Anchor Capital: Essential market review 12 Dec

South Africa Market Review

South African markets closed in the red yesterday, amid weakness in mining sector stocks. Gold miners, AngloGold Ashanti, Harmony Gold Mining and Gold Fields dropped 8.0%, 5.9% and 4.3%, respectively. Platinum miners, Impala Platinum Holdings, Anglo American Platinum and Lonmin declined 6.1%, 3.0% and 1.6%, respectively. Ellies Holdings fell 5.4%, after the company indicated that it is expected to post a headline loss in 1H15. On the upside, Times Media Group, KAP Industrial Holdings and Capitec Bank Holdings rose 4.6%, 3.8% and 3.6%, respectively. Emira Property Fund gained 0.6%. The company announced that Geoff Jennett would replace Peter Thurling as the CFO of Strategic Real Estate Managers. The JSE All Share Index dropped 1.3% to close at 48,110.52.

UK Market Review

UK markets finished lower yesterday, following a drop in mining sector stocks and after the European Central Bank’s (ECB) second round of liquidity operations came in lower than market expectations. Glencore and Fresnillo declined 3.7% and 3.3%, respectively. Bunzl fell 1.9%, after the company slashed its forecast for FY15 sales growth. Sports Direct International slipped 1.3%, although the firm announced an increase in its 1H14 profit before tax. Bucking the trend, Dixons Carphone climbed 1.5%, amid news that the firm exceeded its targets for Christmas store openings. Whitbread advanced 0.8%, despite reporting a slight decline in its 3Q14 like for like sales growth. The FTSE 100 Index declined 0.6% to close at 6,461.70.

US Market Review

US markets ended in the green yesterday, lifted by upbeat US retail sales and initial jobless claims data. Urban Outfitters climbed 7.6%, after it indicated an improvement in its same- store sales for November. Walgreen soared 7.1%. It indicated that the CEO, Greg Wasson, would retire after it has completed its merger with Alliance Boots. Delta Air Lines surged 4.6%, after it forecast its pretax income to increase to $5.00bn next year. On the flipside, QEP Resources, Nabors Industries and Chesapeake Energy dropped 3.2%, 3.1% and 2.5%, respectively, as oil prices continued their decline. The S&P 500 Index climbed 0.5% to settle at 2,035.33, while the DJIA Index rose 0.4% to close at 17,596.34. The NASDAQ Index advanced 0.5% to finish at 4,708.16.

Asia Market Review

Asian markets are trading mostly higher this morning, tracking overnight gains on Wall Street. In Japan, Canon surged 4.6%, after it lifted its FY14 dividend. Nidec Corporation advanced 4.4%, after the company announced the acquisition of Germany-based Geräte und Pumpenbau GmbH for an undisclosed amount. In Hong Kong, banking sector stocks, China Merchants Bank and Industrial & Commercial Bank of China added 1.7% and 0.2%, respectively. In South Korea, Kia Motors and LG Display jumped 4.3% and 3.5%, respectively. The Nikkei 225 Index is trading 1.4% higher at 17,502.74, while the Kospi Index is trading 0.4% in the green at 1,924.67. The Hang Seng Index is trading almost flat at 23,311.14.

Commodities

At 06:00 SAST today, Brent crude oil rose 0.1% to trade at $62.82/bl. Yesterday, Brent crude oil fell 1.5% to settle at $62.78/bl., amid speculation that the Organisation of the Petroleum Exporting Countries (OPEC) would keep its crude output unchanged.

Yesterday, the Illinois North Central No.2 Yellow corn spot prices rose 1.4% to $3.69/bushel.

At 06:00 SAST today, gold prices declined 0.2% to trade at $1,225.02/oz. Yesterday, gold gained 0.1% to close at $1,227.72/oz. However, gains in the yellow metal were capped as the US dollar gained ground against its key peers following upbeat US macro updates.

Yesterday, copper rose 0.6% to close at $6,517.50/mt. Aluminium closed 0.5% lower at $1,927.75/mt.

Currencies

Yesterday, the South African rand weakened against the US dollar, after the BER survey showed that consumer confidence in South Africa improved less than expected in 4Q14. Additionally, upbeat US retail sales and initial jobless claims data kept the US dollar supported against the majors. Later today, investors will eye preliminary Reuters/Michigan consumer sentiment survey for further direction to the South African rand against the US dollar.

The yield on benchmark government bonds fell yesterday. The yield on 2015 bond dropped to 6.40% while that for the longer-dated 2026 issue declined to 7.93%.

At 06:00 SAST, the US dollar is trading 0.2% lower against the South African rand at R11.6260, while the euro is trading 0.1% lower at R14.4081. At 06:00 SAST, the British pound has declined 0.2% against the South African rand to trade at R18.2762.

Yesterday, the euro lost ground against most of the major currencies, after the TLTRO auction result showed a weaker-than-anticipated response. Market participants will keep a tab on today’s German wholesale price inflation along with eurozone industrial production and employment data for further direction to risk appetite.

At 06:00 SAST, the euro remained unchanged against the US dollar and the British pound to trade at $1.2393 and GBP0.7883, respectively.

Economic Updates

The BER consumer confidence index in South Africa rose to a reading of 0.00 in 4Q14 from a reading of -1.00 reported in 3Q14.

On an annual basis, non-farm payrolls in South Africa climbed 1.0% in 3Q14, compared with a 2.7% increase registered in 2Q14.

The Swiss National Bank held its interest rate at 0.00%, in line with market expectations and reiterated its commitment to the minimum exchange rate of CHF1.20 per euro. The central bank further indicated that it would continue to implement the minimum exchange rate and is prepared to buy foreign currency in unlimited quantities for this purpose.

The EU normalised consumer price index in France dropped 0.2%, on a monthly basis, in November, following an unchanged reading reported in October.

On an annual basis, the final consumer price index in Germany climbed 0.6% in November, at par with the preliminary estimate and following a 0.8% rise recorded in October.

The ECB, in its latest monthly report, indicated that the central bank would reconsider its current monetary policy in early FY15 and decide to provide further monetary stimulus if required.

The ECB indicated that it has provided EUR129.80bn in four-year loans to eurozone banks in the second installment of its lending program of Long-Term Refinancing Operation (LTRO), less than market expectations. In the previous lending round in mid-September, the ECB had provided EUR83.00bn of four-year loans to banks.

On a monthly basis, in November, advance retail sales in the US rose 0.7%, more than market estimates and compared with a revised increase of 0.5% reported in October.

In the week ended 6 December 2014, the seasonally adjusted initial jobless claims in the US eased to 294.00k from a reading of 297.00k posted in the prior week.

Business inventories in the US advanced 0.2%, on a monthly basis, in October, following a climb of 0.3% recorded in September.

The Bank of Canada (BoC) Governor, Stephen Poloz, dispelled concerns over the possibility of a housing bubble in the Canadian economy by stating that the central bank does not foresee a rise in the nation’s unemployment rate or mortgage rates, which are the two significant factors that could trigger a crash in the nation’s housing market.

Corporate Updates

South Africa

Aveng Limited: The infrastructure development company, in its trading statement for the six months ended 31 December 2014, stated that it anticipates its headline EPS to decline by at least 45.0% from a headline EPS of R0.82 recorded in the similar period prior year. The company also indicated that it expects to realise a profit of R713.00mn after tax from the disposal of its wholly owned Electrix business to VINCI Energies.

Ellies Holdings: The electronic products manufacturer, in its trading statement for 1H15, indicated that its loss per share is expected to be between R0.10 and R0.15, compared with an EPS of R0.25 reported in the same period earlier year. Its headline loss per share for the current financial period is expected to be between R0.10 and R0.15, compared with the headline earnings of R0.25 posted in the same period earlier year.

Emira Property Fund: The company indicated that it has appointed Geoff Jennett to the board of its authorised management company, Strategic Real Estate Managers Limited, as Chief Financial Officer, with effect from 1 January 2015.

African Bank’s ‘good bank’ listing delayed to build up track record: The listing of the “good bank” salvaged from the wreckage of the collapse of African Bank Investments (ABIL) will be delayed indefinitely to allow the bank to build up a track record and win the confidence of potential investors.

FlySafair eyes bigger share of business travel: SA’s newest low-cost carrier, FlySafair, has not been able to attract business travellers due to its limited network but is looking to launch new routes next year.

Jubilee mulls strategy as units diverge: Jubilee Platinum is considering options to unlock value from its four business units, which range from power generation to smelting, Chairman, Colin Bird, says.

Carmol under investigation by Reserve Bank: Petroleum company, Carmol Distributors’ operations have been suspended pending an investigation by the South African Reserve Bank (SARB) in terms of the Banks Act, according to a note published by attorneys acting for Carmol.

Government to help Eskom raise cash to curb power crisis: South Africa’s government will help raise cash to fund Eskom SOC Holdings Limited’s purchases of diesel from February, when the power utility runs out of money to purchase the fuel used to prevent blackouts.

Sishen solar energy plant connected to grid: The electricity supplied to Eskom by the 319 600 photovoltaic units at the Sishen Solar Energy Facility in the Northern Cape is equivalent to the consumption of 100 000 households, Rafael Esteban, the South African country Director for the Spanish group Acciona Energia said on Thursday.

Mali says has no remaining Ebola cases: Mali has no remaining cases of the Ebola virus as the last patient in the country has recovered and left hospital, the Ministry of Health said on Thursday.

UK and US

United Technologies: The company, in its guidance for FY15, indicated that its EPS is expected to be $7.10, compared with market consensus at $7.29/share, as it expects sales at its Pratt & Whitney military and commercial original equipment business to be down by a low single digit percentage. Its 4Q14 EPS is anticipated to be about $1.60 and its sales is estimated to be approximately $17.00bn, compared with market consensus of $1.68/share and $17.20bn, respectively.

Adobe Systems: The computer software company, in its FY14 results, indicated that its total revenue climbed to $4.15bn from $4.06bn posted in the earlier year. However, its non-GAAP diluted EPS dropped to $1.29 from $1.34 reported in the previous year. The company expects its FY15 revenue at $4.85bn, compared with market expected revenue of $4.93bn and its FY15 EPS at $2.05, slightly lower than market consensus of $2.07/share. Additionally, the company announced that it has entered into a definitive agreement to acquire privately-held Fotolia, for an approximate cash consideration of $800.00mn.

Lululemon Athletica: The athletic apparel company, in its 3Q15 results, indicated that its net revenue advanced to $419.40mn from $379.090mn recorded in the corresponding period a year ago. Its diluted EPS was registered at $0.42, better than market estimates of $0.38/share. In FY15, the company anticipates its EPS to be in the range of $1.74 to $1.78, versus market consensus of $1.77/share and revenue to be between $1.77bn and $1.78bn, versus market consensus of $1.79bn.

Nordson Corporation: The company, in its FY14 results, indicated that its net sales rose to $1.70bn from $1.54bn posted in the prior year. Its GAAP diluted EPS advanced to $3.84 from $3.42 reported in the previous year. The company sees its 1Q15 GAAP EPS in the range of $0.60 to $0.70, versus market consensus of $0.73/share.

DLH Holdings: The company, in its FY14 results, indicated that its revenue climbed to $60.49mn from $53.51mn recorded year ago. Its net income per diluted share was registered at $0.54, compared with a net loss of $0.02/share posted in the previous year.

Cisco Systems: The network-equipment maker unveiled data-analytics software packages that are designed to assist retailers and other large companies make better use of Web- connected devices.

General Motors: The auto maker indicated that it would invest around $5.00bn between 2013 and 2018 to double capacity at its four plants in Mexico.

Delta Air Lines: The company stated that lower fuel prices would increase its profit next year but it could also force the carrier to write off $1.20bn from fuel hedging.

Norwegian Cruise Line Holdings: Media reports revealed that an engine room fire aboard a luxury cruise ship managed by the company’s subsidiary, Oceania Cruises, killed three people.

Whitbread Plc: The company, in its interim management statement, indicated that its total sales for the 13 weeks ended 27 November 2014 rose by 13.2% and like for like sales climbed 6.0%. The board remains confident in delivering full year results in line with expectations and its strong financial position remains unchanged. Separately, the company announced that Patrick Dempsey, the Managing Director of Whitbread Hotels & Restaurants (WHR), would be stepping down on 28th February 2015.

Bunzl Plc: The company, in its FY14 trading update, revealed that its revenue growth for the year is expected to be approximately 6.0%, due to underlying revenue growth of about 2.5% and the positive impact of acquisitions. The company’s operating margin should be slightly ahead of the prior year. The company also announced the acquisition of Acme Supplies, a cleaning and hygiene supplies business based in Vancouver Island, Canada.

Sports Direct International: The company, in its 1H15 results, indicated that its revenue rose to GBP1.43bn from GBP1.35bn recorded in the same period a year ago. Its diluted EPS stood at 18.60p, up from 17.40p posted in the corresponding period previous year. The company stated that it remains confident of achieving at least its FY15 internal underlying EBITDA target of GBP360.00mn, before the Employee Bonus Share Scheme charges. Looking to FY16, the company remains confident that its continued focus on providing customers with exceptional quality and unbeatable value would deliver another year of profitable growth.

John Wood Group: The company, in its pre-close trading update for FY14, announced that the company anticipates FY14 performance in line with expectations and up on FY13, with growth in Wood Group PSN Production Services offsetting the reduction in Wood Group Engineering and Turbine Activities. Separately, the company stated that it has been awarded a five year contract with an estimated value of $750.00mn from BP. Under the contract Wood Group PSN, would deliver engineering, procurement and construction services to six UK continental shelf offshore upstream assets and the Forties Pipeline System onshore midstream facilities in Grangemouth. The company also stated that it has acquired Swaggart Brothers for an initial consideration of $36.30mn with a further payment in 2017 based on future performance.

Ocado Group: The company, in its trading statement for the 16 weeks to 30 November 2014, indicated that its gross sales rose 18.6% to GBP331.90mn, compared with the same period previous year. Its average orders per week stood at 177,000, compared with 152,000 posted in the corresponding period a year ago.

Go-Ahead Group: The company, in its 1H15 trading update, indicated that overall trading in the year to date has been robust, with a solid performance in its bus and rail operations. The company’s full year expectations for both divisions remain unchanged. The company remains committed to improving the passenger experience and making it as easy as possible for people to use its services. The company further mentioned that the group remains in a good financial position with strong cash generation and a robust balance sheet, supporting its progressive dividend policy and allowing flexibility to pursue value-adding opportunities both within and outside its traditional markets.

Polymetal International Plc: The company announced that it has entered into a five-year non-revolving committed credit facility agreement with Eurasian Development Bank for the total amount of $80.00mn to finance the development of the Kyzyl gold project in Kazakhstan.

Spectris Plc: The company announced that it has completed the acquisition of the privately- held Canadian company, Engineering Seismology Group for C$64 million, on a debt and cash-free basis. The company will operate it as a separate unit with the aim of accelerating its growth and expanding it internationally.

Keller Group: The engineering contractor revealed that it had signed a $177.00mn (GBP113.00mn) contract to supply and install precast piles in the Caspian region.

Financial Times

Commercial property lending bounces back: Commercial property lending volumes have hit the highest level since the financial crisis in the first six months of 2014, as debt begins to creep back into the market, according to new research.

Qataris appoint Ken Costa to Songbird Estates board: Ken Costa, the City grandee and former Lazard and UBS banker, has been appointed to the board of Songbird Estates to represent the Qatari sovereign wealth fund that is attempting to wrestle control of Canary Wharf.

Knight Frank fuels portal wars by quitting Zoopla: One of Britain’s best-known estate agents, Knight Frank, is to quit property website Zoopla in favour of a new start-up being established by estate agents frustrated with the big portals’ dominance.

Parcels surge hits Christmas deliveries in UK: Christmas deliveries are descending into chaos, with retailers admitting to problems getting packages to customers on time and Yodel, one of the UK’s leading delivery services, suspending collections from retailers.

Merck’s Ebola vaccine trial suspended: The race to stem the spread of Ebola suffered a setback on Thursday when researchers suspended a clinical trial of a new vaccine, and US officials said an American nurse with exposure to the disease would be admitted to a special treatment facility.

Moss Bros gains as consumers smarten up: Consumers are smartening up as the economy shows signs of growth, with suit seller Moss Bros reporting an uptick in the sale of black-tie outfits for fancy evening events.

Stefano Pessina to become Walgreens Boots Alliance interim Chief: Stefano Pessina, the billionaire Executive Chairman of Alliance Boots and a board member of Walgreens, will initially serve as interim Chief Executive when the two pharmacy chains merge but still plans to return to a strategy role.

SuperGroup vows to shrug off setbacks to hit full-year forecasts: SuperGroup, owners of the logo-heavy Superdry brand, blamed warm autumn weather and expansion across Europe for a 31.6% fall in underlying operating profits to GBP12.50mn in the six months to October 25.

UK regulator criticised for not taking action on annuities: The City regulator was accused on Thursday of sweeping annuity mis-selling “under the carpet” after a two-year inquiry uncovered evidence of sales failings but did not recommend fines or customer compensation.

Mexico sets rules for historic oil tender: Mexico has unveiled long-awaited initial contract terms for the first 14 oil and gas areas it is auctioning in a historic tender round starting next year. They impose a ban on oil majors teaming up to bid and a five-block limit on bids from any company or consortium.

US oil price below $60.00/bl: US crude closed below $60.00/bl for the first time in five and- a-half years, sliding amid new concerns consumption will lag far behind surging output.

Delta aims for $1.70bn fuel price boost: Delta Air Lines expects lower fuel prices to produce an annual net cost benefit of $1.70bn, the company said on Thursday, in the latest sign of how falling fuel costs are boosting the fortunes of big US carriers.

UK banks face fines for illegal migrant accounts: Banks and building societies that open current accounts for known illegal immigrants will face fines or even criminal sanctions under new powers that come into force on Friday.

Lending Club banks 56.0% surge on debut: Lending Club, the San Francisco start-up that set out to bypass traditional banking, captured the attention of Wall Street on Thursday as it listed on the New York Stock Exchange and shot to a valuation of $8.50bn.

Airbus plays down fears over A380 future: Shares in Airbus fell for a second day on Thursday as management scrambled to reassure investors about the future of its superjumbo A380 project and the group’s medium to long term financial prospects.

New United Tech Chief delivers FY15 warning: United Technologies, the maker of Pratt & Whitney aero engines and Otis elevators, issued lower-than-expected projections for FY15 as its new Chief Executive admitted investor returns had “not been very good” in the past two years.

Daimler to put EUR2.50bn into pension: Daimler is making a EUR2.50bn contribution to its company pension fund to reduce underfunding caused by low levels of interest rates.

Google makes shifts from Spain and Russia: Google is shutting down its news service in Spain in one of the tech company’s most defiant responses yet to an increasingly hostile legal and political environment in Europe.

Hearst invests in $325.00mn teen video site: Hearst has taken a 25.0% stake in AwesomenessTV, the teen-focused digital video network owned by DreamWorks Animation, in a deal that values Awesomeness at $325.00mn.

Ecclestone vows to maintain iron grip on Formula One: Bernie Ecclestone came out fighting against plans to clip his wings as Formula One Chief Executive and made clear he had no intention of relinquishing his power any time soon.

Google shuts Russia engineering office: Google is to close its engineering office in Russia, in the latest sign that a crackdown on internet activity by Russian authorities this year could hasten an outflow of engineering talent from the country.

India ban threatens Xiaomi’s overseas expansion: A patent dispute has dealt a blow to Xiaomi’s international expansion, leaving the fast-growing Chinese smartphone maker facing a temporary ban on sales in India and further pressure on margins.

Legal & General: Was up 2.2% to GBP2.47, after Nomura turned positive in a FY15 insurance sector preview.

IGas: Lost 14.8% to GBP0.39, after Canaccord Genuity raised concerns over its debt levels.

Lending Club: peer position: Lending Club wants to lead a “peer-to-peer” lending revolution. The $9.00bn valuation it received when it floated on Thursday (after a huge first day pop) is astonishing. The company, after all, had just $160.00mn in revenues over the past year. A multiple of 50.00 times sales is a bet that a company will take over a fast-growing market. Lending Club is positioned for fast growth because it is not a bank at all, but a middleman. It is to banking as Uber is to cars: it brings people who want to borrow money together with those who want to lend. Nearly all its revenues are origination fees of about 4.0%, on average, collected for matchmaking. The borrower gets quicker approval than walking into a bank branch. Lenders can diversify across many borrowers, reducing credit risk. Lending returns are also good, approaching double-digits. The fees, and lack of balance sheet risk for Lending Club itself — that belongs to the lenders — makes this a simple, juicy business.

Taiwan tech: the screen and the cycle: Once upon a time, in a kingdom called Taiwan, lived many happy companies making electronics. They provided decent goods at low prices, more efficiently than anyone else. They were beloved by gadget sellers and consumers alike, even if the latter did not know the companies’ names, or even that they existed. Companies such as Largan (lenses) and Catcher (metal casings) and TSMC (semiconductors) produced products that were very hard to make, trendy or had many applications and profound economies of scale. These enjoyed 40.0% to 50.0% gross margins. This made for happiness. Others made commodity components with specific applications. Screens, for instance, were a crowded business. With the television market maturing, there was overcapacity. This was very sad. One part of the screen industry made good money: the touch function. Not many companies could make them. Those that could, such as TPK and Wintek, made gross margins in the mid-teens. But in time that, too, changed. Touch became easier to integrate; TPK and Wintek were no longer so special. Worse, laptop touch screens did not catch on. Wintek suffered from overexpansion. TPK had spent about $500.00mn on a big new plant due to open in FY14; it delayed opening the facility but it looked likely it would have to open in early FY15. This was sad, too.

Miners: race to the bottom: Anglo American spent $5.00bn to buy this mine and almost $9.00bn to develop it — incurring $4.00bn in impairments and losing a Chief Executive along the way — before it could ship the first 80.00kt of ore in late October. Spot iron ore prices were $79.00/t then. They have fallen by $10.00 while the ore was in the hold. And that, an investor might declare, is why Anglo American’s shares are changing hands for just 10.00 times next year’s forecast earnings — and will not be trading higher any time soon. Miners fed oversupply with their spending. They are reaping the results. BHP Billiton has lost $70.00bn in market capitalisation since the end of July, or nearly the entire value of another big iron ore miner, Rio Tinto. BHP also produces oil. But both it and Rio will keep the pedal to the metal with iron ore expansion next year. With four-tenths of its operating earnings from iron ore, Anglo will be affected by the flood of supply despite selling other commodities too (and unusual ones, like diamonds). Anglo also promised investors that it could raise returns on capital employed to 15.0% by FY16. That target has now retreated into the depths. It assumed $7.30bn of earnings before interest and tax by FY16 — using spot prices from June 2013. Plug in the consensus for FY16 prices and EBIT drops to $5.00bn for a 12.0% ROCE.

returns on capital employed to 15.0% by FY16. That target has now retreated into the depths. It assumed $7.30bn of earnings before interest and tax by FY16 — using spot prices from June 2013. Plug in the consensus for FY16 prices and EBIT drops to $5.00bn for a 12.0% ROCE.

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