Latest Stockmarket News and Comment

Sources: Bloomberg, Reuters, Standard & Poor's EMS Marketscope, Consensus forecasts

AMEC, an engineering consultant to mining, oil and gas, nuclear power and renewable energy generating businesses, reported results for FY2011 ended 31st December 2011 yesterday. Revenues increased 11% y-o-y to £3.3bn. Earnings before interest, tax and amortisation (EBITA) grew 12% to £299m with EBITA margin improving slightly to 9.2% from 9.1%. Pre-tax profit was flat at £259m. The December-end order book stood at £3.7bn compared to £3.1bn at the end of FY2010. Dividend declared increased 15% to 30.5p and the management announced a £400m share buy-back programme. It provided a positive outlook for 2012 based on the order intake during 2011. The management also added that it expects the £263m investment in various acquisitions during 2011 to contribute to revenues in 2012.

Our view: AMEC’s is debt-free with a strong cash position (£521m) despite a string of acquisitions in 2011 that have helped it to increase revenues during 2011. Also, greater visibility on revenues due to a stronger order book has enabled the management to declare a £400m share buy-back programme and look for more acquisition driven growth. Nonetheless, the pre-tax income for the year was flat and the management expects the change in business mix to lower margins, marking a shift in management focus from the bottom-line to expanding revenues. Also, the share price has appreciated 29% in the past three months, prompting us to issue a hold recommendation for the stock until further clarity on the success of the management’s strategy change.

Croda, a speciality chemicals company, released preliminary results for FY2011 ended 31st December 2011 yesterday. Revenues increased 6.6% y-o-y to £1.1bn during the period as sales of consumer care products increased 11.2% to £574.3m and earnings from the industrials specialities division grew 1.8% to £494.1m. Operating profits grew 11.2% to £242.4m and pre-tax profit surged 25.9% y-o-y to £242.2m. During Q4 2011, revenues increased to £243.2m, reflecting a slower growth of 2.4% as sales of speciality industrial chemicals shrank 4.8% due to the slowdown in Europe and businesses taking an extended Christmas break. Annual dividends increased 57.1% to 55.0p per share. The company reported completion of its £50m share buy-back programme during the year.

Our view: The company’s fastest growing segment, consumer care, contributing 54% of revenues and 72% of operating profits, and is expected to continue to deliver healthy growth as the company focuses on penetrating emerging markets such as Asia and Latin America. This focus helps Croda to offset any downturn in Western markets. The company reported that it is not seeing consumers trading down to cheaper products. We are optimistic that the company’s strong product differentiation would help it to expand in growing economies, and have a buy recommendation on the stock.

Drax reported results for FY2011 yesterday. For the year ended 31st December 2011, the company’s earnings increased 11.4% to £1.8bn; however, higher fuel costs put pressure on profits. Gross profit declined 9.0% to £500.5m, while earnings before interest, tax, depreciation and amortisation (EBITDA) fell 14.9% to £333.6m. The average cost per MWh increased 29.6% to £33.3 during the year. Annual dividends shrank to 27.8p per share from 32.0p per share in FY2010. Drax announced it had cancelled its proposed biomass co-firing 290MHw power plant in Yorkshire due to weak support from the government for biomass-based power generation.

Animal genetics company Genus released an interim statement for H1 2011 ended 31st December 2011. Revenue increased 9% y-o-y to £166.9m, while adjusted profit before tax grew 22% y-o-y to £23.3m. Basic earnings per share rose to 26.7p, up 27% over that the previous year. Bovine and Porcine sales volumes increased 8% and 13%, respectively, with stronger sales in Asia, especially China and India. The management said trading was in line with expectations and the business would be able to meet market estimate. It also recommended an interim dividend of 4.5p per share.

Rathbone Brothers, a provider of investment management services, released a preliminary statement for FY2011 ended 31st December 2011. Pre-tax profit increased 30% to £39.2m, while underlying pre-tax profit grew 20% to £46.2m. Funds under management expanded 1.4% to £15.9bn. The management's outlook for 2012 is cautiously optimistic as the global economy continues to grow with signs of improvement in Western economies, particularly the US. The economic situation in Europe continues to be uncertain, it said. The management identified regulatory interventions in the financial sector as one of the major risks to the business. The company declared 29.0p per share as the final dividend, taking the full-year dividend to 46.0p per share.

Sources: Bloomberg, Reuters, Standard & Poor's EMS Marketscope, Consensus forecasts

Consumer confidence in the Eurozone improved slightly to -20.2 points in February from a revised -20.7 points in January, the Eurostat reported yesterday. In the 27-nation European Union, consumer confidence rose to -20.1 from -20.8 in January.

Our view: Improving consumer confidence is another indicator of stabilisation in the Eurozone after the economy contracted 0.3% in Q4 2011. Consumer confidence edging up raises hopes of a revival of consumer spending that accounts for about 50% of the economy. The International Monetary Fund estimated that the Eurozone economy would contract 0.5% in 2012.

The Chicago Fed National Activity Index fell to 0.22 points in January from a revised 0.54 points (0.17 points previously) in December. The more stable three-month moving average increased to 0.14 in January from 0.06 in December. The employment sub-index rose to 0.35 in January from 0.28 in December, while the production index slid to 0.11 from 0.54 over this period. New orders, sales and inventories, after being flat for the previous month, contributed 0.03 points to the index's rise. The contribution of housing activity and consumption, while negative, improved slightly to -0.27 in January from -0.30 in December.

Our view: The Chicago Manufacturing Index is the third index, after the New York's Empire State Manufacturing Survey and the Philadelphia Fed's Manufacturing Survey, to indicate expansion in manufacturing activity in the US. However, doubts about the sustainability of recovery are bound to emerge as, although the headline indices have improved, a deeper dive into the data reveals mixed indications.

Public sector net borrowings, excluding financial interventions, recorded a surplus of £7.8bn during January, (£5.2bn in January 2011) as local governments borrowed lesser than tax collections, the Office of National Statistics reported yesterday. The government's net borrowings in January, including financial interventions, registered a surplus of £10.7bn in January as against a deficit of £10.8bn (revised from -£11.1bn) in December. This brings year-to-date total public sector borrowings to £93.5bn; the government had borrowed £109.1bn until January 2011 during FY2011. Public sector net debt stood at £988.7bn, or 63% of GDP, in January.

Sources: Bloomberg, Reuters, Standard & Poor's EMS Marketscope, Consensus forecasts

Sources: Bloomberg, Reuters, Standard & Poor's EMS Marketscope, Consensus forecasts

British chipmaker CSR yesterday released full-year results for FY 2011. The company's revenues grew 5.6% y-o-y to US$845.2m, helped by a 32% surge in revenues in the fourth quarter. The rise in revenues was led by the segment which it calls the Home Business Group, whose revenues rose by 13.9% on growth in the stereo audio markets and consolidation of subsidiary Zoran. The company's operating loss, however, widened to US$48.4m, in spite of its decision to cease investment in the low-margin business of television chips and tuners, following the acquisition of Zoran. The move is expected to result in savings of US$130m a year by the second quarter of 2012. The company also announced a share buyback worth US$50m and a final dividend of US$0.071 per share.

Our view: Although the company widened its operating loss in the year, this was a result of discontinuation of low-margin business as well as the acquisition of Zoran. These steps will result in cost savings going forward, improving its profitability. The company's fourth quarter revenues were near the top of analysts' expectations, which is a positive sign. In addition, the share buyback programme and higher dividends indicate the confidence of management in the outlook. We maintain a Hold view pending fresh evidence of the effects of restructuring.

Sources: Bloomberg, Reuters, Standard & Poor's EMS Marketscope, Consensus forecasts

The average house price in the UK rose 4.1% m-o-m to £233,252, the sharpest increase since April 2002, according to British property website Rightmove. Housing prices in London rose 2.5% to an average of £449,252, which is close to the record seen in October. On a y-o-y basis, housing prices increased 1.4% in the whole of the UK and 4.3% in London. The number of listings fell 9%, indicating a shortage of sellers in the market.

French business confidence for the manufacturing sector stood at 92 points in February, unchanged from January's reading, according to the survey results from Insee. This was as a result of improvement in production expectations, offset by worsening export orders and past production. The corresponding index for services stood at 91 points and that for the industrial sector at 96, both unchanged since January. The general production outlook index increased to -27 from -36 a month earlier. The index for demand and total order levels rose 2 points to -26 during the same period while index for demand and export order levels fell to -33 from -26.

Sources: Bloomberg, Reuters, Standard & Poor's EMS Marketscope, Consensus forecasts

Sources: Bloomberg, Reuters, Standard & Poor's EMS Marketscope, Consensus forecasts

Anglo American released full-year results on Friday for the year to December 2011. The company's revenue grew 11% y-o-y to US$36.5bn. Its operating profit increased 14% y-o-y to US$11.1bn. During FY 2011, record operating profitability from iron ore and coal more than offset the decline from copper. Although copper prices where high in the first half of the year, disappointing volumes and higher costs affected this segment later on. Underlying EPS improved 23% to US$5.06, higher than the consensus of US$4.78. The company only increased its regular dividend payment by 14% to US$0.74. It intends to spend nearly US$98bn on capital expenditure to double production in forthcoming years.

Our view: We continue to favour Anglo American because of its diversified mining operations and high quality of assets. Its exposure to platinum and diamonds sets it apart from the other mining majors. Both of these are late-cycle commodities, in that their prices are the last to move in the commodity cycle, offering diversification benefits. We believe Anglo American will continue to benefit from its focus on expanding iron and coal, with a view to demand from Asia. We remain buyers of the stock.

Severn Trent released a positive trading update on Friday. The group expects trading across the business to be in line with expectations. Notably, management expects to see a significant improvement at its services unit by the next financial year. The services unit provides water and waste management in Europe and North America.

Our view: The positive view from management, especially on the services business, is heartening. We had previously kept the stock on a sell as the services business was continuing to show weakness due to the slowing economy, but we are now upgrading the stock accordingly.

Spectris, a developer of productivity-enhancing instrumentation and controls, released full-year results for FY 2011 on Friday. Sales increased 23% y-o-y, exceeding £1bn for the first time. Sales in Asia-Pacific increased 17% y-o-y, boosted by China, where sales improved 27%. Asia-Pacific now contributes the same proportion to sales as Europe, where revenue grew 13%. North American sales increased 14%. Three bolt-on acquisitions during the year also boosted group revenue. The largest of these acquisitions was made in August, when the company bought privately-held Omega Engineering for US$475m. Organic sales increased by approximately 15% y-o-y. The adjusted operating margin expanded to 18.2% from 15.8% in FY2010. Adjusted EPS came in ahead of expectations at 124p compared to 86p in FY 2010. The company also announced a higher dividend of 33p compared with 28p in the prior year.

Our view: The demand for the company's productivity-enhancing products is clearly strong, and exposure to the Asia-Pacific market has boosted performance. Management remains confident of growth this year, as its acquisitions strategy, coupled with investment in new products and applications, position the company well. We maintain our BUY recommendation.

Sources: Bloomberg, Reuters, Standard & Poor's EMS Marketscope, Consensus forecasts

According to the Office for National Statistics, UK retail sales volume expanded 2% y-o-y and 0.9% m-o-m in January. Excluding auto fuel, m-o-m growth was 1.2%. Sales volume at non-store retailing improved 2.2% m-o-m, while other stores and non-food stores saw growth of 2.2% and 6.2%, respectively. Only sales at food retailers saw a decline of 0.3%.

Our view: This was better than market expectations of a m-o-m decline of 0.4%. Inflation remaining under control and a slow improvement in economic conditions are helping consumption levels. While the month's data is positive, retail sales are a volatile metric, and as long as the employment situation continues to deteriorate, it is unlikely that the improvement in consumption will be sustained at the pace seen in January.

The seasonally-adjusted CPI for Urban Consumers increased 0.2% in January according to the U.S. Bureau of Labor Statistics. The unadjusted CPI for the past twelve months increased 2.9%, a slight decline from the 3% increase seen during December. Each of the indices for food, energy, and "all items less food and energy" increased 0.2% in January. For the 12-month period, the index for energy increased 6.1%, the food index rose 4.4% while the index for all items less food and energy expanded 2.3%.

Our view: The January data points towards rising inflationary pressures in the US, as the inflation level increased at the fastest pace since September 2011. The US Federal Reserve has a 2% inflation target. This could limit the Fed's ability to extend its stimulus measures.

Annual PPI increased 3.4% in January compared to 4.0% in December and market expectations of a 3.2% rise. PPI increased 0.6% on a monthly basis in January following a 0.4% decline in December. The consensus estimate called for a 0.3% improvement in January on a monthly-basis. The increase in PPI came primarily from energy costs. Excluding energy, PPI was 0.4% on a monthly-basis and 1.8% for the year.

Sources: Bloomberg, Reuters, Standard & Poor's EMS Marketscope, Consensus forecasts

Sources: Bloomberg, Reuters, Standard & Poor's EMS Marketscope, Consensus forecasts

Reed Elsevier released results for FY2011 ended 31st December 2011 yesterday. Despite revenue being almost flat (-0.9%) at £6.0bn, adjusted operating profit increased 4.5% to £1.6bn, as operating margins improved to 27.1% in FY2011 from 25.7% a year earlier. Adjusted pre-tax profit increased 9% y-o-y to £1.4bn. At the Elsevier division, which contributes about 47% of the total adjusted operating profit, revenue increased 2% y-o-y to £2.1bn in 2011. Revenue at the LexisNexis Risk Solutions division (which contributes about 22% to adjusted operating profit) declined 2% y-o-y to £908m, as demand for screening services slowed in H2 2012. Management announced that it will not consider selling off any of the company's core businesses, though some small disposals could happen. The board also declared an annual dividend of 21.55p per share, a 6% y-o-y increase.

Our view: The strategic shift from print to digital media is improving operational performance. Also, we believe that the market has been particularly harsh while discounting of value of the company's LexisNexis business in the aftermath of the 2008 financial crisis. The firm commitment not to sell off any core businesses indicates that management is confident about the businesses growth, and it lends credibility to our view that the shares are currently undervalued. We have a buy rating on the stock, which was one of our picks for 2012 and was covered in the research note 'A dozen for twelve' on 17th January 2011.

BAE Systems, the defence contractor, released FY2011 results yesterday. During the year to 31st December 2011, revenue declined 14.0% to £19.2bn and operating profit declined 1.3% to £1.6bn. However, net profit attributable to shareholders increased 17.9% to £1.2bn. The order book shrank 8.4% to £36.2bn. Management said that sales are likely to be flat in 2012, given the economic environment, but underlying earnings per share are expected to increase on successful re-negotiation of the terms of the Salam programme (delivering fighter-jets to the Royal Saudi Air Force). The annual dividend per share increased 7.4% to 18.8p.

Our view: The company is trying to shift its focus towards newer nations with expected robust defence budgets like Saudi Arabia, Australia and India. However, its core markets remain the US (47% of revenue) and the UK (29% of revenue). The US government has announced capping of defence expenditure for 2012 at 2011 levels, and the UK government targets reducing defence spending. Under these conditions, the management's expectation of sales remaining flat in 2012 is realistic. We expect the growth for the company to remain subdued in the near-term and have a hold rating on the stock.

Kingfisher, the home improvement retail group, released a trading update yesterday for Q4 2011 ended 28th January 2011. During the quarter, revenue increased 2.2% y-o-y to £2.4bn and like-for-like (LFL) sales increased 0.9%. Sales in UK and France increased 1.5% y-o-y and 4.6% y-o-y to £968m and £938m respectively. Other international sales declined 1.3% to £449m and LFL sales were almost flat (+0.1%). Management said that adjusted profit for FY2012 is expected to meet analyst expectations of a 20% increase.

Our view: The business is expected to benefit as tight consumer budgets means consumers choose a DIY route to re-decoration rather than investing in a new house, as indicated by improving LFL sales in FY2012 compared to FY2011. We believe, however, that the current share price adequately reflects this positive trend. Also, the economic outlook in the company's main countri