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Spain discussing a bad bank scheme

Newsletter Update Monday, 30th April 2012


FTSE-100


Graph - 300412

Source: Bloomberg

FTSE-100 statistics


Yesterday: +0.5%
Latest: 5,777.1
High: 5,789.0
Low: 5,708.0
Top three: Man Group +14.1%
Barclays +4.7%
CRH +3.9%
Bottom three: Polymet Intl -2.3%
BT Group  -1.5%
Shire  -1.3%

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 could open higher today as investors hope the US Fed would move in favour of QE3 after Q1 2012 GDP growth missed forecasts. FTSE futures were trading 10 points up at 7:00 am.

New York: Strong corporate earnings from Amazon and Expedia cheered markets despite Q1 2012 GDP failing to meet expectation. The S&P 500 index closed 0.2% up on Friday, taking weekly gains to 7.2%.

Asia: Markets were trading higher as weaker than expected US economic data upped the chances of the US Fed pursuing QE3. Australia’s S&P ASX 200 index closed 0.8% higher. The Japanese and Chinese markets were closed for today.

Continental Europe: Upbeat corporate earnings led by Sandvik lifted the sentiment, allaying the hurt caused by S&P’s downgrade of Spain. The German DAX gained 0.9% and the French CAC 40 ended 1.1% higher on Friday.

UK small caps: The FTSE AIM All-Share index ended 0.5% up on Friday. To read our latest small cap research, click here.

Today’s breakfast menu:

- HB Markets on Aegis Group – Buy; AZ Electronic Materials – Buy; Pearson – Buy; WPP – Buy; Colt and Ultra Electronics

- US GDP; US Michigan consumer confidence; UK GfK consumer confidence; German consumer confidence; German import price index; US employment cost and US personal consumption

Today’s news

Spain discussing a bad bank scheme

A scheme to segregate the problematic property loans of all Spanish banks under one roof is believed to be under discussion. The “bad bank” scheme, which is being set up to avoid an international rescue programme similar to the ones required by Greece, Ireland and Portugal, would help Spain retain credibility in international markets.

NAB announces jobs cuts in the UK

National Australia Bank, owner of Clydesdale Bank and Yorkshire Bank, announced the closure of certain branches in the south of England due to difficult economic conditions. The move to close the commercial real estate portfolio and concentrate on retail banking operations could result in nearly 1,400 job losses.



Read the latest HB Markets research note now!

Company News

UK companies reporting today

 

Mkt. Cap.

(£)

Ticker

Sector

Period

Expected
sales (£)

Expected
EPS (p)

Aquarius Platinum Ltd

645.4m

AQP.L

Mining

Q32012

US$151.0m

US$0.008

Aberdeen Asset Mgmt

3.2bn

ADN.L

Financials

H12012

386.5m

8.90

             

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.


Read the latest AIM Update now!

Economic News

Economic releases due today

Region

Release

Indicator

Period

Previous

Expected

UK Hometrack Housing Survey (MoM) m-o-m % April 0.2 -
UK Hometrack Housing Survey (YoY) y-o-y % April -1.0 -
Eurozone M3 SA (3mths average) % March 2.3 2.7
Eurozone M3 SA y-o-y % March 2.8 2.8
Eurozone CPI Estimate y-o-y % April 2.6 2.5
Germany Retail Sales m-o-m % March -1.1 1.0
Germany Retail Sales y-o-y % March 1.7 0.5
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 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 2.0
US Chicago Purchasing Manager Index April 62.2 60.5
US NAPM-Milwaukee Index April 51.8 53.0
US Dallas Fed Manufacturing Activity Index April 10.8 8.0
           

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%.

Later this week…

Companies
reporting

 

Mkt. Cap. (£)

Ticker

Sector

Period

Expected sales (£)

Expected EPS (p)

             

Tuesday 1st May

 

 

N Brown Group

641.9m

BWNG.L

Retail

FY2012

743.5m

26.08

CSR

398.3m

CSR.L

Technology

Q12012

US$216.5m

-US$0.033

Chemring Group PLC

612.4m

CHG.L

Aero & def

Trading update

-

-

Man Group

1.7bn

EMG.L

Financials

Q12012

-

-

Imperial Tobacco Group

24.9bn

IMT.L

Tobacco

H12012

3.8bn

92.73

BP

81.9bn

BP.L

Oil & gas

Q12012

87.9bn

0.27

Lloyds Banking Group

81.9bn

LLOY.L

Financials

Q12012

4.8bn

0.13

Reckitt Benckiser Group

26.1bn

RB.L

Cons. stapples

Q12012

2.3bn

55.40

Perform

696.6m

PER.L

Entertainment

Trading update

-

-

National Express

1.1bn

NEX.L

Transport

Q12012

-

-

Xstrata

36.1bn

XTA.L

Mining

Trading update

-

-

             

Wednesday 2nd May

 

 

Home Retail Group

855.1m

HOME.L

Retail

FY2012

2.9bn

7.32

Spirent Communications

1.1bn

SPT.L

Comm. Equip.

Q12012

79.3m

1.68

Henderson Group

1.3bn

HGG.L

Financials

Trading update

-

-

Provident Financial

1.5bn

PFG.L

Financials

Trading update

-

-

British Sky Broadcasting

11.4bn

BSY.L

Broadcasting

Q32012

1.7bn

11.55

Standard Chartered

36.1bn

STAN.L

Financials

Q12012

-

-

Next

4.9bn

NXT.L

Retail

Q12012

-

-

JD Wetherspoon

525.4m

JDW.L

Retail

Q3 2012

-

-

Kerry

€5.9

KYGA.L

Food

Q12012

-

-

Carillion

1.2bn

CLLN.L

Construction

Trading update

-

-

Wolfson

201.9m

WLF.L

Technology

Q12012

-

-

             

Thursday 3rd May

 

 

Avocet Mining

329.6m

AVM.L

Mining

Q12012

39.6m

3.80

Mondi

2.7bn

MNDI.L

Basic mats

Trading update

-

-

Regus

1.1bn

RGU.L

Busi. servs.

Q12012

-

-

St James’s Place

1.7bn

STJ.L

Financials

Q12012

-

-

Smith & Nephew

5.4bn

SN.L

Healthcare

Q12012

984.8m

0.19

Schroders

3.8bn

SDR.L

Financials

Trading update

-

-

Intl Consolidated Airlines

3.2bn

IAG.L

Airlines

Trading update

-

-

Randgold Resources

4.9bn

RRS.L

Mining

Q12012

US$321.5m

US$1.28

Antofagasta

11.8bn

ANTO.L

Mining

Q12012

1.2bn

30.80

BG Group

47.8bn

BG.L

Oil & gas

Q12012

3.3bn

23.40

WM Morrison

7.1bn

MRW.L

Retail

Q12012

-

-

Legal & General

6.9bn

LGEN.L

Financials

Q12012

-

10.60

Rexam

3.7bn

REX.L

Basic mats

Trading update

-

-

Diageo

39.4bn

DGE.L

Beverages

Trading update

-

-

RSA Insurance

3.7bn

RSA.L

Financials

Q12012

863.0m

-

Millenium & Copthorne 1.5bn MLC.L Hotels Q1 2012 - -
Aer Lingus   AERL.L Airlines Trading update - -
Morgan Sindall 293.6m MGNS.L Construction Trading update - -
Ryanair €1.2BN RYA.L Airlines Trading update - -
WSP Group 164.3m WSH.L Engineering Q1 2012 - -
             

Friday 4th May

 

 

Lancashire Holdings

1.3bn

LRE.L

Financials

Q12012

-

-

easyjet

1.9bn

EZJ.L

Airlines

Trading update

-

-

Rentokil Initial

1.6bn

RTO.L

Busi. servs.

Q12012

-

-

Phoenix Group Holdings

927.3m

PHNX.L

Financials

Q12012

-

-

Laird

566.4m

LRD.L

Technology

Q12012

-

-

Royal Bank of Scotland

13.7bn

RBS.L

Financials

Q12012

6.8bn

0.55

Rolls-Royce Holdings

15.5bn

RR.L

Aero & def.

Q12012

-

-

Smurfit Kappa

€1.4bn

SKG.L

Basic mats.

Q1 2012

-

-

             

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

Economic
releases

Region

Release

Indicator

Period

Previous

Expected

           
Tuesday 1st May        
UK Halifax House Prices SA m-o-m % April 2.2 -0.8
UK Halifax House Price (3mths) y-o-y % April -0.6 0.4
UK PMI Manufacturing Index April 52.1 51.5
US Construction Spending m-o-m % March -1.1 0.5
US ISM Manufacturing Index April 53.4 53.0
US ISM Prices Paid Index April 61.0 59.0
           
Wednesday 2nd May        
UK PMI Construction Index April 56.7 54.0
UK Net Consumer Credit £bn March 0.4 0.3
UK Net Lending Sec. on Dwellings £bn March 1.2 1.0
UK Mortgage Approvals Thousands March 49.0 48.0
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 -
Eurozone PMI Manufacturing Index April 46.0 46.0
Eurozone Unemployment Rate % March 10.8 10.9
Germany Unemployment Change Thousands April -18.0 -10.0
Germany Unemployment Rate SA % April 6.7 6.7
Germany PMI Manufacturing Index April 46.3 46.3
US Total Vehicle Sales Millions April 14.3 14.4
US Domestic Vehicle Sales Millions April 11.1 11.1
US MBA Mortgage Applications w-o-w % 27th April -3.8 -
US ADP Employment Change Thousands April 209.0 173.0
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 PMI Services Index April 55.3 54.1
UK Official Reserves (Changes) US$bn April 1.1 -
Eurozone Producer Price Index m-o-m % March 0.6 0.6
Eurozone Producer Price Index y-o-y % March 3.6 3.4
Eurozone 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 388.0 379.0
US Continuing Claims Thousands 21st April 3,315.0 3,306.0
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 -
Eurozone PMI Composite Index April 47.4 47.4
Eurozone PMI Services Index April 47.9 47.9
Eurozone Retail Sales m-o-m % March 0.0 0.0
Eurozone Retail Sales y-o-y % March -2.1 -1.1
Germany PMI Services Index April 52.6 52.6
US Change in Nonfarm Payrolls Thousands April 120.0 165.0
US Change in Private Payrolls Thousands April 121.0 170.0
US Change in Manufacturing Payrolls Thousands April 37.0 20.0
US Unemployment Rate % April 8.2 8.2
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


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.

Important Risk Warnings and Disclaimers

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THIS RESEARCH BROCHURE IS A MARKETING COMMUNICATION: It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is also not subject to any prohibition on dealing ahead of the dissemination of investment research, although as a matter of policy HB Markets plc requires its employees not to deal ahead of the dissemination of the report.

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