Anchor Capital: Essential market review, 1 April

By Anchor Capital

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South African Market Review
South African markets closed lower yesterday. Arcelor Mittal South Africa and Anglo American dropped 4.6% and 3.7%, respectively. Peer, BHP Billiton declined 2.5%, amid reports that manganese workers from its South African mines have begun a strike to claim bonuses before the mines are spun off. Gold miners, Sibanye Gold and Gold Fields retreated 3.6% and 2.4%, respectively. Among banking sector stocks, Standard Bank Group, Nedbank Group and Barclays Africa Group fell 0.3%, 0.2% and 0.2%, respectively, but Capitec Bank Holdings climbed 4.8%. AngloGold Ashanti rose 0.5%, after it announced its plan to seek a joint venture partner or buyer for its Cripple Creek & Victor mine in the US. The JSE All Share Index fell 0.5% to close at 52,181.95.
UK Market Review
UK markets finished lower yesterday, pressured by weakness in mining and tobacco sector stocks. Anglo American and BHP Billiton declined 4.5% and 2.5%, respectively. Antofagasta dropped 1.0%, after denying rumours that it was planning to merge with Canada’s Teck Resources. Imperial Tobacco Group and British American Tobacco, which intended to invest and buy assets in the Lorrillard-Reynolds merger, fell 3.4% and 3.0%, respectively, amid concerns that their deal would fall apart. On the upside, Kingfisher advanced 4.3%, after disclosing plans of closing about 60 stores in its UK chain B&Q and few additional stores in Europe. The FTSE 100 Index declined 1.7% to close at 6,773.04.
US Market Review
US markets ended in the red yesterday, reversing some of gains registered in the previous session. Harman International declined 2.1%, after indicating that it agreed to acquire Bang & Olufsen A/S’s automotive car audio business. UTi Worldwide dropped 1.9%, after reporting a wider-than-expected loss in 4Q15. International Business Machines slid 1.3%, after it announced that it would invest around $3.00bn over the next four years to build an “Internet of Things” unit. However, CBRE Group jumped 6.3%, after agreeing to acquire Johnson Controls’ workplace solutions business for around $1.50bn.The S&P 500 Index fell 0.9% to settle at 2,067.89, while the DJIA Index dropped 1.1% to close at 17,776.12. The NASDAQ Index declined 0.9% to finish at 4,900.89.
Asia Market Review
Markets in Asia are trading mostly lower this morning, mirroring overnight losses on Wall Street. In Japan, ABC-Mart declined 3.4%, amid reports that its same-store sales for FY16 might be flat. Exporters, Nissan Motor, Canon and Toyota Motor retreated 1.9%, 1.6% and 0.7%, respectively. In Hong Kong, technology sector stocks, Kingdee International Software Group, NetDragon Websoft and Boyaa Interactive International jumped 5.9%, 5.8% and 5.6%, respectively. South Korean markets are trading lower following dismal manufacturing PMI and exports data for March. Hyundai Motor and Posco fell 2.7% and 2.5%, respectively. The Nikkei 225 Index is trading 1.0% lower at 19,021.31, while the Kospi Index is trading 0.7% in the red at 2,027.57. The Hang Seng Index is trading 0.7% higher at 25,064.63.
Commodities
At 06:00 SAST today, Brent crude oil rose 1.9% to trade at $54.34/bl. Meanwhile, the American Petroleum Institute indicated that US crude oil stocks rose by 5.20mn bls last week. Yesterday, Brent crude oil fell 2.6% to settle at $53.34/bl, as investors continued to closely monitor a potential deal regarding the destabilisation of Iran’s nuclear programme. Meanwhile, the White House indicated that negotiations with Iran on its nuclear programme could extend beyond a deadline.Yesterday, the Illinois North Central No.2 Yellow corn spot prices fell 5.7% to $3.54/bushel.

At 06:00 SAST today, gold prices advanced 0.4% to trade at $1,188.28/oz. Yesterday, gold declined 0.2% to close at $1,183.57/oz.

Yesterday, copper declined 0.7% to close at $6,064.50/mt. Aluminium closed 0.6% lower at $1,781.25/mt.

Currencies
Yesterday, the South African rand strengthened against the US dollar. Economic data showed that the deficit on the country’s trade balance narrowed in February. Separate data from the US showed that consumer confidence rebounded strongly in March. Going forward, investors will eye manufacturing PMI, BER consumer confidence and total vehicle sales in South Africa, due today. While in US, market participants will keep a tab on manufacturing PMI for March, employment change data, scheduled today.The yield on benchmark government bonds fell yesterday. The yield on 2015 bond declined to 6.05% while that for the longer-dated 2026 issue fell to 7.80%.

At 06:00 SAST, the US dollar is trading 0.4% higher against the South African rand at R12.0806, while the euro is trading 0.1% higher at R13.0262.

Yesterday, the euro declined against most of the major currencies, after preliminary data revealed that the consumer price inflation in the eurozone continued to remain in the negative territory for the fourth consecutive month. Moving ahead, traders will keep a tab on the final print of Markit manufacturing PMI across the eurozone for March, scheduled today.

At 06:00 SAST, the euro advanced 0.5% against the US dollar to trade at $1.0783, while it has gained 0.2% against the British pound to trade at GBP0.7255.

Economic Updates
The trade deficit in South Africa dropped to R8.50bn in February, compared with a trade deficit of R24.20bn in the prior month. Market anticipations were for the nation to post a trade deficit of R5.70bn.In 4Q14, on a quarterly basis, the final gross domestic product (GDP) registered a rise of 0.6% in the UK, compared with a rise of 0.7% in the prior quarter. The preliminary figures had recorded a rise of 0.5%. Market expectations were for GDP to advance 0.5%.

The number of people unemployed registered a drop of 15.00k in Germany, in March, more than market expectations for a drop of 12.00k. In the prior month, the number of people unemployed had registered a drop of 20.00k.

In the eurozone, the flash core consumer price index (CPI) registered a rise of 0.6% in March on an annual basis, less than market expectations for an advance of 0.7%. In the previous month, the core CPI had risen 0.7%.

In the eurozone, the unemployment rate recorded a drop to 11.3% in February, compared with market expectations of a drop to 11.2%. The unemployment rate had recorded a revised reading of 11.4% in the previous month.

The preliminary CPI recorded a drop of 0.1% in the eurozone, on an annual basis in March, in line with market expectations. In the previous month, the CPI had fallen 0.3%. In March, the conference board (CB) consumer confidence index in the US recorded an unexpected rise to a level of 101.30. In the previous month, the CB consumer confidence index had registered a revised reading of 98.80.

The Richmond Federal Reserve (Fed) President, Jeffrey Lacker, opined that interest rates in the US should be raised in June amid a robust pace of growth in the labour market and as the nation’s inflation rises towards the Fed’s target.

The GDP in Canada dropped 0.1% on a monthly basis in January, lower than market expectations for a drop of 0.2%. In the previous month, the GDP had recorded a rise of 0.3%.

The final manufacturing PMI in Japan fell to a level of 50.30 in March. In the previous month, manufacturing PMI had recorded a reading of 51.60. The preliminary figures had indicated a drop to 50.40.

Corporate Updates
South AfricaBHP Billiton

: Media reports indicated that manganese workers in South Africa have begun a strike over claims that the company owes them bonuses before the mines are spun off into a new company called South32.AngloGold Ashanti Limited: The mining company stated that it has received formal notification from JP Morgan Chase & Co. that it has acquired a beneficial interest in the securities of the company through a number of companies within the group. Accordingly, JP Morgan’s total beneficial interest in the company’s securities now amounts to 7.19% of the issued ordinary share capital of the company. Furthermore, the company announced that it is planning to seek a joint venture partner or buyer of its Cripple Creek & Victor mine in the US. In addition, the company had also received an approach for the purchase of its stakes in the Sadiola and Yatela mines in Mali.

Sibanye Gold Limited: The gold mining company revealed that it has completed the Department of Mineral Resources’ web-based Mining Charter template. It indicated that after initial calibration and rounding off, all of the company’s operations have achieved top quartile scores for the three years up to and including FY14. With regard to the black economic empowerment ownership component, the company is confident that it exceeds the 26.0% requirement and has received legal opinion which supports its position.

Standard Bank’s Zim unit’s 2014 profit up 13.0%: Standard Bank’s Zimbabwe unit reported on Tuesday a 13.0% jump in 2014 profit to $20.70mn after raking in higher fee and commission income in a sector affected by high levels of bad debts and bank closures.

Capitec continues relentless climb: Shares in JSE-listed banking group Capitec have continued to surge upwards adding another 26.0% in March 2015. The company is now on the verge of breaking into the elite Top40 index.

Novus hits the JSE running: Media24, a subsidiary of Naspers, has successfully unbundled its profitable Paarl Media printing business and listed it on the JSE as Novus Holdings.

UK and US

UTi Worldwide: The supply chain services and solutions company, in its FY15 results, indicated that total revenue dropped 5.8% from the preceding year to $4.18bn. Its basic and diluted loss was $2.04/share, compared with a loss of $0.80/share recorded in the previous year. For FY16, the company expects adjusted EBITDA to be within the range of $125.00mn to $150.00mn.

Conn’s Inc.: The retailing company, in its FY15 results, stated that total revenue increased 24.4% from the prior year to $1.49bn. However, its diluted EPS dropped to $1.59 from $2.54 reported in the last year. The company stated that during FY16, it would discontinue offering video game products, digital cameras and certain tablets.

Immune Design Corporation: The clinical-stage immunotherapy company, in its FY14 results, revealed that total revenue increased sharply to $6.43mn from $1.60mn. It incurred a basic and diluted loss of $4.56/share, compared with a loss of $43.48/share posted in the last year. The company announced that analyses of data from three ongoing Phase 1 studies support continued development of its two primary product candidates, CMB305 and G100.

Landec Corporation: The company, in its 3Q15 results, indicated that product sales rose 9.6% from the same period a year ago to $138.53mn. However, its diluted net EPS dropped to $0.14 from $0.24 posted in the corresponding period of previous year. For 4Q15, the company expects revenue to be in the range of $130.00mn to $135.00mn and diluted EPS to be between $0.18 and$0.20. Quest Resource Holding: The sustainability, recycling, and resource management company, in its FY14 results, stated that revenue climbed to $174.45mn from $67.51mn recorded in the preceding year. It incurred a basic and diluted net loss of $0.02/share, compared with a loss of $0.04/share reported in the prior year.

Willdan Group: The technical and consulting services company, in its FY15 results, revealed that its contract revenue increased 26.4% from the prior year to $108.08mn. Its diluted EPS stood at $1.22, compared with $0.35 recorded in the previous year. For FY16, the company expects contract revenue growth rate of more than 20.0%, resulting primarily from acquisitions completed in January 2015, and expects a tax rate of approximately 40.0%.

Kingold Jewelry: The company, in its FY14 results, indicated that net sales dropped 6.9% from the last year to $1.11bn. Its diluted EPS was $0.72, compared with $0.44 recorded in the prior year. The company expects to process between 70.00mtand 80.00mtof 24-karat gold products in FY15.

International Business Machines: The company stated that it would invest $3.00bn over the next four years in a new ‘Internet of Things’ unit, aiming to sell its expertise in gathering and making sense of the surge in real-time data.

Charter Communications: The cable television company agreed to acquire Bright House Networks for $10.40bnin cash and stock.

Dyax Corporation: The company announced positive safety, pharmacokinetic, biomarker, and efficacy results from the Phase 1b clinical study of their investigational product, DX-2930. Discovered by the company, DX-2930 is a fully human monoclonal antibody inhibitor of plasma kallikrein being developed for the prevention of hereditary angioedema attacks.

Kingfisher Plc: The retail company, in its FY15 results, indicated that sales dropped 1.4% from the preceding year to GBP10.97bn. Its diluted EPS stood at 24.20p, compared with 29.70p recorded in the previous year. The company announced that its Executive Director, Kevin O’Byrne, is to step down from the board and leave the business on 15 May 2015.

ICAP Plc: The financial services company announced the retirement of its group Executive Director, John Nixon.

Cable & Wireless Communications: The telecommunications company announced that following the completion of the acquisition of Columbus International, John Risley has been appointed as a Deputy Chairman and a Non-Executive Director and Nick Cooper would step down as Corporate Services Director of the company.

esure Group Plc: The insurance company announced that it has completed the acquisition of 50.0% of GoCompare.com Holdings Limited for a consideration of GBP95.00mn.

Financial Times

Quindell founder builds stake in Daniel Stewart: Rob Terry, the founder of Quindell, who sold out most of his stake in the controversial insurance claims processor in December, is backing the struggling broker that helped list the company on Aim.

Gulf Keystone Chairman steps down after share placing: Simon Murray is to step down as Chairman of cash-strapped Gulf Keystone Petroleum, less than two years after he took up the role amid criticisms of other board members’ pay and the oil company’s corporate governance.

Lloyds retail investors take bond dispute to court: Hundreds of retail investors holding special high-income bonds in Lloyds Banking Group have succeeded in taking the bank to court over its plans to buy back the debt at face value.

HP sues Autonomy founder Mike Lynch as battle heats up: Hewlett-Packard is suing Autonomy’s co-founder Mike Lynch, seeking damages of $5.10bn over an alleged fraud that occurred during his leadership of the UK software group, as the warring parties moved towards a showdown in the UK courts.

UK brokers cautious ahead of general election: UK brokers Cenkos Securities and Shore Capital reported strong full-year results this week but warned that next month’s general election is likely to dampen capital markets activity.

Sales pick up at Thomas Cook after tough start to year: Thomas Cook tried to put turbulent trading in the past as bookings in continental Europe showed signs of improvement after a tough start to the financial year.

Prudential Chief Tidjane Thiam gets 36.0% pay rise to GBP11.80mn: Tidjane Thiam, the outgoing Prudential Chief Executive, received a 36.0% pay rise in FY14, taking his earnings to GBP11.80mn, after the UK insurer enjoyed a strong year.

Kingfisher to close 60 B&Q stores over two years: Véronique Laury, the new Chief Executive of Kingfisher, is taking an axe to 60 of B&Q’s 360 UK stores over the next two years, in an effort to revive the fortunes of the chain as Britons increasingly turn away from DIY.

Honda eases fears for Swindon plant with GBP200.00mn injection: Honda’s struggling UK operation has been given a shot in the arm with the announcement that it will become the sole producer of one of the carmaker’s most popular models.

Petrobras independent Director to quit board: An independent Director of Brazil’s Petrobras has voiced a vote of no-confidence in the government’s handling of problems at the corruption-ridden state-controlled oil company by refusing to stand for re-election next month.

Spain’s ‘bad bank’ Sareb doubles losses in FY14: Sareb, Spain’s so-called bad bank, doubled its losses in FY14 even as the country’s broader real estate sector continues to recover. GoDaddy prices IPO at $20.00 a share: GoDaddy, the web-hosting company that became known for its controversial ads, priced its initial public offering above expectations at $20.00, according to people familiar with the deal, in what has been a tepid period for US tech listings.

Europe seeks to emulate US biotech investment boom: A Belgian medical diagnostics company backed by Johnson & Johnson will announce plans for an initial public offering on Wednesday as European companies try to emulate the biotech investment boom under way in the US.

General Motors aims to accelerate GMC light truck sales: General Motors has laid out plans to boost the US market share of its GMC premium light truck brand by two-thirds, in the latest attempt by a big US automaker to enhance profitability in its core market.

Philips sells LED and car business stake to PE groups for $2.80bn: Philips has sold off a majority stake in its LED and car business to private equity investors for $2.80bn as part of its plan to move beyond lightbulbs and focus more on healthcare equipment.

Charter agrees to buy Bright House for $10.40bn: Charter Communications, the fourth largest cable company in the US, has agreed to buy Bright House Networks in a $10.40bn deal that is contingent on Comcast’s $45.00bn takeover of Time Warner Cable being cleared by regulators.

Comcast backs CFO in $4.00bn growth venture: Comcast’s Chief financial officer, Michael Angelakis, will leave his post to take the helm of a new $4.00bn company focusing on growth investments around the world backed by the US’s largest cable group.

Yoox bags Net-a-Porter in merger plan: Yoox has confirmed an all-share merger with Net-a-Porter, the designer clothing website, which will create the world’s largest online retailer focused on luxury brands, with combined sales of EUR1.30bn.

Heineken shakes up top team in effort to boost sales: Three Heineken Executives – a quarter of the Dutch brewer’s top team – are leaving the family-controlled group in a shake-up aimed at boosting flagging sales.

Andreessen Horowitz adds $52.00mn to Tanium investment: Cyber security provider Tanium has become one of the largest ever investments made by Andreessen Horowitz, as part of efforts to raise more money to expand outside the US.

Huawei boosts R&D spending as 4G revolution marches on: Huawei, the privately held Chinese telecoms group, boosted its research and development spending by almost one-third in FY14 as China’s 4G revolution marched on.

Unions argue UK rail nationalisation would save GBP1.50bn: Research into privately run railway franchises argues that GBP1.50bn could be saved by FY20 if expiring contracts were awarded to the public sector over the next parliament.

Goldman and Infracapital sell stake in busiest UK ports: Goldman Sachs’s infrastructure arm and Infracapital are selling their 33.33% stake in Associated British Ports to a consortium of Canada Pension Plan Investment Board and Hermes Infrastructure for GBP1.60bn.

Lex
Oil reserves: no thaw yet: According to BMO Capital, half of the six largest oil companies have failed to add to their reserves over the past three years. In other words, they have begun to run down their inventories. BP has only replaced 90.0% of what it has used over the past three years, and Shell has done even worse. Chevron has not done much better, replacing 99.0% of its reserves. And all that happened in a period when the Brent oil price averaged $106.00 a barrel. Bernstein anticipates that investment in oil and gas production worldwide will fall a quarter this year. Thus, assuming the energy companies still want to increase their inventory, perhaps another route to higher reserves would be through acquisitions of projects or even entire companies. Unfortunately for potential buyers, exploration and production company share prices have stopped falling this year, partly because these companies can still raise capital. Valuations now look high. Whereas Shell trades near 10 times FY16 earnings, midsize explorers such as US listed Occidental Petroleum, which could add a fifth to Shell’s reserves, trade at about twice that. That is well above the 25.0% premium seen a year ago. Wood Mackenzie, the energy consultancy, believes the oil price implied by these high valuations is $80.00, well above the current $55.00 level.Lloyds Banking Group: words and bonds: Lloyds Banking Group has angered its bondholders with a plan to redeem at par £700m of so-called enhanced capital notes it issued as part of its FY09 recapitalisation following its disastrous acquisition of HBOS. Bondholders are angry because the notes, with coupons of between 6.4% and 16.1%, have been a boon while rates are low. They are also upset by Lloyds’ reading of the terms. The bank says it can call the notes at par if there is a “capital disqualification event” – for example if they “cease to be taken into account” in its core tier one ratio. Roll forward to last year’s tests by the Prudential Regulation Authority, the FSA’s successor, and capital metrics and definitions have changed. Its stress hurdle rate was a common equity tier one (not the same as core tier one) capital ratio of 4.5%. Lloyds passed, with a ratio of 5.0% – without the ECNs. They were not disqualified, just not needed. Yet it is hard to avoid the impression that the bank is using the tests (and the PRA’s blessing to call the notes) to justify redeeming costly debt. BNY Mellon, trustee for the notes, wisely wants a declaratory judgment on the ECN terms from the court. Lloyds, with GBP12.00bn already set aside for payment protection insurance claims, can ill-afford reputational self-harm.

Charter/ Bright House: harmonic convergence: Last week Warren Buffett and his private equity firm of choice, 3G Capital, merged their company Heinz with Kraft using mostly shares, sharply reducing Heinz’s leverage. On Tuesday, US cable company Charter Communications, chaired by noted junk bond fan John Malone, borrowed the Heinz/Kraft template, announcing a $10.40bn acquisition of competitor Bright House Communications. The tune should stop following regulatory approval and closing of the Comcast/ Time Warner Cable mega-merger. Charter in a separate, previously announced transaction, is acquiring subscribers from Comcast/TWC as well as investing in another cable company being spun-off from Comcast/TWC. The quarter stake that Advance/Newhouse is taking in Charter will result in a more complicated structure than in the Heinz/Kraft deal. Advance/Newhouse and Charter will form a partnership to which both contribute their cable assets. Advance/Newhouse then receives $2.00bn in cash, $5.90bn in partnership units that exchange into common stock, and most interestingly, $2.50bn in preferred units that pay a 6.0% coupon but can be converted into shares at a 40.0% premium to the current Charter share price. And like Mr Buffett and 3G Capital, Mr Malone’s Liberty Broadband vehicle will buy another $700.00mn in stock in Charter to maintain a 19.0% stake. These machinations (partly driven by tax) will take Charter’s net debt/cash flow ratio below a reasonable 4 times.

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