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London pre-open: Rolls-Royce secures contract extensions

Date: Monday 28 May 2012

London open

City sources predict the FTSE 100 will open up 35 points from Friday's close of 5,352.

Stocks to watch

Rolls-Royce, the global power systems company, has secured contract extensions with the Royal Air Force worth almost £100m. The deal will see the company provide ongoing support for engines on the UK's C-130 Hercules transport and VC10 tanker fleets. The extension will mean the Hercules Integrated Operational Support (HIOS) contract, which covers the servicing of the C-130 fleet and is delivered jointly by Rolls-Royce, Marshall Aerospace and Lockheed Martin, will continue until 2015.

Salamander Energy, the upstream oil and gas company focused on Thailand and Indonesia, has announced a successful appraisal of the Tutung gas-condensate discovery in Indonesia. The firm drilled the Tutung Alpha-3 (TA-3) well to a depth of 3,351 metres and found stacked sequences of deltaic sandstones in the target section. These sandstone intervals were evaluated using logging while drilling log data and wire-line pressure testing and gas and fluid sampling.

Drinks giant Diageo is set to buy Ypioca, one of Brazil's largest cachaca brands in Brazil, the company announced on Monday. Diageo, which already owns well-known brands such as Smirnoff and Guiness, said it has reached an agreement with Ypioca Agroindustrial Limitada to purchase its white rum brand for 900m Brazilian real, or £300m, in cash.

In the Press

The country’s beleaguered high street will not recover for another three years and will underperform for the rest of the decade, according to leading economic commentators. Retailers will have to weather a “tough trading environment” as householders’ hoarding of cash and debt repayment mean consumer spending will fail to return to pre-recession levels before at least 2015. The forecast from the Ernst & Young ITEM Club suggests the worst of the recession could be behind us but warns a recovery could be derailed by consumer habits and put under renewed pressure by rapidly increasing mortgage costs. The economists expect Bank of England interest rates, the foundation for mortage costs, to climb to 4-5 per cent by 2015, leading to a quadrupling in the percentage of household disposable income going towards debt interest payments to 3.2 per cent, according to The Telegraph.

The Government must boost the credit rating of infrastructure assets to attract the private funds it needs for its planned £250bn spend on transport, power, schools and hospital projects, the CBI will say today. Noting “little has happened on the ground” since Chancellor George Osborne trumpeted the spending blitz in November’s Autumn Statement, the employers’ lobby urges the Government to make “smarter use” of its balance sheet. Improving Britain’s infrastructure is a key plank of the Government’s much-criticised growth agenda but it is struggling to attract the necessary investment from the private sector, not least for riskier greenfield projects, The Telegraph says.

One of the world’s biggest car parts suppliers has rejected overtures from Westminster to bring large-scale manufacturing into Britain. Robert Bosch, a key provider of components in engines and in car safety, has rejected the entreaties of ministers and will not set up a large operation in the UK because it is too expensive. The attraction of so-called Tier 1 automotive suppliers to Britain has been one of the single most important goals of Vince Cable, the Business Secretary, and Mark Prisk, the minister with responsibility for the car industry, writes The Times.

Newspaper tips

Questor was neutral on Randgold shares for some time, but recommended a purchase after the shares slumped 13% following a military coup in Mali, where the company’s flagship Loulo mine is to be found. The shares were at 57.65 pounds. However, since then the tumbling gold price and a weak set of first-quarter figures has ensured the price continues to fall. Earnings per share in the first three months came in at 94p, 13% lower than consensus expectations. The fall was not down to the Mali coup, but was caused by production issues in Ivory Coast. The company’s expansion plans should also lead to a significant rise in profits this year. Mark Bristow, chief executive, spent 652,478 pounds buying 13,480 shares at £48.40 on May 18th. Graham Shuttleworth, the chief finance officer, also spent 142,209 pounds buying at the same price. The shares are trading on a December 2012 earnings multiple of just 12.7 times, falling to 10.4, which is a significant discount to its recent rating. This reflects uncertainty over the gold price. However, Randgold’s total cost of mining each ounce in the first quarter was $751. The shares look oversold and Questor says buy.

James Fisher, the provider of specialist equipment and support for oil tankers, has warned investors that its strong performance in the first four months of the year should not necessarily be taken as a general indicator for the full year. After the group's trading update at the start of May, the shares jumped to almost 600p. They have already been as high as 615p this year. However, resurgent eurozone troubles have prompted a broad-based sell-off and the shares are now significantly below this level. There is no company-specific reason for the fall, other than the general market backdrop. Indeed, analysts have some punchy price targets on the shares, with the average forecast of the four analysts monitored by Bloomberg on this measure being 706.25p. Trading on a December 2012 multiple of 10.3 times, falling to 9.6, the shares remain a buy.

Quindell owns a string of companies that help insurers to process claims more effectively, driving down their costs and delivering a better service to consumers. It is an attractive partner for large insurers because it offers a comprehensive range of claims management services. And having Ai Claims, Mobile Doctors and Silverbeck under one umbrella will drive down costs, so Quindell will not need to rely on referral fees and can charge insurers less than most rivals. The strategy is working and Quindell has already picked up business from Royal & SunAlliance and Ageas (formerly Fortis). Furthermore, chief executive Rob Terry is in talks with other leading insurers and a number of contracts are expected to be signed before the end of the year. The company delivered sales of £13.7m last year and profits of £6.7m. This year, brokers expect sales of £80m and profits of £28m, while in 2013, sales are forecast at nearly £300m with profits rising to more than £40m. Upwards revision of these figures is likely. Quindell shares are 5.63p and the company is valued at £145m. But Terry is determined to move the group to the main market over the next year and take it into the FTSE 100 within a few years. Brokers believe he can do it. Encouragingly, he has invested more than £12 mof his own money in the business. Buy, says The Financial Mail on Sunday´s Midas column.

US close

US stocks finished slightly lower on Friday afternoon ahead of a long weekend with Wall Street closed on Monday for Memorial Day, as concerns over the Eurozone outweighed some better-than-expected consumer sentiment data.

Weighing on sentiment late on were reports that Spain will inject €19bn into troubled financial group Bankia, taking its total investment into the institution to €23.5bn, giving the government around a 90% stake. Meanwhile, there were rumours that the state of Catalonia has requested financing help from the central government in order to meet its debt obligations.

In other news, Peter Bofinger, economist of a member of the group which advises the German government, has said that the terms of Greek bailout should be renegotiated as “they were made under the assumption of a much better cyclical development”.

Also weighing on sentiment were reports that China's banks could miss their 2012 loan targets, exacerbating concerns over a slowdown in the world's second-largest economy.

In US economic news, the Thomson Reuters/ University of Michigan’s final reading on consumer confidence for the month of May has come in at 79.3, following a reading of 77.8 in the month before. Analysts were expecting an unchanged figure. In particular, the expectations sub-index improved to 74.3, the highest since July 2007, from 72.3 in April.

Social media group Facebook finished at $31.90, down 3.43% and well below its debut price of $38 as it continued to receive criticism over its initial public offering.

Chesapeake Energy rose after billionaire activist investor Carl Icahn became one of its biggest shareholders.

Big Lots jumped despite a 22% fall in quarterly profit as it announced a share repurchase programme worth $200m.

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