Volatile day for investors as markets lose some early gains as polls suggest political return for Berlusconi
On a volatile day governed by the downgrading of the UK's AAA credit rating and - perhaps more significantly - the Italian election, Royal Bank of Scotland managed to hold onto its early gains.
The bank, which reports results on Thursday, rose 9.8p to 354.8p on talk it could use the occasion to signal a partial sale of its US bank Citizens.
Weekend reports suggested RBS was considering a partial IPO to sell up to 25% of the American operation, which analysts value in total at between $9bn and $15bn. RBS is under pressure to continue its restructuring to make it more attractive to the UK government to sell some of its stake in the bank. Analysts at JP Morgan said:
As we have argued for over a year, Citizens offers optionality to boost capital at the cost of dilution of a strategically peripheral source of earnings (US retail) to RBS. We believe that Citizens might eventually achieve an exit valuation of 1-1.3 times net asset value based on comparison with its peer group. Although we prefer Barclays, Standard Chartered and HSBC in the UK, we see RBS shares as undervalued in a restructuring scenario and believe that the group can address regulatory capital concerns through management action.
Overall the FTSE 100 finished 19.67 points higher at 6355.37, having climbed as high as 6390. The early gains came despite the Moody's downgrade of the UK, which many commentators believed was already in the price, given sterling's recent weakness. Instead investors preferred to concentrate - at least initially - on the prospect of more measures to stimulate the global economy after comments from the US Federal Reserve late on Friday, and talk that the next governor of the Bank of Japan could be Haruhiko Kuroda, an advocate of aggressive monetary easing. On top of that came a survey showing Chinese manufacturing had grown for the fourth month - albeit slipping back from recent two year highs.
But that complacency ended abruptly amid growing signs of Silvio Berlusconi's possible return from the political dead, as evidenced by a number of polls following the Italian elections. The possibility of a centre-right win and a move away from the country's agreed austerity programme or alternatively, a hung parliament or a new election, sent shockwaves through the markets. So earlier gains were lost, and the euro came under renewed pressure. Angus Campbell, head of market analysis at Capital Spreads, said:
The threat of an unclear result in the Italian elections spooked investors in the latter part of the session as it looked like the centre-right might take the Senate, but the centre-left the Chamber, with many exit polls conflicting substantially. This uncertainty flushed out some sellers later on as memories of some of the terrible elections that took place in Greece, which inflamed the eurozone debt crisis, have come back to haunt us.
Mining companies moved higher following the Chinese figures, with Antofagasta adding 33p to £11.17 and Anglo American climbing 39.5p to 1981.5p.
But Reckitt Benckiser dropped 135p to £43.81 after the US regulator approved generic competition for its suboxone treatment for heroin addiction.
Publisher Pearson lost 45p to £11.71 after it said this year's earnings would be flat compared to the 2012 figure and unveiled a £150m restructuring plan.
Marks & Spencer slipped 9.7p to 367.9p after weekend reports of further market share losses in clothing. Clive Black at Shore Capital said this prospect did not come as a big surprise, given the retailer's poor general merchandise sales to the end of December. He said:
We believe that there are virtues to the M&S investment case, most notably a good performance from its food division, better thinking in international markets and small but interesting developments in beauty and home categories. The biggest prize to our minds though is the potential for a step up in free cash flow generation as and when infrastructure and store modernisation investment is completed within the next year or so. However, such virtues do need for general merchandise to improve in relative and absolute terms and in particular ladies wear in the UK. We cannot hide our worry lines in this respect but we remain cautiously optimistic that gradual improvement can come through.
Shore Capital believes that if these factors come together then M&S can deliver an improvement in trading profit, sustain dividend growth (it has an attractive yield of around 5% already) and consider other shareholder friendly initiatives as free cash flow comes through such as a sustained share buy-back programme. The revelations of New Year market share do not change our views at this stage on the stock but they do remind the market of M&S recent weakness in their key category.
Still with retail Associated British Foods said first half profits would be ahead of expectations, helped by continuing strength in its Primark discount fashion stores. But investors decided to bank some profits following the company's recent share price performance, pushing it 15p lower to £18.15. Analyst Nick Bubb said:
The interesting aspect [to the Primark report] is that in its last update, for the 16 weeks to 5 January, sales were running up 27% overall and like for like sales growth was said to be about 9%, whereas now it is put at 7% for the full period. Other things being equal etc, assuming an even pace of new space openings, that would imply a slowdown to only 3% like for like in the last 8 weeks, but that may say more about the recently booming area of Germany than the core UK business. Interestingly, ABF say that Primark will see no further margin benefit from lower cotton prices in the second half.
Elsewhere ITV dipped 1.3p to 119.8p. The broadcaster, which has recently been lifted by bid speculation, also reports figures this week and Liberum Capital repeated its buy recommendation following talk of a possible £200m cash return to shareholders. Analyst Ian Whittaker said:
While we think they could do more (our ballpark guess was £250m-£300m), they are likely to be cautious. If they returned cash, it would be around 4%-5% accretive on our numbers but 5%-6% for consensus and should drive a re-rating, especially if ITV states it sees a return of cash as an ongoing feature. ITV is our top pick in media.
Property group Intu, formerly Capital Shopping Centres Group, fell 8p to 347.3p after confirming speculation it was in talks to buy Midsummer Place shopping centre in Milton Keynes from Legal & General. The centre is said to be worth around £250m, and Intu said it was considering various funding options, including a possible equity issue. Analysts at Espirito Santo said:
Even in the event of a placing, we would still consider disposals to be necessary to allow the company to make meaningful commitments to its more than £1bn development pipeline. We continue to believe that disposals in line with or ahead of book value will be challenging, creating the possibility that disposals are dilutive to net asset value as well as earnings per share.
Intu.. consistently fails to deliver total returns which exceed our assumed 8.5% cost of equity hurdle in our forecasts to 2015. Unexciting returns and our long-held concerns over capital discipline mean we remain sellers.
Housebuilder Persimmon said selling prices rose by 6% last year to £175,640 helping it record a 52% increase in profits to £225.1m. The company said it had made a strong start to the new year, with forward sales reaching £1bn, up 9% on last year. Meanwhile smaller rival Bovis Homes reported a 5% rise in house prices to £170,700, with profits up 69% to £54.1m.
Persimmon shares fell 11p to 898.5p while Bovis dropped 12p to 660p.
Domino's Pizza served up record profits last year but since then its business has been hit by the wintery weather.
The takeaway specialist said 2012 profits, including start up losses of £3m from its businesses in Germany and Switzerland, rose 10.8% to £46.7m, with online sales now accounting for nearly 56% of its deliveries.
But like for like sales in the first seven weeks of the new year were up just 1.6% compared to 3.8% during the same period last year, and its shares fell 12p to 525.5p.
 |
| READ THE ORIGINAL POST AT www.guardian.co.uk |