Tuesday's Stock Market Report featuring Imperial Tobacco, Persimmon, Unite, a boozy merger and Green Dragon Gas
At the London close the Dow Jones had slipped by 42.77 points to 17,323.47 and the Nasdaq was down by 30.55 points at 4,138.73.
In London the FTSE 100 closed down by 34.00 points at 6,453.97 and the FTSE 250 fell by 59.04 points to 15,394.11. The FTSE All-Share slipped by 17.59 points to 3,458.54 while the FTSE AIM Index shrank by 4.88 points to 715.06.
Investec maintained its positive stance on miner Anglo American (AAL) following a seminar by De Beers, saying that it believes the improved disclosure from the group will enable the market to better assess the diamond business. Most notable is the potential value of the trading side of the business, which the broker believes masks the true profitability of the group as a whole. Investec reiterated its “buy” recommendation on Anglo American and said it continues to believe De Beers could represent upwards of $20 billion dollars of value within the group. Anglo American finished up by 9.5p at 1,325p.
In a note on the oil E&P sector, broker Westhouse said the slide in the Brent oil price to $85 a barrel has exacerbated the substantial underperformance of the UK sector relative to the market in recent weeks. However, the broker suggested that this has thrown up some interesting opportunities for investors. First, it highlighted stocks that it believes are trading at deep discounts to core NAV and that have material catalysts in the next three to six months, namely Bowleven (BLVN), Circle Oil (COP), Genel Energy (GENL), Ithaca Energy (IAE), Lekoil (LEK) and Rockhopper Exploration (RKH) (all Buy rated) and Tullow Oil (TLW) (Add).
Second, Westhouse highlighted stocks that have what it referred to as solid valuation support but also offer significant optionality and as a result could become M&A prospects, namely Faroe Petroleum (FPM) and Sirius Petroleum (SRSP).
Value at the bottom of the barrel according to Westhouse
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Cough causer Imperial Tobacco (IMT) said net revenue in its tobacco business fell by 6% to 6.58 billion pounds in the year to 30th September, which was below consensus forecasts of 6.97 billion pounds. Imperial has had to deal with declining volumes, weak economies and government tax increases which have put people off smoking, but has tackled this by cutting costs, including closing factories. The latter move has already resulted in more than 60 million pounds of annual savings and is expected to save 300 million pounds each year by 2018. The company also recently floated a portion of its logistics business, Logista, on the Spanish stock exchange, raising 395 million pounds, which it used to help pay down net debt by 11% to 8.1 billion pounds. Imperial Tobacco said it expected to raise its dividend by at least 10% for its new financial year (2014/15), following a 10% increase for the year just ended. Shares in the company finished up by 110p at 2,777p.
Persimmon (PSN), the UK’s largest housebuilder, has brushed off concerns over a possible housing market slowdown as a return to the “traditional seasonal pattern”, in its trading statement for the quarter ended 3rd November. Despite a raft of data suggesting that the housing market could be coming off the boil, the firm stressed that prices remain robust, that it was fully sold for 2014 and that it had seen a 12% increase in reserved forward sales to 696 million pounds for the period from 2015 onwards. “The stock looks well-placed to deliver higher returns and generate attractive levels of cash flow supported by good volume delivery and strong margins,” noted analysts at Citi. Persimmon shares finished down by 14p at 1,444p.
Scottish engineering group Weir (WEIR) plans to close five small manufacturing facilities, cut some jobs and consolidate other service centres next year in a bid to reduce its cost base by 35 million pounds. The group, which makes valves and pumps for the energy and mining industries, said orders at its oil and gas business grew by 40% against the prior year, but original equipment orders were significantly below peak levels. Total orders rose by 14% on a constant currency basis, helped by strength in its oil and gas business, and full-year expectations have been maintained. The company stressed that falling oil prices have not impacted activity levels so far and that its focus remains on oil and liquid-rich formations. Weir shares moved down by 76p to 2,165p.
In what the company referred to as “another magnificent year”, Primark owner Associated British Foods (ABF) reported total sales up 16% to 4.95 billion pounds for the 52 weeks to 13th September. Citing an increase in the number of Primark stores and the popularity of its autumn/winter and spring/summer ranges for the strong performance, the firm nevertheless warned that it saw “limited opportunity” to grow adjusted earnings per share in the new financial year, due to an expectation of falling prices for its sugar business on the back of the abolition of sugar quotas and increased competition. However, “With the strength of the group’s balance sheet and strong cash generation, we have every reason to be confident of further progress,” it added. Shares in AB Foods sweetened by 112p to 2,783p.
Cheap clothes offset cheap sugar at AB Foods
Shares in student accommodation outfit Unite Group (UTG) closed up by 7.7p at 434p after the firm announced that 99% of its rooms are occupied for the 2014/15 academic year. Benefitting from a positive market for student letting the firm is on target to deliver like-for-like rental growth of at least 3% for the full year and expects to achieve its 4.5% EPS yield on NAV target a year ahead of expectations. On the development front, planning consent has been secured at Greetham Street, Portsmouth for 836 beds and further sites have been secured in Aberdeen and Liverpool for a combined 1,250 beds.
Booze merchants Greene King (GNK) have finally agreed to take over rival Spirit Pub Company (SPRT), in a deal valued at 773.6 million pounds. The acquisition will create the UK’s largest managed pubs operator, with the enlarged group having over 3,100 establishments around the country. Spirit shareholders are set to receive 8p per share in cash and 0.1322 new Greene King shares under the deal. Spirit, which de-merged from Punch Taverns only three years ago, recently rejected a rival bid from Irish drinks firm C&C Group. Shares in Greene King fell by 22p to 786.5p despite the firm suggesting that cost synergies of at least 30 million pounds per annum could be achieved as a larger group. Spirit shares did better, closing up by 1.5p at 108.5p.
Spirit investors say cheers to Greene King deal
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AIM listed voice and data telecommunications firm AdEPT Telecom (ADT) lived up to its name after revealing that its largest customer has renewed its contract for another three years, in a deal worth 2.2 million pounds. This is the third time that AdEPT’s un-named customer has renewed its contract and it will extend the relationship to nine years. Broker Northland forecasts adjusted pre-tax profits of 3.9 million pounds on revenues of 22.2 million pounds for the year to March 2015. The shares gained 5.5p, closing at 121p.
Not doing quite so well were shares in TT Electronics (TTG), which plunged by 50p to 112.5p after the global electronics company revealed that performance for 2014 is anticipated to be at the lower end of current market expectations. Despite revenues growing by 3% in the ten months to October, squeezed margins, shipping delays and disruption from delays in the firm’s “Operational Improvement Plan” have negatively affected the business. More significantly, performance is now expected be materially lower in 2015.
Recruitment services group Impellam (IPEL) has said “you’re hired” to Lorien Limited, buying the technology staffing business for an initial consideration of 22.3 million pounds in cash and 7.5 million pounds in Impellam shares. The firm announced a 15 million pound placing at 460p per share to part finance the deal and will also assume Lorien’s net debt of 14 million pounds. Lorien was founded in 1977 and is the largest independent specialist IT recruitment business in the UK, with offices in London, Leeds, Manchester and Edinburgh. For the 12 months to 31st January 2015 the business is expected to achieve an adjusted EBITDA of 8.7 million pounds on net fee income of 24 million pounds. Investors seemed to like the deal, with Impellam shares closing up by 11p at 471p.
Advanced Computer Software (ASW) grew pre-tax profits by 63% to 7.8 million pounds in the six months to August despite revenues rising by only 9% to 108.1 million. The numbers at the software and IT services group were driven by a contribution from the March 2013 acquisition of Computer Software Holdings and underlying organic growth of 5%. Current trading is said to be going well, with full year forecasts expected to be met. The shares, on which broker finnCap has a 150p target, slipped by 0.25p to 106.75p.
Shares in K3 Business Technology (KBT) inched up by 1p to 220p after the enterprise software developer revealed that it has been accredited with membership of Microsoft’s Global Independent Software Vendor programme. This makes the firm the first such Microsoft Dynamics AX partner for the fashion retail sector and one of only 25 companies globally to be included in the programme. K3 shares have now more than doubled from their nadir of 93p in March 2013.
Green Dragon Gas (GDG) has signed a 10-year offtake agreement with Shanxi Guohua Energy for the sale of coal bed methane gas from its Shizhuang South and North blocks, in Shanxi Province. This adds to the firm’s existing 20-year offtake agreement with PetroChina Huabei Oilfield. Prices will be agreed annually and deliveries are expected to start by May next year, with maximum deliveries of between 1.8–2.5 billion cubic feet (bcf) expected in 2015, rising to between 17.7 - 24.7 bcf in 2025. Green Dragon shares added 4.25p, closing at 515p.
Green Dragon Gas on fire with offtake deals