Precious metal miners among leading fallers as gold and silver hit after US jobs dataLeading shares ended the week on a downbeat note, albeit off their worst levels following stronger than expected US jobs data.The FTSE 100 finished down 12.49 points at 6853.44 as concerns about the standoff between Greece and the eurozone intensified ahead of a key Eurogroup meeting called for next week.Of all the epithets to employ to today’s non-farm payrolls up, ‘Goldilocks’ might be the best. Jobs growth was strong, but not too strong. Meanwhile earnings growth was better as well, providing the rationale for a stabilisation that still leaves the index tantalisingly close to 6900.Yet again it is the mining sector that has contributed most to the losses today, as the tale of oversupply that has caused such woe for the sector overall rears its head again.The sector’s valuation is retesting highs, but is likely to push on as strong, cash-backed returns become relatively more attractive. The calmness of the land market makes this cycle genuinely different, and industry structure underpins returns. There is a wall of worry to climb, but the risks are all known and fairly limited. A 5% dividend yield is attractive in a low-return world. The four big concerns for the sector are valuation, the General Election, margin risks and rate rises. Each of these poses credible but limited risk, all of which should be offset by the stock market’s rising appetite for high returns and yield. The General Election may only create risk if it proves inconclusive; and rate rises are only an issue if their pace exceeds wage growth.The LSE said that it has “already received a number of expressions of interest” and the press are suggesting there are “at least three interested buyers” (of which CIBC is named as one, others unnamed). It is our speculative view that Aberdeen could be among those who have taken a look. In our view, at the press rumoured price of $1.4bn (assuming there is no material surplus capital to be injected into the business before sale) is correct, then relative to historic earnings of around $80m, it does not stand out as being obviously cheap (around 17.5 times earnings) on a headline basis for an asset manager.However, Russell Investment appears to be cost inefficient compared to most other asset managers with scale ($256bn assets under management and $784m revenue but only around 17% operating margin versus 30%-50% industry norms). Aberdeen as a known (and successful in our view) cost cutter could therefore possibly add value. In our view, they would need to extract a 30% plus margin to make it value enhancing at a price of $1.4bn.... Additionally, Aberdeen management (for better or worse) have made it widely known they want to diversify the business away from its reliance on emerging markets and related equities, which this deal would do. They have also said that the US is a market they want to expand into. Finally, management also appeared to give the impression recently that they would look to seek shareholder approval for any future deals, possibly hinting that they are looking at a transaction of more than 10% new share issuance (which $1.4bn would be).Importantly a positive overall survival benefit in the COMBI-d study forms part of the oncology asset sale to Novartis, $1.5bn contingent consideration determined by a positive overall survival outcome. This puts the final price paid by Novartis for GlaxoSmithKline’s oncology assets to $16bn, £4bn of which is due to be returned to investors via a B Share scheme following completion of the asset swap which also includes Glaxo’s purchase of Novartis’ Vaccines unit and the establishment of a Consumer Health joint venture controlled by Glaxo. Fourth quarter earnings were significantly below expectations, as management invested heavily in R&D and SG&A. This highlights AstraZeneca’s dilemma: the pipeline is rich with innovation but needs heavy investment to realise its full potential. At the same time, Nexium, Crestor, and EU Symbicort are going generic, and key launch brands in respiratory and diabetes need continued investment in highly competitive categories. To mitigate this, the chief executive has introduced a new source of earnings (“externalisation revenue”) selling/partnering non-core pipeline assets to prop-up earnings. The problem is the magnitude and consistency of earnings that ‘externalisation’ needs to generate. We estimate that AstraZeneca needs to realise at least $1.5bn of proceeds from asset sales annually in 2015, 2016 and 2017 in order to keep earnings per share flat at 2014 levels and support the dividend.But should investors really pay 15-20 times PE for one-time gains on partnering/disposals? We see better opportunities elsewhere in EU Pharma (Novartis, Sanofi, Bayer). Continue reading...
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