By Anchor Capital
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South African Market Review
South African markets closed higher on Friday, after the South African Reserve Bank’s (SARB) decision on Thursday to keep the repo rate unchanged continued to support some key interest rate sensitive sectors.
Hudaco Industries, Spur Corp and Curro Holdings soared 7.5%, 7.3% and 6.9%, respectively. AngloGold Ashanti, Gold Fields and Harmony Gold rose 4.7%, 1.5% and 1.5%, respectively, amid a rise in gold prices.
Banking sector stocks, FirstRand, Nedbank Group and Standard Bank surged 1.4%, 1.1% and 0.9%, respectively. However, Merafe Resources fell 1.1%, despite the company revealing a rise in its attributable ferrochrome production from the Glencore Merafe Chrome Venture for 4Q14.
The JSE All Share Index advanced 0.6% to close at 51,266.81.
UK Market Review
UK markets finished lower on Friday. Consolidated Airlines Group shed 3.5%, after reversing earlier gains which were triggered by news that Qatar Airways purchased almost 10.0% of the company.
J Sainsbury and Wm Morrison Supermarkets declined 3.2% and 2.7%, respectively, after the Business Secretary, Vince Cable, declared that supermarket companies could incur penalties of as much as 1.0% of their full year UK sales if they treated their suppliers badly.
BT Group slipped 2.6%. The company posted a better-than-expected profit for 3Q15, but its revenue fell short of market estimates.
Bucking the trend, mining sector stocks, Randgold Resources and Fresnillo gained 4.9% and 4.2%, respectively. The FTSE 100 Index declined 0.9% to close at 6,749.40.
US Market Review
US markets ended in the red on Friday, following dismal US economic growth data for 4Q14.
AbbVie sank 4.4%, as the company faced losses in 4Q14 due to its failed merger with the UK drugmaker, Shire.
Chevron edged down 0.5%, after the company reduced its expansion budget and suspended its share repurchase programme for FY15.
Tyco International slid 2.2%, as the company posted 1Q15 revenue below market estimates and issued tepid 2Q15 earnings guidance. On the other hand, Nabors Industries and Denbury Resources advanced 8.5% and 5.8%, respectively, following a rise in crude oil prices.
The S&P 500 Index fell 1.3% to settle at 1,994.99, while the DJIA Index dropped 1.4% to close at 17,164.95. The NASDAQ Index plummeted 1.0% to finish at 4,635.24.
Asia Market Review
Asian markets are trading weaker this morning, tracking Friday’s losses on Wall Street and following dismal Chinese manufacturing data.
In Japan, Japan Airlines retreated 1.2%, after it hiked its FY15 net income outlook by less than forecast.
Chubu Electric Power declined 5.9%, after it slashed its FY15 net income guidance.
In Hong Kong, China Minsheng Banking dropped 3.8%, amid news that its President resigned shortly after media reports indicated that he was being investigated by China’s anti-corruption authority.
In South Korea, LG Electronics eased 1.2%. The company reported a rise in its FY14 operating profit.
The Nikkei 225 Index is trading 0.5% in the red at 17,582.11, while the Kospi Index is trading 0.1% lower at 1,946.54. The Hang Seng Index is trading 0.2% lower at 24,446.11.
Commodities
At 06:00 SAST today, Brent crude oil fell 0.6% to trade at $50.48/bl. Over the weekend, data released in China showed a decline in manufacturing and services Purchasing Managers’ Indices (PMI) for January. On Friday, Brent crude oil rose 8.4% to settle at $50.77/bl., after reports revealed that the number of rigs drilling for oil in the US dropped which might weigh on the nation’s oil production.
On Friday, the Illinois North Central No.2 Yellow corn spot prices fell 0.7% to $3.46/bushel. At 06:00 SAST today, gold prices declined 0.3% to trade at $1,280.03/oz. On Friday, gold gained 2.1% to close at $1,283.79/oz., following the release of downbeat US Gross Domestic Product (GDP) data for 4Q14. On Friday, copper rose 2.0% to close at $5,541.00/mt. Aluminium closed 2.5% higher at $1,853.75/mt.
Currencies
On Friday, the South African rand weakened against the majors, after the SARB Governor, Lesetja Kganyago, indicated on Thursday that a further decline in the nation’s inflation rate or inflation expectations is likely to strengthen the case for accommodation in the central bank’s policy stance. Meanwhile, data showed that South Africa’s trade balance swung to a surplus from a deficit for the first time in 10 months in December. In the US, preliminary GDP data revealed that the economy expanded at a slower-than-expected pace for 4Q14. Later today, investors will keep a tab on manufacturing PMI readings in the US and South Africa.
The yield on benchmark government bonds remained mixed on Friday. The yield on 2015 bond fell to 5.96% while that for the longer-dated 2026 issue advanced to 7.12%.
At 06:00 SAST, the US dollar is trading 0.2% lower against the South African rand at R11.6248, while the euro is trading 0.1% lower at R13.1472.
On Friday, the euro weakened against most of the major currencies, following the release of downbeat eurozone consumer price inflation readings for January. Later today, traders will eye revised manufacturing PMI data across key European nations for further direction.
At 06:00 SAST, the euro advanced 0.1% against the US dollar to trade at $1.1311, while it has remained flat against the British pound to trade at GBP0.7500.
Economic Updates
The trade surplus in South Africa recorded a reading of R6.80bn in December, compared with a trade deficit of R5.70bn in the previous month. Market anticipations were for the nation to register a trade surplus of R1.80bn.
The South African Reserve Bank has indicated that, on an annual basis in South Africa, M3 money supply registered a rise of 7.4% in December, less than market expectations for an advance of 8.5%. M3 money supply had risen 8.3% in the previous month.
On an annual basis, in December, the private sector credit advanced 8.5% in South Africa, less than market expectations for an advance of 9.2%. In the previous month, the private sector credit had advanced 9.1%.
Net consumer credit registered a rise of GBP0.58bn in the UK in December, compared with a revised advance of GBP1.23bn in the previous month. Markets were expecting net consumer credit to advance GBP1.20bn.
The National Institute of Statistics has reported that the flash GDP in Spain advanced 0.7% on a quarterly basis in 4Q14, higher than market expectations for an advance of 0.6%. In the prior quarter, GDP had recorded a rise of 0.5%.
The National Institute of Statistics has reported that, on an annual basis, the preliminary consumer price index dropped 1.4% in January, in Spain, compared with a drop of 1.0% in the previous month. Market expectations were for the consumer price index to drop 1.2%.
On a monthly basis in Germany, retail sales climbed 0.2% in December, less than market expectations for an advance of 0.3%.
Retail sales had registered a revised rise of 0.9% in the prior month.
In December, the unemployment rate recorded an unexpected drop to 11.4% in the eurozone, compared with a level of 11.5% in the prior month. Markets were expecting the unemployment rate to record a flat reading.
The preliminary consumer price index fell 0.6% in the eurozone on an annual basis in January, higher more than market expectations for a drop of 0.5%. In the previous month, the consumer price index had registered a drop of 0.2%.
The GDP registered an unexpected drop of 0.2% on a monthly basis in Canada, in November, compared with market expectations for a steady reading. The GDP had climbed 0.3% in the prior month.
In 4Q14, on a quarterly basis, the flash annualised GDP advanced 2.6% in the US, less than market expectations for a rise of 3.0%. In the previous quarter, the annualized gross domestic product had registered a rise of 5.0%.
The NBS manufacturing PMI in China eased to 49.80 in January. The NBS manufacturing PMI had recorded a level of 50.10 in the prior month.
Corporate Updates
South Africa
Merafe Resources: The company, in its production and sales report, indicated that it attributable ferrochrome production from the Glencore Merafe Chrome Venture for 4Q14 was 92.00kt, 3.4% higher compared with the same period a year ago, with production levels averaging 88.0% of operating capacity utilisation. Meanwhile, its FY14 ferrochrome production volumes increased 4.7% to 334.00kt, compared with the preceding year. The company further stated that its start-up project Lion II is on track and is expected to reach full capacity by mid-FY15. Additionally, the company indicated that wage agreements were reached with the western mining employees in 4Q14.
Investec Plc: The company announced the completion of the sale of Kensington Group Limited (formerly Kensington Group Plc) and related assets to Blackstone Tactical Opportunities Advisors and TPG Special Situations Partners.
Redefine International: The company announced the retirement of Richard Melhuish from the board.
Aquarius Platinum: The company stated that it is committed to building good working relations with the Government of Zimbabwe, following the Government of Zimbabwe proposition of export tax on unrefined platinum, with a view to encouraging platinum mining companies to invest in smelting and refining capacity in Zimbabwe. The platinum mining company alongwith other platinum companies are in the process of engagement with the Government of Zimbabwe to resolve the matter.
Hulamin Limited: The company announced that its CEO, Richard Jacob, has made a good recovery following surgery in August last year. He would be back in his office at Hulamin from today and would use the month of February to familiarise himself with developments in the business. The company further indicated that CFO, David Austin, would continue as acting CEO until 28 February 2015 and Richard would resume his role as CEO effective 1 March 2015.
Controversial former African Bank boss dies: Controversial former head of risk at African Bank, Tami Sokutu, has died at his home in Cape Town at the age of 53 after a short illness, the Sunday Times reported.
‘Pay back the money, Ketso’: Ketso Gordhan’s bruising public battle with his former employer PPC is not over yet.
Steinhoff investors let pool rule: Steinhoff shareholders are an enthusiastic bunch and usually like to vote by a significant majority in favour of resolutions put to shareholder meetings.
Local smartphone maker doubles its workforce: South African manufacturer, CZ Electronics, will double its workforce from 2H15, as it prepares for an increase in demand for its locally assembled mobile phones and tablet computers, the company said this week.
Transaction Capital may use R1.20bn excess to grow businesses: JSE-listed, Transaction Capital, will look to deploy R1.20bn of excess capital in growing its asset-backed lending and risk-services businesses and possibly commit R60.00mn in funding for its bakkie finance pilot project this financial year.
Tsogo plays losing hand in Western Cape: The Competition Commission has thwarted a deal that would have given Tsogo Sun, SA’s largest gaming company, a hand in all five Western Cape casino licences.
Redefine leans on subsidiary in quest to conquer Europe: Redefine Properties has announced its second deal in two days as it looks to grow and attract bigger investors.
Afrox restructures as earnings fall sharply: Gas, welding and safety products company African Oxygen (Afrox), whose MD quit suddenly earlier this month, has announced that its earnings per share for the year to December took a beating because of soft demand for its products.
Clicks Group reaps rewards of strong promotional activity: Clicks Group, the retailer that sells medicines and cosmetics, saw buoyant trading in some of its divisions in the period after Christmas and into the new year, driven by strong promotional activity.
Hedges ‘saved African Bank from further losses’: African Bank, the failed South African lender with Sfr555.00mn (R7.00bn) of debt, says hedges put in place after August saved it from more losses, allowing administrators to continue recovery plans.
UK and US
Chevron Corporation: The energy company, in its FY14 results, indicated that its total revenue was $211.97bn, 7.4% lower compared with the previous year. Its diluted EPS dropped to $10.14 from $11.09 posted in the preceding year. Meanwhile, the company also announced a $35.00bn capital and exploratory investment programme for FY15. It stated that the investment plan for FY15 would focus on the most attractive opportunities and the company is testing some short cycle investments to ensure profitability.
Altria Group: The tobacco company, in its FY14 results, indicated that its net revenue rose to $24.52bn from $24.47bn reported in the previous year. It further indicated that its diluted EPS increased 13.3% to $2.56, compared with the previous year. For FY15, the company expects adjusted diluted EPS would be in the range of $2.75 to $2.80.
AbbVie Inc.: The research-based biopharmaceutical company, in its FY14 results, indicated that net sales grew 6.2% to $19.96bn, compared with the preceding year. Its diluted EPS, excluding specified items, was $3.32, compared with $3.14 posted in the prior year. The company reaffirmed its adjusted diluted EPS for FY15 to be in the range of $4.25 to $4.45.
MasterCard: The financial services company, in its FY14 results, indicated that its net revenue increased to $9.47bn from $8.35bn reported in the previous year. Its diluted EPS rose 21.1% to $3.10, compared with the preceding year.
Eli Lilly and Co.: The pharmaceutical company, in its FY14 results, indicated that total revenue declined 15.1% to $19.62bn, compared with the preceding year. Its EPS stood at $2.23, compared with $4.32 in FY13, while its non-GAAP EPS dropped to $2.78 from $4.15 posted in the previous year. The company confirmed that reported EPS guidance for FY15 was in the range of $2.40 to $2.50 and non-GAAP EPS is in the range of $3.10 to $3.20.
Simon Property Group: The real estate company, in its FY14 results, indicated that total revenue was $4.87bn, compared with $4.54bn recorded in FY13. It further stated that its net diluted EPS was $4.52, compared with $4.24 posted in the previous year. The company estimates that fund for operations per diluted share for FY15 would be within a range of $9.60 to $9.70 and net diluted EPS would be in a range of $5.05 to $5.15.
Franklin Resources: The investment company, in its 1Q15 results, indicated that its total operating revenue declined 2.1% to $2.06bn, compared with 1Q14. It further reported diluted EPS of $0.91, compared with $0.96 posted in the same period a year ago.
Weyerhaeuser Co.: The forest product company, in its FY14 results, indicated that net sales were $7.40bn, compared with $7.25bn in the previous year. Its net diluted EPS from continuing operations before special items rose to $1.25 from $0.99 posted in FY13. The company further stated that for FY15, it would focus on driving operational excellence to fully capitalise on their improving markets and delivering value to its shareholders.
Tyco International: The protection and security solutions company, in its 1Q15 results, indicated that its net revenue decreased 0.6% to $2.48bn, compared with the same period a year ago. Its diluted EPS from continuing operations was $0.38, compared with $0.52 posted in 1Q14. The company revised FY15 guidance of EPS before special items to a range of $2.30 to $2.40.
Intercept Pharmaceuticals: The pharmaceutical company announced that its investigational product obeticholic acid has received “breakthrough therapy designation” from the US Food and Drug Administration for the treatment of patients with nonalcoholic steatohepatitis with liver fibrosis.
BT Group: The telecommunications services company, in its 3Q15 results, indicated that revenue decreased 2.7% to GBP4.48bn, compared with the same period a year ago. Its adjusted EPS stood at 8.00p, compared with 7.30p reported in 3Q14. Additionally, the company has agreed a new plan to pay down its ballooning pension deficit and signed off on an upgrade of its fibre network, putting its finances in order ahead of a key football rights auction and a deal to buy mobile network EE.
Vedanta Resources: The diversified metals and mining company, in its 3Q15 production release, stated that its total group revenue rose 0.6% to $3.36bn from $3.34bn posted in the same period preceding year, while total group EBITDA dropped 11.1% to $1.02bn. The company reported its oil and gas gross daily average production of 218.90k boepd, compared with 224.49k boepd posted in the corresponding period previous year.
International Consolidated Airlines: The company indicated that Qatar Airways has acquired a 9.99% holding in it to strengthen existing commercial ties.
Inchcape Plc: The company announced the appointment of Stefan Bomhard as its new CEO. It further indicated that its existing CEO, André Lacroix, would leave the company at the end of March and Stefan would take up his appointment on 1 April 2015.
Jardine Lloyd Thompson: The company announced the appointment of Dominic Samengo-Turner as CEO of JLT Asia, with effect from 1 May 2015. Ian Robinson, the current the COO of JLT Asia, would take up the position of COO of Thistle Insurance Services Limited, with effect from 1 July 2015 and Warren Downey would be appointed Deputy CEO and COO of JLT Asia, with effect from 1 May 2015 and 1 July 2015, respectively. The company further announced that Mark Wood would be retiring as the CEO of JLT’s UK Employee Benefits business and would be leaving the group at the end of May 2015 and Duncan Howorth would take up the position of CEO of JLT’s UK Employee Benefits business, effective from 1 June 2015.
Morgan Advanced Materials: The company announced the appointment of Pete Raby as CEO, with effect from 1 August 2015.
Financial Times: Creditors set to seize control of Towergate: Towergate’s senior creditors are set to seize control of the insurance broker in a restructuring of its GBP1.00bn debt burden that will wipe out the interest of its private equity backer Advent and also lead to heavy losses for bondholders.
Dixons Carphone to launch mobile services in the UK: Dixons Carphone, the electrical retailer, is to launch mobile services in the UK that will also offer internet connectivity to the “smart” home appliances sold in its stores.
Leyshon Energy changes its Aim: The collapse in oil prices has already forced some Aim oil and gas companies to quit the public market.
Insurers warned to use ‘big data’ responsibly: The insurance industry risks sparking a regulatory crackdown unless it takes “great care” to ensure its increasing use of personal data does not leave chunks of society without affordable cover, the head of Britain’s main industry body has warned.
Shire gets go ahead to market binge-eating medicine: Shire has received its second important regulatory breakthrough in two weeks after winning US approval for the first medicine to treat binge-eating disorder.
LendInvest set to debut on London Stock Exchange: LendInvest is set to become the first peer-to-peer platform in the UK to list on the stock exchange in a sign the alternative finance sector is maturing.
Genel to part with founding CFO: Genel, the energy group led by former BP Chief Tony Hayward, is set to part ways with one of its founders at a time when falling oil prices are hitting companies in the sector.
Refiners say Keystone is route to oil independence: Republicans backing the Keystone XL oil pipeline say it would create thousands of jobs in an economy grappling with slow wage growth, but US refiners supporting the project argue a more fundamental concern is at stake: American energy security.
Hellman & Friedman eyes bid for Auto Trader: US private equity firm Hellman & Friedman is preparing a GBP2.00bn takeover bid for Auto Trader, the UK’s largest marketplace for used cars, in a deal that would that would derail what is expected to be one of this year’s biggest initial public offerings.
Psychometric testing on the rise in emerging markets: A mini-boom in psychometric testing is improving financial inclusion in emerging markets, providing an alternative for loan applicants who do not have traditional credit records.
China construction tycoon eyes Greece: The Chinese construction magnate chasing indebted local authorities for RMB50.00bn ($8.00bn) in unpaid infrastructure bills is turning his gaze to another risky market, saying that he is on the hunt for investment opportunities in Greece.
Germany is lagging behind disruptive US start-ups, warns Bosch chief: The Chief Executive of Bosch, the privately owned technology conglomerate, has warned that Germany is failing to keep pace with disruptive business models developed in Silicon Valley.
US safety regulator orders 2nd recall of 2.10mn vehicles: The issues surrounding a recent spike in North American vehicle recalls grew more complex on Saturday when a US regulator ordered a second recall for 2.10m vehicles because a previous recall repair might have been ineffective.
Google, Microsoft and Amazon pay to get around ad blocking tool: Google, Amazon, Microsoft and Taboola have quietly paid the German start-up behind Adblock Plus, the world’s most popular software for blocking online advertising, to stop blocking ads on their sites.
Lex: Lending Club: return policy: Less so Lending Club, the cheerful peer-to-peer lending platform that went public in December with the slogan “Welcome to the ‘better rates, together’ club.” Any borrower can take part, if they pass a credit assessment. Lending Club makes money from both sides: Investors pay a fee of around 1.0% while borrowers pay an up-front fee of 4.0%.
So with Lending Club making revenue of roughly 5.0% of loans, is the equity a better investment? Alas, the appeal of the stock is harder to see. The platform is valued at $7.00bn, 20.00 times this year’s revenues and 300.00 times earnings. Even if revenues double for several years, it still looks expensive, at 6.00 times FY18 revenues and 44.00 times FY18 earnings, according to forecasts from S&P Capital IQ. Such a valuation rests on the expectation that Lending Club will expand its loans to small businesses, and move into new financial products like insurance.
A recent deal to supply credit to Google suppliers points to the small business opportunities. Small businesses aside, Lending Club’s existing market – credit card refinancing is the bulk of its loans – is already huge. Credit card receivables are some $850.00bn in the US, of which around $370.00bn would meet the Club’s credit standards versus $6.00bn it has lent so far. But profits may be elusive in the near term, as Lending Club invests in claiming market share and fending off smaller rivals: the company is in the red.
DreamWorks Animation: cliffhanger: DreamWorks Animation SKG is the cartoon division of the movie studio founded by Hollywood legends Steven Spielberg, Jeffrey Katzenberg and David Geffen and spun off in FY04. Its fortunes have faded in the last year. Once celebrated for franchises such as Shrek and Kung Fu Panda, four of its last six films have, embarrassingly, led to cost impairments (charges incurred when box office revenue won’t meet expectations). Last week, it said that it would reduce its annual film slate from three to two, cut nearly a fifth its staff and take a $290.00mn charge.
Since the beginning of FY14 its shares are down by nearly half. But in a town where a studio is as good as its last film, a stunning comeback is always just a blockbuster away. Quality over quantity appears sensible. However, the concern is that the staff reductions bite deep into the artistic talent needed to make great films. The cuts will save $60.00mn annually (in the short term, however, $110.00mn in cash severance costs will test the company’s liquidity).
DreamWorks also wants to bring down the cost of each film to around $120.00mn. DreamWorks has other businesses beyond its theatre releases. It produces films and television programmes for Netflix as well as YouTube and has toys based on its features. It has also extended its brand into live entertainment and theme parks. Now, it is refocusing its efforts on the new, shorter slate of films. Investors like “happily ever after”; in DreamWorks, they have a cliffhanger.
Super Bowl ads: game on: Super Bowl advertising has itself become a contest. As the biggest US advertising event of the year, it is an annual milestone in the competition between TV advertising (a $190.00bn global market) and online advertising ($120.00bn, and growing fast). This competition is not a zero-sum game, of course: Super Bowl TV advertisers all have social media campaigns and digital ads, too.
NBC will take in more than $300.00mn in Super Bowl-related ad sales, according to Kantar Media. Digital ad companies benefit too. Facebook has launched a dedicated Super Bowl page, and Twitter is expecting a boost in viewers and ad revenue from the event. Digital spending is expected to keep growing as advertisers catch up with the watching habits. Viewers spend half their time on digital platforms, yet this is just a third of ad budgets, according to Macquarie.
The disparity is even greater on mobile, which accounts for a quarter of time spent but less than 10.0% of ad budgets. For the TV networks, while revenue has been hurt by an ad slump, all is not gloomy – they also benefit from digital ad spending, as more viewers watch their programming on phones and tablets. The race is not over.
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