By Anchor Capital
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South African Market Review
South African markets closed in negative territory yesterday. Anglo American Platinum, Aquarius Platinum and Impala Platinum shed 4.1%, 2.5% and 2.4%, respectively. Banking sector stocks, Barclays Africa Group, FirstRand and Standard Bank fell 2.9%, 2.0% and 1.3%, respectively. Vodacom Group plummeted 0.2%, after it reported a decline in its revenue for 3Q15 due to a drop in mobile termination rates in South Africa and intensified competition. On the upside, Barloworld Limited surged 1.0%, after it stated that businesses trading in 1Q15 was above or in line the previous period. Resilient Property Income Fund rose 0.5%, after indicating that its retail sales growth in 1H15 was ahead of expectations. The JSE All Share Index dropped 0.6% to close at 51,630.82.
UK Market Review
UK markets finished lower yesterday, erasing some gains from the previous session, led by a decline in energy sector stocks. Tullow Oil and BG Group shed 5.2% and 1.4%, respectively. Hargreaves Lansdown plunged 7.6%, after the firm reported a decrease in its 1H15 profit. Mining sector stocks, BHP Billiton and Antofagasta fell 2.0% and 1.2%, respectively. On the brighter side, GlaxoSmithKline added 1.6%, as its 4Q15 profit beat expectations and after the firm reiterated that it would return GBP4.00bn cash to stakeholders from its pact with Novartis. Sky gained 1.3%, after the firm posted a rise in its 1H15 revenue. The FTSE 100 Index declined 0.2% to close at 6,860.02.
US Market Review
US markets ended mostly lower yesterday, after the European Central Bank tightened its rules on Greece’s bailout. ENSCO, Denbury Resources and Noble Corporation tumbled 5.2%, 5.0% and 4.7%, respectively, in line with a drop in oil prices. Merck & Company declined 3.2%, after it posted disappointing 4Q14 revenue and provided a tepid earnings guidance for FY15. General Motors climbed 5.4%, after it reported 4Q14 earnings above market expectations and announced plans to raise its quarterly dividend. Microsoft added 0.6%, following reports that the company acquired Sunrise for around $100.00mn. The S&P 500 Index fell 0.4% to settle at 2,041.51, while the DJIA Index rose marginally to close at 17,673.02. The NASDAQ Index dropped 0.2% to finish at 4,716.70.
Asia Market Review
Markets in Asia are trading mixed this morning. Chinese markets have risen after the Chinese central bank reduced its reserve requirement ratio in an effort to boost lending and to stimulate the nation’s economy. In Japan, Hitachi plunged 9.5%, after the company’s 3Q15 earnings fell short of market expectations. On the upside, Sony surged 12.6%, after the firm’s 3Q15 earnings more than doubled, following upbeat sales of its cameras and video games. In Hong Kong, banking sector stocks, Bank of Communications and China Merchants Bank climbed 0.6% and 3.6%, respectively. In South Korea, Rifa Industrial and Hyosung Corp fell 2.2% and 4.4%, respectively. The Nikkei 225 index is trading 0.9% lower at 17,526.24. The Hang Seng index is trading 0.6% up at 24,819.01, while the Kospi index is trading 0.7% lower at 1,949.00.
Commodities
At 06:00 SAST today, Brent crude oil rose 0.2% to trade at $53.28/bl. Yesterday, Brent crude oil fell 4.4% to settle at $53.17/bl, after the Energy Information Administration reported that US crude stockpiles jumped by 6.30mn bls for the week ended 30 January 2015, the highest level since records began in 1982.
Yesterday, the Illinois North Central No.2 Yellow corn spot prices fell 0.6% to $3.57/bushel.
At 06:00 SAST today, gold prices advanced 0.2% to trade at $1,271.52/oz. Yesterday, gold gained 0.7% to close at $1,269.35/oz, after data showed that US non-farm private employment rose less than expected in January and as China’s central bank cut banks’ reserve requirement ratios. Meanwhile, the ECB cancelled its acceptance of Greek bonds in return for funding.
Yesterday, copper rose 0.2% to close at $5,732.75/mt. Aluminium closed 0.6% lower at $1,862.00/mt.
Currencies
Yesterday, the South African rand weakened against the US dollar, amid mixed US data. The ADP survey showed a weaker than expected addition in private US payrolls, while the ISM report indicated that activity in the non-manufacturing sector improved more than expected for January. Going forward, market participants will keenly today’s SACCI business confidence print in South Africa and US trade data for further direction.
The yield on benchmark government bonds rose yesterday. The yield on 2015 bond rose to 6.02% while that for the longer-dated 2026 issue advanced to 7.32%.
At 06:00 SAST, the US dollar is trading flat against the South African rand at R11.4689, while the euro is trading 0.3% lower at R13.0259. At 06:00 SAST, the British pound remains unchanged against the South African rand to trade at R17.4424.
Yesterday, the euro declined against most of major currencies, as the ECB tightened its rules on Greece’s bailout. Meanwhile, the final services PMI in the eurozone rose more than expected in January and the eurozone’s retail sales for December recorded a rise. Going forward, investors will focus on the retail PMI data in the eurozone today.
At 06:00 SAST, the euro slipped 0.3% against the US dollar to trade at $1.1358, while it has weakened 0.3% against the British pound to trade at GBP0.7469.
Economic Updates
The Markit Economics has indicated that, in the UK, the services PMI climbed to 57.20 in January, higher than market expectations of an advance to a level of 56.30. In the prior month, the services PMI had registered a reading of 55.80.
In January, the final services PMI fell to a level of 49.40 in France, compared with market expectations of a drop to a level of 49.50. In the previous month, services PMI had recorded a level of 50.60. The preliminary figures had indicated a fall to 49.50.
The Markit Economics has indicated that, in January, the final services PMI in Germany recorded a rise to 54.00, compared with a level of 52.10 in the previous month. Markets were expecting services PMI to advance to a level of 52.70. The preliminary figures had recorded an advance to 52.70.
The Markit Economics has indicated that the final services PMI recorded a rise to 52.70 in January, in the Eurozone, higher than market expectations of a rise to 52.30. The preliminary figures had recorded an advance to 52.30. In the prior month, services PMI had registered a reading of 51.60.
The Eurostat has indicated that the seasonally adjusted retail sales in the eurozone registered an unexpected rise of 0.3% on a monthly basis in December. In the prior month, retail sales had climbed by a revised 0.7%.
In January, the seasonally adjusted Ivey PMI in Canada fell to a level of 45.40, lower than market expectations of a fall to 53.40. Ivey PMI had registered a reading of 55.40 in the prior month.
In the US, the ADP private sector employment climbed by 213.00k in January, following a revised gain of 253.00k in the prior month. Markets were expecting the private sector employment to rise 220.00k.
The Institute for Supply Management (ISM) has indicated that the non-manufacturing PMI registered an unexpected rise to a level of 56.70 in the US, in January. In the prior month, the non-manufacturing PMI had recorded a revised reading of 56.50.
The Housing Industry Association has reported that new home sales slid 1.9% on a monthly basis, in December, in Australia. In the previous month, new home sales had risen 2.2%.
Corporate Updates
South Africa
Vodacom Group: The company, in its 3Q15 update, indicated that group revenue decreased 1.1% to R19.99bn with service revenue down 2.7% to R15.82bn, due to a decline in mobile termination rates in South Africa, increased competition and increased pressure on consumer spending.
Resilient Property Income: The property company, in its IH15 interim statement, indicated that its rental revenue was R833.45mn, compared with R672.13mnposted in the same period a year ago. The company’s retail sales grew 8.8% and ahead of expectations. Its basic EPS rose to R6.33 from R2.45 posted in the same period preceding year. The company has declared a dividend per share of R1.86, an increase of 16.3% compared with the comparable prior period.
Barloworld Limited: The industrial company, in its 1Q15 trading update, revealed that performance with most businesses trading were above or in line with the prior comparable period. It stated that there are no changes to FY15 revenue outlook ranges provided for the equipment and handling businesses and automotive and logistics division at the time of releasing itsFY14 results.
Arcelormittal South Africa: The steel manufacturing corporation, in its trading statement for FY14, stated that the loss per share is expected to reduce from R5.35 to a range between R0.33 and R0.43, due to the impairment charge last year of R1.95bn related to the closure of the Thabazimbi mine.
Nampak Limited: The manufacturing company announced the retirement of the Chief Financial Officer, Mr. Gareth Griffiths and Mr Roy Smither, a non-Executive Director and Chairman of the company’s audit committee.
Baroka Platinum offers R3.00bn for Amplats’ Bokoni mine stake: Baroka Platinum has offered R3.00bn to buy Anglo American Platinum’s stake in the Bokoni mine in Limpopo, According to media reports.
Tiger Brands’ Nigeria business widens losses: Tiger Brands’ Nigerian flour business reported a widened loss of 2.92bn naira (about R176.00mn) for its first quarter ended December, as currency weakness in the local market offset a 27.5% surge in sales.
Eskom to charge more for power to recoup diesel costs: South Africa’s energy regulator said on Wednesday it has given Eskom the go-ahead to charge consumers more for power to recoup the extra diesel costs it has incurred while running gas turbines to cope with electricity demand.
Investec, Stanlib oppose changes to SA banking law: Investec Asset Management and Stanlib Asset Management were among South African fund managers that told lawmakers Wednesday they oppose planned changes to bank laws because they will undermine the rights of failed financial institutions’ creditors.
UK and USMerck & Co. Inc
.: The pharmaceutical company, in its FY14 results, indicated that net sales were $42.24bn, compared with $44.03bn recorded in the previous year. Its non-GAAP EPS stood at $3.49 and GAAP EPS at $4.07. The company expects its FY15 non-GAAP EPS to be between $3.32 and $3.47 and GAAP EPS in the range of $1.62 to $1.91.
21st Century Fox: The multinational mass media corporation, in its 2Q15 results, stated that revenue dropped 1.3% to $8.06bn, compared with the same period preceding year. Its net EPS from continuing operations was $2.89, compared with $0.43 posted in 2Q14.
General Motors: The vehicle manufacturing company, in its FY14 results, revealed that total revenue was $4.85bn, compared with $3.34bn recorded in the preceding year. However, its earnings for the year dropped to $0.54bn from $0.57bn posted in the prior year. The company expects increased pickup truck and big SUV sales for FY15 and is looking ways to increase factory output.
Southern Co.: The electric utility holding company, in its FY14 results, indicated that total revenue increased $1.41bn to $18.50bn, compared with the previous year. Its basic EPS stood at $2.21, compared with $1.88 posted in FY13. Meanwhile, media reports revealed that the company and its electricity customers in Georgia would not pay for contractor cost increases from an 18-month delay on two nuclear reactors being built. Additionally, the CEO of the company stated that the power company could get $240.00mn in damages from the builders of its new nuclear plant in Georgia.
Automatic Data Processing: The business outsourcing solutions company, in its 2Q15 results, stated that total revenue from continuing operations increased 6.7% to $2.67bn, compared with the corresponding period preceding year. The company indicated that diluted EPS from continuing operations increased to $0.70 from $0.65 posted in the same period a year ago. The company anticipates FY15 revenue growth of 7.0% to 8.0% and diluted EPS growth from continuing operations of 12.0% to 14.0%.
Prudential Financial: The financial services company, in its FY14 results, revealed that total revenue increased to $49.64bn from $45.28bn recorded in FY13. However, its adjusted operating income per share for the Financial Services Businesses dropped to $9.21 from $9.67 posted in the preceding year.Cognizant Technology Solutions: The information technology company, in its FY14 results, indicated that revenue was $10.26bn, compared with $8.84bn posted in the preceding year. Its diluted EPS stood at $2.35, compared with $2.02 recorded in the previous year. The company expects FY15 revenue to be at least $12.21bn, up at least 19.0% compared with FY14 and diluted EPS on a non-GAAP basis expected to be at least $2.91.
Yum! Brands Inc.: The fast food company, in its FY14 results, stated that total revenue rose 1.5% to $13.28bn, compared with FY13. However, its diluted EPS dropped to $2.32 from $2.36 recorded in the previous year. The company maintained its FY15 guidance of at least 10% EPS growth.
Allstate Corporation: The insurance company, in its FY14 results, revealed that revenue increased 2.1% to $35.24bn, compared with the previous year. Its net diluted EPS stood at $6.27, compared with $4.81 posted in the preceding year.
BIND Therapeutics: The clinical-stage nanomedicine platform company announced that it is commencing an underwritten public offering of units consisting of shares of its common stock and warrants to purchase shares of its common stock. It would be selling all of the units in offering.
Sky Plc: The internet streaming media, broadband and telephone services company, in its1H15 results, indicated that revenue from continuing operations increased 17.1% to GBP4.30bn, compared with the same period preceding year. Its basic EPS from continuing operations rose to 63.60p from25.20p posted in 1H14.
Hargreaves Lansdown: The investment service company, in its 1H15 interim results, stated that revenue was GBP19.72bn, compared with GBP15.84bn recorded in the same period a year ago. Its diluted EPS dropped marginally to 16.80p from 17.00p posted in the same period prior year.
Victrex Plc: The company, in its 1Q15 management statement, revealed that group revenue was 14.0% up to GBP59.80mn, compared with GBP52.40mn posted in the same period during FY14. Furthermore, the company stated that for FY15 it would focus on rolling out new products into the Spine market, alongside pre-development work for our new product platforms of Dental, Trauma and Knee.
Synergy Health Plc: The outsourcing company, in its trading update, announced that revenue for 9M15 increased by 5.7% to GBP303.10mn, compared with GBP286.90mn during the same period in FY13. The company stated that it is trading in line with the board’s expectations for FY15.
Financial Times
JPMorgan unit set to take control of Towergate: A $30.00bn alternative investments arm of JPMorgan is closing in on a deal to take control of Towergate, ending a battle among the insurance broker’s creditors over who gets what in a restructuring of its GBP1.00bn debt burden.
GlaxoSmithKline upbeat as it eyes HIV spin-off: GlaxoSmithKline has reported signs of stabilisation in its troubled respiratory drugs business and laid out its options for further restructuring as the UK group sought to draw a line under a difficult year.
Game plans in focus ahead of football rights kick-off: BT and Sky will bid in an auction for Premier League football rights, which is expected to generate GBP3.50bn-GBP5.00bn and underlines the huge value that live sports has for broadcasters and telecoms groups worldwide.
BT and EE poised to seal GBP12.50bn deal: BT has finalised the GBP12.50bn acquisition of EE, Britain’s largest mobile network, from Deutsche Telekom and France’s Orange after several weeks of exclusive negotiations.
ICAP to fight EUR14.90mn Brussels fine: ICAP is to fight a EUR14.90mn fine imposed on it by European antitrust authorities for aiding a cartel in the yen swaps markets as Brussels formally closed a portion of its long-running probe into rate manipulation.
Investors back UK’s first tidal lagoon power project: Plans for the UK’s first tidal lagoon power project will get a boost on Thursday with the announcement that it has reached its target of raising GBP200.00mn from two British institutional investors.
Hargreaves to enter P2P lending market: Hargreaves Lansdown, the UK’s leading fund supermarket, is to set up its own peer-to-peer lending platform as it seeks a slice of the fledgling industry’s rapid growth.
Brazilian government scrambles to find new leader for Petrobras: The resignation on Wednesday of Petrobras’ top management, including Chief Executive Maria das Graças Foster, has left the Brazilian government scrambling to find replacements capable of regaining investors’ trust in one of the country’s largest companies.
Petrobras chief and 5 executives resign over scandal: The Chief Executive of Petrobras and five other executives have resigned over the corruption scandal in the Brazilian state-owned oil company that is threatening to envelop the government of President Dilma Rousseff.
Chinese stocks rise on bank reserve ratio cut: Chinese equities jumped in early morning trade on Thursday after the People’s Bank of China loosened policy earlier than anticipated during London trading hours on Wednesday.
Royal Bank of Scotland eyes more closures: Royal Bank of Scotland is planning to close at least 99 branches this year despite mounting concern that lenders are leaving communities without access to high street networks.
Ackman’s Pershing Square secures seat on Zoetis board: Bill Ackman, the billionaire hedge fund activist, has parachuted one of his representatives on to the board of Zoetis, the $22.00bn animal health company he is trying to shake up or sell.
Murdoch loses Saudi ally at News Corp: Rupert Murdoch has lost an important News Corp ally after Prince Alwaleed bin Talal sold most of his stake, a move that could embolden dissident shareholders to challenge Mr Murdoch’s grip on the media company.
Fox cuts profit forecast as TV viewers switch to digital platforms: Rupert Murdoch’s 21st Century Fox has cut its profits forecast for the next fiscal year by about $500.00mn because of currency swings and a decline in television ratings as viewers move to new digital platforms.
Starbucks brews up UK profit after 17 years: Starbucks has finally brewed up a pre-tax profit in the UK, almost 17 years after setting up shop in the country.
Staples to buy Office Depot for $6.30bn: Staples agreed to acquire Office Depot on Wednesday in a $6.30bn transaction that will create the largest office stationery company in the US, marking the latest victory for activist investor Starboard Value.
Sony narrows full year net loss forecast: The weaker yen has helped Sony to trim its annual loss forecast by 26.0% even as the Japanese electronics group ramped up the restructuring of its smartphone business, writes Kana Inagaki in Tokyo.
Twitter to show tweets in Google search: Twitter has struck a deal with Google to show tweets in search results, as the messaging platform tries to broaden its reach beyond its 284.00mn monthly active users.
Twitter targets emerging markets with Indian R&D centre: Twitter plans to set up a research and design centre in the Indian technology hub of Bangalore, its first such facility outside the US, as part of wider moves to accelerate growth in major emerging markets.
Wizz Air resurrects float as it aims to undercut rival Ryanair: Wizz Air has resurrected plans to float on the London Stock Exchange just seven months after scrapping them as it aims to undercut rival Ryanair, Europe’s largest low-cost airline.
Hargreaves Lansdown: fell 7.6% to 966.00p on weaker than expected earnings.
Arm Holdings: rose 3.1% to GBP10.69 after announcing the FY16 launch of a new range of chips aimed at high-end devices such as games consoles.
Lex:
Staples/Office Depot: paper clipped: The second- and third-largest US chains, Office Depot and OfficeMax, joined forces in FY13 and the benefits are just beginning to show through. Staples, the leading purveyor of toner, copy paper and pens, had that success in mind as it struck a $6.00bn deal on Wednesday to buy Office Depot, the company created by the earlier deal. But exactly how, when and to whom the benefits accrue is a trickier issue. The Office Depot/OfficeMax deal was a no-premium, stock-only affair, announced in early FY13. When the tie-up closed in late FY13, the shares of the surviving company, Office Depot, traded at about $5.65.A year later, the shares had dipped to $5.00. But in early November FY14, Office Depot announced that the synergy target had jumped to $840.00mn per year, ahead of the original $400.00 to $600.00 mn goal, and that FY15 operating profit would be five times what its combined operations achieved in FY13. The shares rocketed to nearly $7.00. And so Office Depot, $5.00 a share three months ago, could be valued at as much as $11.00. On Wednesday, Office Depot shares traded at $9.50, acknowledging both the stock component of the Staples bid (Staples shares traded down a 10th) and regulatory uncertainty. Staples shares are still more than a 10th higher than they were in December, when deal rumours first surfaced. For Staples shares to keep rising, it will have to deliver on those synergy targets. That is not something Office Depot shareholders will have to worry about.
Bonds / buybacks: too popular to be smart: Not all buybacks are equal. Some destroy value, some create it, and it is hard to tell them apart. Apple has spent $45.00bn on repurchases in the past 12 months. It issued $6.50bn in bonds this week at low rates; the proceeds will be used for more buybacks and dividends (Apple has oceans of net cash, but 90.0% of it is overseas — hence the need to issue US debt and avoid repatriation tax). This approach has logic, given the cash and the fact that Apple’s cost of debt is lower than its cost of equity.Taking equity out of the capital structure — adding leverage — might make sense, depending on Apple’s other options. And taking out equity with buybacks rather than dividends is tax efficient for some investors. But few companies are as under-leveraged as Apple. And buybacks can crowd out other things — such as investments in research or hard assets. At IBM and Cisco, which repurchased $13.00bn and $4.50bn in shares over the past 12 months, respectively, research spending is lower than five years ago. Some companies are — surprise — issuing debt to invest in their business. This week Netflix issued $1.50bn in debt to fund expansion. The company has been burnt by poorly-timed repurchases. It spent $200.00mn buying shares in FY11 — just before its share price crashed. But the company seems to have learnt a lesson. Yes, buybacks can optimise a capital structure. Only investment creates growth.
Sky: how high’s the limit?: The next auction of English Premier League football TV rights is under way. Results are due soon, and it will not be cheap. The auction of the rights for FY13-FY16 raised GBP3.00bn in total (of which Sky paid two-thirds). A decade earlier the rights to the same competition were sold for GBP1.00bn. And the English Premier League is not losing popularity. That is not too worrying, but a big payout for football rights could change that. Ominously for Sky, there will be competition.Rival BT Group has already won the rights for all European cup matches, including the Champions League, for the next three seasons. BT does not have limitless resources. UK regulator Ofcom has questioned whether BT is overcharging companies that want to use its backbone network, and using the proceeds to show football to its own subscribers. But with a strategy that is partly based on using football to win subscribers, BT will be part of the auction. Still, Sky will have to face up to the challenge. The current content mix is performing well. On Wednesday Sky revealed good first half subscriber increases in its key UK and German markets, the latter up 9.0% year on year. Revenue per user held up everywhere except Germany.
*Published with special permission by Anchor Capital (ACG)
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