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Market buzz: Hikma speculation, Dovish remarks out of ECB and Fed
1457: Shares of SSE are lower after the Competition and Markets Authority said it would examine the implications of the asset swap between E.ON and RWE for the already proposed tie-up between npower and SSE.
1449: Commenting on Friday's news of a possible Saudi order for 48 Typhoon jets, in a research note sent to clients analysts at JP Morgan highlight the lack of detail around when the formal contract will be signed.
Assuming a handful of deliveries in 2019 and eight per year between 2020 and 2024, then the broker's estimates for BAE's earnings per share might get a lift of between 2% and 4% in 2019 and 2020, possibly more if weapons were also provided, they said.
In that same note they also point out the hole in the company's delivery schedule for Eurofighters for 2019- 2020.
JP Morgan also draws attention to how BAE's commitment to pay roughly £700m of dividends per year, leaves little left over for investment, M&A or buybacks.
Having said that, just three weeks ago the broker voiced its concern that Saudi would not order any EFs over the coming year.
"BAE is proud of 14 years or rising dividends yet over this timeframe it has significantly underperformed its US defence peers and we wonder whether the commitment to such a large dividend is the right strategy."
1417: Shares in Hikma and Vectura are down due to their earlier confirmation that the US drug regulator had put its foot down about their generic version of an asthma drug.
But there's good, if highly speculative, news from the Telegraph that Germany's Stada has said it is "on the hunt for acquisitions in order to gain access to the UK generic drugs market". CEO Claudio Albrecht said he is weighing up a swoop in the UK market, adding that work on pinpointing an acquisition is already happening.
Looking elsewhere at the papers, there's a bearish write-up about Netflix on the FT, pointing out that the shares are worth 12 times the $12bn its recent annual revenues, 120 times expected profits for 2018,
But there's good, if highly speculative, news from the Telegraph that Germany's Stada has said it is "on the hunt for acquisitions in order to gain access to the UK generic drugs market". CEO Claudio Albrecht said he is weighing up a swoop in the UK market, adding that work on pinpointing an acquisition is already happening.
Looking elsewhere at the papers, there's a bearish write-up about Netflix on the FT's Alphaville, pointing out that the shares are worth 12 times the $12bn its recent annual revenues, 120 times expected profits for 2018.
"Spending of $8bn on content is planned for 2018. It would be easier to believe such costs were sustainable if the group wasn't funding itself through an accumulation of debt. That borrowing may be the part the market has overlooked, or even got wrong, but it makes Netflix the epitome of the boom we now enjoy."
US-based Citron Research, noting short interest at a 10-year low, thinks the stock "can be shorted back to $300" as the company's content spend ($8bn planned for this year) is "unsustainable long term".
1232: Quite dovish remarks from Belgian ECB rate-setter Jan Smets to Reuters today, saying structural reforms may have boosted euro area economy's capacity, meaning inflation will take longer to rise. It is "absolutely crucial" price stability objective is met and "we are not there yet", he adds.
For his part, over the weekend, St.Louis Fed archdove James Bullard told the FT the central bank was putting the US economic recovery at risk by hiking rates even as it pares its multi-trillion dollar balance sheet.
1121: Credit Suisse has boosted its target price for Asos from 5,725p to 7,050p, pointing to top-line growth of 32% in 2017 to say company is in "rude health". However, following the recent 're-rating' in the shares, the broker believes the improved rate of sales growth "looks priced in". Neither does it expect the 11 April half-year numbers from the digital fashion retailer to drive a further re-rating.
The broker's target price is equally-weighted towards financial multiples and DCF, with the former raised to 1.9 times' the company's forward EV/sales and the EV/EBITDA component to 30 times' on the back of the re-rating in its e-commerce peers, as well Asos's own strong top-line growth. On the DCF side of the valuation, the analysts leave their estimate of the company's terminal margin at a "generous" 7% "despite limited visibility into LT potential relative to peers".
1058: The Financial Conduct Authority (FCA) has published a discussion paper on "transforming culture in financial services", looking at the role of leaders, incentives and governance of decision making. Presenting views from academics and industry 'thought leaders', the paper is a set of essays that discuss what a good culture might look like, the role of regulation and regulators, how firms might go beyond incentives, and how to change behaviour for the better.Presenting views from academics and industry 'thought leaders', the FCA's culture paper is a set of essays that discuss what a good culture might look like, the role of regulation and regulators, how firms might go beyond incentives, and how to change behaviour for the better.
The FCA's supervision chief, Jonathan Davidson, says: "Culture may not be easily measurable but it is manageable. So firms can and should take responsibility for ensuring their culture is healthy for both their employees and customers, which can complement and support their business strategy. We as a regulator have long gone beyond having the mindset that simply complying with rules is enough. However we don't believe a one size fits all culture is the right way to go. So we want to promote a discussion and consensus on the essential features of a healthy culture and how firms, regulators, employees and customers can help deliver that culture."
Suggestions include a role for regulation to help "re-align" incentives, while other essays "debunk the myth that you can't have a healthy culture and be profitable", with many arguments for both regulators and organisations make efforts to measure culture.
1008: A few analyst comments and broker recommendations, covering Just Eat, SIG, 3i, Vectura and TT Electronics.
Deutsche Bank has downgraded Just Eat to 'sell' after new CEO Peter Plumb announced investment plans to expand into the delivery services business. "While we think this move is strategic to defend Just Eat's leadership position against increased competition, it will come at the expense of profitability." Analysts are cutting their numbers by 20-30% in 2018-2020. "In delivery, Just Eat doesn't have the first mover advantage."
Analysts at Canaccord have trimmed their estimates and target price for SIG, after last week's results saw outlook comments from management pointing to an increasingly challenging UK market, though margins are expected to move higher thanks to self-help measures. PBT forecast is cut to £85.5m in 2018 from £93m and hence target price down to 165p from 180p but maintains 'hold' recommendation.
Canaccord is more bullish on 3i, where it maintains a 'buy' rating and keeps its target price at 1035p after the results from non-food European discount retailer Action, the company's largest investment. "We believe a strong Q4 should deliver another strong total return for 2017/18E and this momentum could well be sustained into 2018/19." Analysts' forecast a NAV of 710p for 2018 less a forecast final dividend of 20.0p.
After the news from Vectura and Hikma this morning (the US FDA has put its foot down so a further clinical trial will take place this year), N+1Singer says "at least the pair know what they need to do to move to approval". Hikma anticipate enrolling people on this trial in coming weeks with data submitted to the FDA as early as possible in 2019 with hoped for approval and launch in 2020. Singer had assumed a second-half 2020 launch, which shifts the approval milestone of $11m/£8.8m for Vectura. "It is encouraging that Hikma remain committed to VR315 as the market was worried over this." Singer remains at 'buy' for Vectura with a 120p price target.
Berenberg looks at TT Electronics after another transitional year, with last week's results showing strength across the board. "The proposed Stadium acquisition looks attractive in our view, and, assuming the deal completes, we estimate that TT has a further £90m of M&A firepower. We think there is scope for material near-term earnings upgrades and continue to believe that TT can be materially bigger on a multi-year view."
0907: Economic data calendar is fairly limited today, with the week's main event in the UK being Chancellor Philip Hammond's spring statement tomorrow.
The Chancellor is not expected to make any major policy announcements in the 1130 GMT Tuesday statement, which has been slimmed-down to just a reading of the revised forecasts from the Office for Budget Responsibility. The OBR's updated economic and fiscal forecasts will be as detailed as ever and could see the cumulative government borrowing forecast out to 2022-23 fall by £46bn to £166bn, say economists at RBC Capital Markets. Yesterday the Chancellor told the BBC that "there is light at the end of the tunnel" but the UK is "still in the tunnel at the moment".
Given the market's current pre-occupation with the outlook for US treasury yields, Monday's auctions of $28bn of 3 year notes and $21bn of re-opened 10 years are set to pick up more interest than usual, says Rabobank. "A combination of the relatively large size of the offerings and the approach of US February CPI inflation data tomorrow could keep some buyers side-lined. 10 year yields have edging higher since the middle of last week, though they remain below their late February highs."
In the news are reports in the South Korean press that North Korean leader Kim Jong Un wants to sign a peace treaty after his meeting with US President Trump this spring. The Dong-A Ilbo newspaper suggested that Kim is likely to raise the issue of a peace treaty along with the establishment of diplomatic relations and nuclear disarmament, citing an unnamed senior official in SK's presidential office.
Rabobank picks out highlights in the week's data ahead being the Eurozone February CPI inflation data, plus a few reports from the US including CPI inflation data, retail sales, production and the University of Michigan sentiment and inflation expectations survey. "Fed speakers this week will be thin on the ground but there are plenty of speeches scheduled for ECB representatives, including President Draghi who could shine more light on the outlook for policy in the Eurozone."
0857: The FTSE 100 was in positive territory along with the rest of Europe, but is down slightly now. The pound is up 0.2% on the dollar at 1.3876 and flat against the euro.
Quoted in the London open market report, Rebecca O'Keeffe, head of investment at broker Interactive Investor, says: "Global markets continue to advance after Friday's US employment numbers effectively gave the green light to investors to buy equities. The combination of spectacular employment growth with no sign of inflationary wage pressures is the perfect scenario for markets and has seen equity markets move higher.
"Recent market wobbles have all been connected to the possibility of stronger US inflation which could cause the Federal Reserve to raise rates faster than the market anticipates and end the nine-year equity party. Confirmation that there is a resurgence in the number of Americans joining the labour force, increasing the participation rate, is a huge boost to US production prospects and growth without the downside risk of wage inflation. Not too hot, not too cold; Goldilocks appears to be alive and well."
0844: London's major share indices are not moving decisively so far on Monday, with the FTSE 100 up less than 0.1% and the FTSE 250 up 0.37%.
GKN investors have shrugged off suitor Melrose's increasing its offer to 467p and said it will "not be increased under any circumstances". Investors have shrugged it off. GKN last week proposed the sale of its Driveline business to Dana.