Increasing applications of the flat panel display revenues at the Optronics division. The management reiterated its FY2012 forecast and anticipates sequential growth throughout the year.

Our view: The decline in Q1 2012 revenue was expected as the semiconductor cycle causes revenue and profits to be loaded towards H2 in 2012. Furthermore, the EBITDA margin has been in line with management’s expectations. As industry defining customers such as TSMC announces increased capital expenditure and the industry prepares for near-term events such as Intel’s new processor family, a new iPhone launch and Windows 8, we believe this will drive demand for AZ’s products and enable it to meet its targets. With industry beating margins, market leading position and barriers to entry in a structural growth market, AZ’s valuation discount is unjustified. And with the private equity overhang gone, the company could be on the target list for one of the chemical majors. (Please refer to our research note on AZ Electronic Materials published 20th April for more.

Pearson (PSON.L, 1,167p) – Buy

Pearson released an interim management statement for Q1 2012 ended 31st March 2012 on Friday. Revenue rose 12% y-o-y to £1.2bn and 11% on a constant currency basis. Underlying revenue grew 3%. The management expect profits to skew towards H2 2012 resulting in lower y-o-y profit in H1 2012. The education business continues to face a weak US market. Organic investment and acquisitions have helped the international education markets, especially the developing markets, perform well. In the UK, professional testing and publishing operations have been impacted by the change in government policy towards apprenticeship funding. In Q1 2012, Financial Times circulation reached 605,000. The management is working to re-calibrate FT’s operations towards subscription revenue and away from advertising revenue. Growth at Penguin is expected to fall in line with the industry. The management said they would strongly defend the civil proceeding launched by the US Department of Justice against Apple and several publishers including Penguin. It also highlighted the vulnerability of revenue to currency fluctuations. Nonetheless, the balance sheet remains strong with around a £1bn available to undertake further bolt-on acquisitions. The management expects to achieve revenue and operating profit growth despite the fragile economic conditions.

Our view: Q1 has historically been a low quarter for Pearson, which sees a seasonal spike during the back-to-school period overlapping Q3. Nonetheless, the education arm had a strong start to the year as the weakness in the US markets was offset by growth in the education markets in emerging markets. Also the shift in the FT’s business model towards subscription and away from advertising, offers greater visibility to cash flows. The move towards digital subscriptions has helped counter the impact of the structural shift in the publishing industry. The company has displayed the agility to adapt to changing consumer preferences. This year’s underperformance and decline in the share price opens up an interesting entry point into a stock with longer term growth potential.

WPP (WPP.L, 844p) – Buy

WPP issued an interim management statement for Q1 2012 ended 31st March 2012 on Friday. Revenue increased 7.6% to £2.4bn. Like-for-like (LFL) revenue rose 4.0% and acquisitions contributed 3.4% to growth. Gross margin improved 4% y-o-y. Q1 2012 operating profit and operating profit margin were not only ahead of last year but also better than the management’s budget. Geographically, revenue from emerging markets covering Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe grew 11.1% and 9.5% on a LFL basis. Revenue from Western Europe and the UK increased 5.8% (LFL: 2.5%) and 5.0% (LFL: 2.5%) respectively. The North American revenue increased 6.9% and 1.4% on a LFL basis. The media operations, 40% of group revenue, grew 8.3% and 6.2% on a LFL basis. Encouraged by the upbeat growth in Q1 2012, the management revised the operating margin target upwards by 50 basis points to 14.8%. The management re-affirmed long term growth targets, which include powering acquisitions driven growth, increasing cost efficiency through active management and expanding operating margin by 0.5% or more.

Our view: WPP reported a strong start to the year that has advertising-spend inducing events such as the London Olympics and the US presidential elections. We like the almost even split between acquisition fuelled and organic growth, which indicates the strength of the core business. WPP’s exposure to the fast growing emerging markets is expected to offset any slowdown in Europe. The upward revision of guidance opens up further scope for price outperformance. We re-iterate our buy rating.

Colt (COLT.L, 106.6p)

Colt released a trading update for Q1 2012 ended 31st March 2012 on Friday. Revenue rose to €397.3m, up 5.2% y-o-y. EBITDA grew 4.7% to €80.6m implying a stable EBITDA margin of 20.3%. Separately, Colt announced identifying a site in the Netherlands to set up a 32MVA power data centre with an initial modular data centre space of 2,000m2, expandable up to 10,000m2. The data centre is expected to be operational in early 2013.

Ultra Electronics (ULE.L, 1,715p)

In a trading update issued on Friday, Ultra Electronics said Q1 2012 performance was in line with management expectations and profits will be weighed towards H2 2012. For FY2012, the management expects the US and the UK to trim their defense spending, but believes that the company’s advanced electronic solutions lie in areas where spends will be least affected. It announced the grant of major contracts from the US Air Force and the US Navy. In addition, the company said nuclear power projects in the US, China and Sweden have agreed to procure Ultra’s specialist nuclear sensors from Areva and Westinghouse. The company’s security and civil sector continues to operate in niche markets with significant potential growth.

Economic News

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

US GDP

The US economy expanded 2.2% in Q1 2012 after reporting 3.0% growth in Q4 2011, the advance estimate from the US Department of Commerce showed on Friday. The deceleration was ascribed to the 2.1% decline in non-residential fixed investment (increased 5.2% in Q4 2011). Consumer expenditure, which grew 2.9% (up 2.1% in Q4 2011), helped offset the decline in non-residential fixed investment.

Our view: Economists were expecting the GDP to grow 2.5% in Q1 2012. Despite the slower growth in Q1 2012, this expansion points at the underlying strength in the economy. Unlike in Q4 2012, when building up of inventory contributed to the increase in output, the expansion in Q1 2012 was based on the pick-up in consumer spending and construction of homes. Nevertheless, the report was still a bit disappointing and could move the Fed, with its dual mandate, closer to QE3.

US Michigan consumer confidence

The final reading of Thomson Reuters/University of Michigan’s consumer confidence index rose to 76.4 in April from 76.2 in March. The gauge of current economic situation was revised upwards to 82.9 from 80.6 in the preliminary reading, but is below the 86.0 reading for March. The revised expectations index edged lower to 72.3 from the initial reading of 72.5, but was higher than March’s 69.8. Expectations of inflation dropped to 3.2% in April from 3.9% in March.

Our view: The rise in consumer confidence above economists’ expectation of 75.7 shows Americans are more upbeat about the economy. Gasoline prices have shown signs of retreating, which has taken some pressure off consumer budgets. Recent labour market data indicating a slowdown in job creation could have affected consumers’ views about their current personal finances. However, they remain positive about the uptrend in the economy as seen by the m-o-m jump in the expectations index and the general belief that inflation could ease in the near future.

UK GfK consumer confidence

Consumer confidence in the UK remained unchanged at -31.0 in April, GfK reported on Friday. The index measuring consumers’ view of their personal finances over the past 12 months increased to -23 from -25 the previous month. However, the gauge of their finances over the next 12 months deteriorated 3 points to -13. Nonetheless, the index of whether this was a good time to make big ticket purchases edged up 1 point to -30. Consumer’s view on the economy rose 2 points to -57 and their barometer of their outlook for the economy declined to -33 from -30.

Our view: The latest reading confounded economists’ expectations of the index improving slightly to -30 in April. The forecast for stronger consumer confidence came after recent retail data showed consumers’ willingness to spend. However, the retail sales series is notoriously volatile. All other consumer confidence surveys released last week pointed to a slump in consumer sentiment. Downtrodden consumer morale, a precursor to consumer spending, could be detrimental to the economic recovery.

German GfK consumer confidence

GfK’s expects its consumer confidence index to drop to 5.6 in May from 5.8 in April. GfK estimates the value for consumer sentiment in the succeeding by considering the readings for the preceding month. The index of economic expectations rose 1.3 points to 8.5 in April. The gauge of income expectations declined 1.3 points to 33 and the willingness to buy index plunged 11 points to 27.6 as rising petrol prices force consumers to reallocate their budgets

US employment cost

In Q1 2012, employment cost in the US increased 0.4%, the US Department of Labor said on Friday. This is below the consensus estimate of a 0.5% rise. With unemployment still high, businesses are able to hire without significant increases in wage payments.

US personal consumption

Personal consumption in the US rose 2.1% in Q1 2012, below economists’ expectation of a 2.3% increase. In Q1 2011, personal consumption grew 1.3%.

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

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.

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