By Anchor Capital
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South African Market Review
South African markets closed higher yesterday, amid strength in energy and banking sector stocks. RCL Foods climbed 6.6%, after the company indicated that its EPS for the interim period ended 31 December 2014is expected to be higher, compared with the same period a year ago. Anglo American Platinum, Impala Platinum and Northam Platinum surged 6.4%, 5.2% and 1.5%, respectively. Sasol advanced 5.4%, in line with a rise in oil prices. Standard Bank and FirstRand rose 4.7% and 1.7%, respectively. However, Life Healthcare Group fell 1.7%, after it revealed that EPS is expected to decrease in 1H15, largely due to its disinvestment in Joint Medical Holdings in the previous year. The JSE All Share Index advanced 1.1% to close at 51,949.33.
UK Market Review
UK markets finished higher yesterday, with the benchmark index closing at the highest level since September, amid a surge in mining and energy sector stocks. BHP Billiton and Anglo American jumped 5.0% and 4.1%, respectively, amid an increase in metal prices. Tullow Oil and BG Group advanced 4.6% and 1.2%, respectively. BP gained 2.8%, after the company’s 4Q15 profit exceeded market expectations. Bucking the trend, Aberdeen Asset Management fell 3.4%, following a drop in assets under management for the three months ended December. Associated British Foods slipped 1.1%, amid a decline in biofuel prices, which would lead to a GBP98.00mn charge for the company. The FTSE 100 Index advanced 1.3% to close at 6,871.80.
US Market Review
US markets ended in the green yesterday, amid an extended rally in energy sector stocks. Denbury Resources, Range Resources and CONSOL Energy surged 11.2%, 7.5% and 6.6%, respectively, following a rise in oil prices. General Motors and Ford Motor advanced 2.6% and 2.5%, respectively, on the back of strong vehicle sales in January. Walt Disney climbed 2.4%, as the company’s 1Q15 results surpassed market estimates. On the flipside, National Oilwell Varco tumbled 4.1%, after the company warned of a severe downturn in its business in FY15, citing a decline in oil prices. The S&P 500 Index climbed 1.4% to settle at 2,050.03, while the DJIA Index rose 1.8% to close at 17,666.40. The NASDAQ Index advanced 1.1% to finish at 4,727.74.
Asia Market Review
Asian markets are trading in the green this morning, mirroring overnight gains on Wall Street. In Japan, Mitsubishi UFJ Financial Group surged 6.1%, after the bank reported an unexpected increase in 3Q15 profit. Terumo Corporation rallied 6.2%, after the company announced a share repurchase programme worth JPY3.00bn. In Hong Kong, Wynn Macau slipped 0.5%, amid news that muted growth in the gaming sector in Macau affected Wynn Resorts’ 4Q14 earnings. In South Korea, Samsung Electronics added 0.2%, after the company appointed Lee Sang-chul as the new head of strategic marketing at its mobile division. The Nikkei 225 Index is trading 2.1% higher at 17,700.17, while the Kospi Index is trading 0.8% firmer at 1,966.91. The Hang Seng Index is trading 0.9% higher at 24,777.14.
Commodities
At 06:00 SAST today, Brent crude oil rose 1.0% to trade at $56.14/bl. Meanwhile for the week ended 30 January 2015, US inventories rose by 6.10mn bls according to the American Petroleum Institute (API) report released late Tuesday. Yesterday, Brent crude oil rose 3.5% to settle at $55.59/bl, amid speculation that a sharp drop in US drilling activity might result in supply declines.
Yesterday, the Illinois North Central No.2 Yellow corn spot prices rose 3.9% to $3.59/bushel.
At 06:00 SAST today, gold prices advanced 0.1% to trade at $1,262.12/oz. Yesterday, gold declined 1.1% to close at $1,260.52/oz, as demand for safe haven assets weakened with rising oil prices and amid hopes that the new Greek government would be able to renegotiate the terms of its bailout with its creditors.
Yesterday, copper rose 3.5% to close at $5,719.00/mt. Aluminium closed 1.0% higher at $1,874.00/mt.
Currencies
Yesterday, the South African rand strengthened against the US dollar, after data showed that US factory orders dropped for the fifth consecutive month in December, thereby dampening optimism over the strength of the US economy. Going forward today, investors will keenly eye the HSBC PMI data in South Africa for further direction. Market participants will also be interested in a number of key releases in the US including ISM services PMI and ADP employment data due later today.
The yield on benchmark government bonds rose yesterday. The yield on 2015 bond rose to 5.96% while that for the longer-dated 2026 issue advanced to 7.16%.
At 06:00 SAST, the US dollar is trading flat against the South African rand at R11.3819, while the Euro is trading 0.1% lower at R13.0516. At 06:00 SAST, the British pound is trading marginally lower against the South African rand at R17.2533.
Yesterday, the Euro advanced against most of the major currencies, amid hopes that the Greek government might reach a compromise with its international creditors on the terms of its bailout. Going forward today, traders will keep an eye on services PMI data across Europe for further hints.
At 06:00 SAST, the Euro slipped 0.1% against the US dollar to trade at $1.1466, while it has weakened 0.1% against the British pound to trade at GBP0.7565.
Economic Updates
The British Retail Consortium (BRC) shop price index eased 1.30% in the UK, on an annual basis, in January. The BRC shop price index had registered a drop of 1.70% in the prior month.
The Chartered Institute of Purchasing & Supply has indicated that, in the UK, the construction PMI recorded an unexpected rise to 59.10 in January. In the prior month, the construction PMI had recorded a level of 57.60.
The trade surplus in Switzerland dropped to CHF 1.52bn in December, following a revised trade surplus of CHF 3.80bn in the prior month. Markets were expecting the nation to register a trade surplus of CHF 2.10bn.
The Ministry of Employment has indicated that the number of people unemployed in Spain registered a rise of 78.00k in January, following a decline of 64.40k in the prior month.
The National Institute of Statistics has reported that, in January, on a monthly basis, the flash consumer price index recorded a drop of 0.4% in Italy. The consumer price index had recorded an unchanged reading in the prior month.
The preliminary EU normalised consumer price index in Italy fell 2.4% in January on a monthly basis, compared with a flat reading in the previous month. Market expectations were for the EU normalised consumer price index to fall 2.4%.
The Eurostat has indicated that, on a monthly basis, the producer price index (PPI) fell 1.0% in December, in the Eurozone, compared with a drop of 0.3% in the previous month. Market anticipations were for the producer price index (PPI) to fall 0.7%.
The Institute for Supply Management (ISM) has indicated that, in January, the New York City current business condition index registered a drop to 44.50 in the US. The New York City current business condition index had registered a level of 70.80 in the prior month.
In December, factory orders in the US dropped 3.4% on a monthly basis, more than market expectations for a drop of 2.2%. In the previous month, factory orders had fallen by a revised 1.7%.
Total vehicle sales eased to 16.66mn in January, in the US, compared to a level of 16.92mn in the prior month. Market expectations were for total vehicle sales to fall to a level of 16.60mn.
In December, the industrial product price index fell 1.6% on a monthly basis in Canada, compared with a revised fall of 0.5% in the prior month. Markets were expecting the industrial product price index to ease 0.8%.
The Australian Industry Group (AIG) performance of services index in Australia advanced to 49.90 in January, compared with a reading of 47.50 in the previous month.
Corporate Updates
South Africa
Life Healthcare Group Holdings: The company, in its trading statement for 1H15, revealed that it expects to show a decrease in EPS of between 37.2% and 57.2%, compared with that reported for 1H14. It further stated that the reason for expected decrease is largely due to the company’s disinvestment of its 49.3% shareholding in Joint Medical Holdings Limited in the prior year.
RCL Foods: The company, in its trading statement for the interim period ended 31 December 2014, indicated that it expects its EPS and headline EPS to be between R0.60 and R0.80, compared with the EPS and headline EPS of R0.02 in the same period a year ago.
Trustco Group: The financial group announced that it took a loss on its Africa insurance division which was due to the continuing operational cost of the insurance business in South Africa with the launch of a new product line and distribution channel this year.
Vukile makes inroads on Synergy acquisition: On Tuesday, Vukile announced that the fund has acquired all the remaining shares in Synergy – raising its stake in the company’s B-linked units to 75.0% and A-linked units to 8.5%.
UK and US
Gilead Sciences: The biotechnology company, in its FY14 results, indicated that product sales were $24.47bn, compared with $10.80bn posted in the preceding year. Its diluted net EPS increased to $7.35 from $1.81 recorded in FY13. Additionally, the company stated that it expects that net product sales would be in the range of $26.00bn to $27.00bn. The company also announced that the board has authorised a dividend programme under which the company intends to pay quarterly dividends of $0.43/share, beginning in 2Q15.
Walt Disney Company: The diversified multinational mass media corporation, in its 1Q15 results, indicated that total revenue was $13.39bn, compared with $12.31bn reported in 1Q14. The company further indicated that diluted EPS increased 23.3% to $1.27, compared with the corresponding period previous year.
United Parcel Service: The shipment and logistics company, in its FY14 results, indicated that total revenue increased $2.79bn to $58.23bn, compared with the previous year. Its diluted EPS reduced to $3.28 from $4.61 posted in FY13. The company anticipated FY15 diluted EPS to be in the range of $5.05 and $5.30.
LyondellBasell Industries: The chemical company, in its FY14 results, indicated that sales and other operating revenues were $45.61bn, compared with $44.06bn posted in the preceding year. Its diluted EPS from continuing operations rose to $8.92from $6.76 recorded in the prior year. For FY15, the company plans to advance approximately GBP1.00bn of ethylene expansion projects, improve operations at their methanol facility, and receive additional volumes of Canadian crude oil at its refinery.
Emerson Electric: The manufacturing and technology company, in its 1Q15 results, indicated that net sales dropped marginally to $5.59bn from $5.61bn in the same period a year ago. However, its diluted EPS increased 15.4% to $0.75, compared with the same period preceding year. The company expects 3.0% to 5.0% of underlying sales growth for FY15 and reported EPS are expected to be in the range of $4.50 to $4.60.
Aetna Inc.: The health care company, in its FY14 results, indicated that total revenue was up 22.6% to $58.00bn, compared with the preceding year. Its net EPS stood at $5.68, compared with $5.33 in the prior year. Furthermore, the company revealed that it is committed to increase its FY15 projection for operating EPS to at least $7.00 from its previous projection of at least $6.90.
Archer Daniels Midland: The global food-processing and commodities-trading corporation, in its FY14 results, indicated that revenue dropped to $81.20bn from $89.80bn posted in the previous year. However, its diluted EPS rose to$3.43 from $2.02 posted in FY13. The company expects FY15 capital expenditures of between $1.10bn and $1.30bn.
Myriad Genetics: The company, in its 2Q15 results, revealed that total revenue was down 10.7% to $184.39mn, compared with the same period a year ago. Its diluted EPS stood at $0.32, compared with $0.66 recorded in the same period for the preceding year. The company revised its FY15 guidance and expects total revenue of $730.00mn to $740.00mn and adjusted diluted EPS of $1.50 to $1.55.
Entropic Communications: MaxLinear has agreed to buy the semiconductor company for $287.00mn in stock and cash.
Apricus Biosciences: The biopharmaceutical company announced that it has further expanded its exclusive license agreement with Hexal AG, an affiliate within the Sandoz Division of the Novartis Group of Companies for the commercialisation of Vitaros, Apricus’ novel topical on-demand treatment for erectile dysfunction.
BP Plc: The company, in its FY14 results, revealed that sales and other operating revenues decreased 7.2% to $353.57bn, compared with the preceding year. Its diluted EPS stood at $1.23, compared with $7.39 posted in FY13. The company expects reported production for FY15 to be higher than FY14.
BG Group: The oil and gas exploration company, in its FY14 results, indicated that group revenue increased to $19.29bn from $19.19bn posted in the previous year. Its diluted loss per share from continuing operations was $0.31, compared with diluted EPS of $0.65 recorded in FY13. The company expects FY15 production volumes to be in the range of 650.00kboed and 690.00kboed. Meanwhile, the company reported an $8.90bn pretax impairment for 4Q14 on assets in Australia and because of the impact of low oil prices on other assets.
Aberdeen Asset Management: The company, in its trading update for 3 months ended 31 December 2014, indicated that assets under management stood at GBP323.30bn, compared with GBP324.40bn posted in the previous quarter ended 30 September 2014. It further revealed that gross inflows were GBP11.29bn, compared with GBP10.35bn in the prior quarter. Meanwhile, outflows were 22.0% up to GBP16.08bn. The company further stated that the SWIP integration is on track with the more complex elements of the migration expected to complete by end of FY15 and the final cost synergies likely to be ahead of its initial expectations.
TalkTalk Telecom Group: The company, in its 3Q15 trading update, revealed that total revenue was up 4.2% to GBP449.00mn, compared with the same period a year ago. The company expects FY15 revenue to grow by atleast 4.0%.
Ocado Group: The company, in its FY14 results, revealed that revenue was GBP948.90mn, compared with GBP792.10mnrecorded in the prior year. Its diluted EPS stood at 1.18p, compared with diluted loss per share of 2.16p a year ago. Meanwhile, the company stated that it ended the with gross sales (retail) growth of 15.3% and expects to continue growing slightly ahead of the online grocery market.
UDG Healthcare: The company, in its 1Q15 trading update, indicated that trading was strong for the period and expects adjusted diluted EPS for FY15 to be between 5.0% and 8.0%ahead of last year.
Associated British Foods: The company announced that it has decided to write down its UK bioethanol joint venture by GBP98.00mn due to a drop in crude oil and bioethanol prices and the ongoing weakening of the euro against sterling. It stated that it was taking this decision to impair its investment in Vivergo Fuels Limited, a wheat-fed bioethanol joint venture with BP and DuPont.
Capita Plc: The outsourcing company has agreed to acquire Avocis, a customer contract management company operating in Germany, Austria and Switzerland, for EUR210.00mn.
National Express Group: The company stated that it has been named the preferred bidder for contracts to provide all services on the Nuremberg S-Bahn public transport system in Germany. It indicated that it has won the two 12-year contracts to run the services following a competitive tender and said the deals are worth a total of EUR1.40bn over the length of the contract.
Financial Times
Ocado makes first full-year profit in its 15-year history: Ocado made the first full-year profit in its 15-year history, its full-year pre-tax earnings of GBP7.20mn delighting investors, who sent its shares up nearly 5 per cent.
UK watchdog hands KPMG fines totalling GBP390, 000: The UK accountancy watchdog said on Tuesday it had fined KPMG a total of GBP390, 000 for putting commercial considerations above ethical standards for auditors in two separate cases of misconduct that stretch back to FY10 and FY11.
BP chief warns of oil industry slump: BP chief executive Bob Dudley warned on Tuesday that the oil industry faces its worst slump since 1986, with crude prices likely to stay at sharply lower levels for “several years” after plunging more than 50.0% since last summer.
Harry Redknapp quits Queen’s Park Rangers: Struggling Premier League football team Queen’s Park Rangers has been left to seek another manager, following Harry Redknapp’s abrupt decision to quit the west London club.
Aberdeen Asset Management shares drop as net outflows rise: Aberdeen Asset Management suffered net outflows of GBP4.80bn in the final quarter of last year because of weakening investor appetite for emerging market funds, sending its shares down sharply on Tuesday.
Vodafone joins battle in ‘multiplay’ market: Vodafone will make its first move into the “multiplay” market of bundled telecoms and internet services with plans to match BT’s fibre broadband coverage of the UK.
Santander UK boosted by current account growth: Santander UK has attracted a quarter of current account customers that have switched from large high street lenders since FY13 in a sign the challenger is breaking the stranglehold of the big four banks.
BP slashes capital spending by 20.0%: BP has slashed projected capital spending for this year by about 20.0%, after a sharp fall in oil prices led to a multibillion-dollar charge and a headline fourth-quarter loss for the group.
UK film production spending hits record level: Film production spending in the UK surged to a record level last year as Hollywood studios took advantage of the territory’s tax breaks to shoot movies including the latest instalments of Star Wars and Mission Impossible.
Tesco to pay £2m to former CEO and CFO: Tesco has performed a U-turn over GBP2.00mn owed to its former chief executive and former finance director, agreeing to hand over the payments, which had been withheld in the wake of its GBP263.00mn profit overstatement.
Property developers fuel St Modwen’s record profits: St Modwen Properties offered evidence of the enduring strength of the UK property market as the brownfield land specialist reported a record full-year profit increase of nearly 70.0%.
BG in $8.90bn writedown of assets after oil price fall: BG Group swung to a pre-tax loss last year after writing down the value of its asset portfolio by $8.90bn to reflect sharp falls in oil and gas prices.
Crude climbs as oil majors cut spending: Oil continued its strong run on Tuesday with Brent, the international crude marker, clawing back its losses for the year as the US dollar weakened and three major oil companies announced plans to cut spending on new and existing projects.
US regulator prepares fraud case against BP: A US financial regulator is preparing to name BP and other companies in an enforcement action alleging that they broke anti-fraud and reporting rules while using oil pipelines in Canada, the energy group has disclosed.
Lower provisions help boost Santander profit by 70.0%: Santander’s profits rose sharply in the first full set of results under Ana Botín, as the Spanish bank’s new Chairman outlined an organic growth strategy following her initial burst of reform.
Novartis faces suspension in Japan over drug trial allegations: Novartis faces a temporary suspension of its business in Japan as punishment for alleged manipulation of clinical trial data in the latest example of authorities clamping down on big pharma.
Ecobank considers HQ move after Togo ruling: Pan-African lender Ecobank Transnational has called an emergency board meeting to discuss moving the bank’s headquarters out of Togo, in the wake of a court ruling that awarded its controversial former chief executive, Thierry Tanoh, $11.60mn in damages for wrongful dismissal.
Gilead to cut price of $1,000.00-a-day pill: Gilead warned investors on Tuesday that it would have to offer steep discounts on its controversial $1,000.00-a-day hepatitis C pill, after US pharmacy groups and insurers threatened to switch to a cheaper alternative.
Sika managers write to Saint-Gobain warning against takeover: Senior managers at Sika, which is fighting to prevent a takeover by Saint-Gobain, have called on their French rival to abandon a deal that will give it control of the Swiss industrial company.
Vodafone joins battle in ‘multiplay’ market: Vodafone will make its first move into the “multiplay” market of bundled telecoms and internet services with plans to match BT’s fibre broadband coverage of the UK.
ADM sells stake in Brazilian export terminal to Glencore: Archer Daniels Midland is forming a joint venture with the commodities trading house Glencore to quadruple the amount of oilseeds flowing through a port in Brazil.
Smith & Nephew: lost 0.8% to GBP11.75 ahead of year-end results due on Thursday
Aberdeen Asset Management: slid 3.4% to 425.00p after reporting GBP4.80bn of net outflows in the December quarter on below-benchmark investment performance.
Lex:
UPS: the shipping blues: In FY14, UPS executed better for its customers — but at a cost to shareholders. The investments it made to ensure smooth holiday deliveries led to excessive costs across the period. It announced in late January, and confirmed in Tuesday’s earnings announcement, that fourth-quarter earnings would be 15.0% below the market’s expectations. Ecommerce sales should be a boon to UPS. But only if it can find a way to better match its capacity investments with customer demand.
The growth in online shopping has created challenges for physical retail chains but a big opportunity for UPS. “Business-to-consumer” packages, as UPS calls them, once represented a fifth of US volume. By FY19, UPS expects them to make up half of its deliveries. The company is investing heavily in analytics and technology (capital spending is a sturdy 5.0% of revenue) so it can reduce driver idleness and wasted travel, reducing per package delivery cost. The company expects new Orion routing software to yield $300.00mn to $400.00mn in annual savings by FY17. While UPS believes revenue will only grow in single-digits, it aims for operating profits that grow at nearly twice that pace.
Santander: oasis or mirage? The name at the top of this vision is Santander; the event that made it possible was last month’s EUR7.50bn equity raising. After that, the bank’s tier one capital ratio under the Basel III rules stands at a decent 9.7 per cent (it would have been a thin 8.3% without it). And the bank makes money — net profits rose 39 per cent to €5.8bn last year. The question, then, is what to do with the money that it makes. Assume that Santander makes a return on tangible equity of 13.0% (within its target range, and better than last year’s 11.0%.) That might leave it with net profits of EUR6.80bn.
The new dividend policy takes out just over a third of that, or EUR2.40bn. Then assume that some of the rest is used to back new lending. Expanding risk-weighted assets by 5.0% (or EUR30.00bn) would require about EUR3.00bn of capital. Santander certainly sees scope for that kind of growth in its core markets in Spain, the UK and Latin America; its loan book grew 7.0% last year. So after taking out the dividend and the capital for new lending, there is EUR1.40bn available to strengthen the group’s capital ratio. Suddenly the idea of a self-funding, dividend paying, capital-strengthening bank starts to look like the real thing rather than an illusion. Chairman Ana Botín has certainly put the bank on the front foot since she took on the role last September, orchestrating the equity issue as well as a wave of board changes.
Ocado: looking for a market: On Tuesday, Ocado announced a GBP7.20mn profit for FY14, a 0.7% profit margin. Net or operating profits, not profits before depreciation and amortisation, are the metrics to watch because the business is so investment intensive and looks set to stay that way. Ocado’s centres are more efficient than traditional grocery retailer’s stores. Suppliers deliver direct to the centre, stocking is automated, there are no tills, food waste is lower and rent is in cheaper industrial locations.
These efficiencies should make Ocado’s operating margin significantly better than the big chains’, if it gets big enough (it had just £1bn in sales last year; Tesco had about GBP60.00bn). Ocado’s valuation of 2.8 times price to revenues (10 times that of UK retailers, Tesco, WM Morrison and J Sainsbury) suggests confidence that it will get much bigger and margins will follow. Nonetheless, Ocado should look to Amazon, which invests heavily, but works the resulting technological and physical assets hard — renting them to partners and adding new products. If Ocado can follow this example, it might live up to its valuation. The launch of Morrison online, which runs on Ocado infrastructure, and the recent Marie Claire deal are a start. Many more are needed.
*Published with special permission by Anchor Capital (ACG)
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