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Saturday, July 20, 2013

FTSE 100 fades at end of positive week, with Arm lower after poor US technology updates

Disappointing results from Microsoft and Google take shine off market buoyed by Bernanke QE comments

A week when the US market reached new peaks ended on a more cautious note after disappointing results from a number of major technology companies.

Markets have been buoyant in recent days as the US Federal Reserve chairman Ben Bernanke suggested to Congress that any slowdown in its $85bn a month bond buying programme was not likely in the immediate future and would depend on the state of the world's largest economy. On top of that came positive results from healthcare groups and banks including Citigroup and Morgan Stanley.

But then Intel, Microsoft and Google all produced results below expectations, which took some of the shine off the week. Microsoft fell around 10% in early trading on Friday and Google nearly 4%, while the poor figures put UK technology companies under pressure, with Arm losing 23.5p to 897.5p ahead of the chipmaker's results next week.

Overall the FTSE 100 finished the day at 6630.67, down 3.69 points but up 86 points on the week. Investors shrugged off the continuing problems in the eurozone, with political uncertainty in Portugal and Spain, and continuing protests in Greece against the cutbacks agreed as part of the country's bailout agreement.

Mining shares had been supported for much of the week by Chinese data which showed GDP growth of 7.5% in the second quarter, in line with forecasts, and by a number of positive production updates. But on Friday profit takers moved in, leaving Rio Tinto 31p lower at 2917.5p and BHP Billiton down 11.5p at 1869.5p.

Among the day's risers IMI added 28p to £14 as Citigroup named the engineer as one of its most preferred stocks. It said:

We see further significant margin upside at IMI, driven by both mix and restructuring. A strong balance sheet and yield are both supportive, too.

National Grid climbed 10p to 774.5p as New York State - where the company has operations - forecast a surge in electricity usage as air conditioners were switched on during the current heatwave.

But Standard Life slipped 5.4p to 385p after rival Aviva, up 0.3p at 372.3p, poached one of its senior executives.

Euan Munro is joining as chief executive of Aviva Investors, which has £274bn assets under management, and leaving his position in the investments division of Standard Life. Aviva was also helped by a positive recommendation from Morgan Stanley:

Aviva is in the earlier stages of its balance sheet repair process. We believe that as it works to improve the fungibility of cash back to the centre in the medium-term the dividend can grow faster than earnings – driving a re-rating.

Among the mid-caps, software group Micro Focus International fell 8p to 759p after disappointing results from SAP. Analyst Roger Phillips at Sanlam Securities said:

The problem area remains Asia-Pacific, where revenues declined by 15% in headline terms. The main exposure within our coverage universe to Asia (Japan specifically) is Micro Focus (sell, target price:600p) with around 15% of group revenues from this region, due to the group being the number two player in the Cobol industry against Fujitsu. SAP and Micro Focus are both "horizontal" enterprise software players addressing multiple vertical markets and so we see some degree of read across. Micro Focus commented that Japan had been challenging at its full year results in June, and the year on year comparative for the first half of 2014 is extremely tough due to a one-off licence fee of $4m that buoyed up the first half of 2013. As a result, we see this as a weak spot that could get weaker for Micro Focus.

Defence group Chemring closed 22.9p lower at 298.2p after UBS moved from buy to neutral and cut its price target from 360p to 330p. Analyst Charles Armitage said:

We believe the implementation of the restructuring plan by the new management team is likely to drive an improvement in Chemring's profitability and cash flow, despite the headwinds from tough defence markets. We estimate there is further upside of around £5m-£10m to earnings, above the targeted £10m cost savings, from an improvement in execution across the businesses.

We are concerned about the continued uncertainty on the short term outlook for US defence budgets as sequestration has not been fully implemented. This presents a challenge to management efforts to restructure Chemring in the short term because of the short cycle nature of many of Chemring's businesses.

Finally Sirius Minerals had a bad week, with its shares subsiding 4p to 18.5p on Friday to make a 33% fall since Monday. The company wants to mine for polyhalite, a potash salt, on the North York Moors national park, but has been forced to delay seeking planning approval while it deals with growing environmental objections. An independent report by consultants at Amec was finally published, which said there was no economic benefit from the proposed development. Sirius objected, saying the report made no mention of the jobs to be created and the prospect of sales to China. But analysts at SP Angel said:

This is quite a damning review from Amec and the basis for their criticism seems to be the lack of an economic case for polyhalite – something we have been saying for some time.

There has also been a lack of clarity and certain degree of complacency from the company on the planning process where they have not been explicit that they need to demonstrate a fundamental requirement to show an exceptional need for this project because of being sited in a national park. The environmental impact assessment is also found to be lacking in fundamental baseline information.

There remains a lot of work to be done to convince the regulators with some basic work found lacking so far.


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