NGmorningcall: Will They or Won't They, The Irish Debt Crisis Set To Dominate Again

M.R. | CMC Next Gen News | 18 Nov, 2010 07:16 | | |

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South Africa-focused investment bank Investec has put in a bit of mixed performance of late, according to broker Charles Stanley.

“On the one hand Investec has benefited from a solid recurring income base as well as a strong performance from the Asset Management and Private Wealth businesses. However, Investec also point out that ‘weak economic growth continues to impact the overall demand for credit and levels of transactional activity, and the performance of the core banking businesses remains dependent on the sustainability of economic recovery and the normalisation of economic activity’,” the broker notes.

Charles Stanley is predicting interim profit before tax of £216m, earnings per share of 24.0p and an interim dividend of 8.0p.

Sticking with the South African theme, brewer SABMiller is expected to grind out an increase in interim profits, driven by economic recovery in its key markets.

Charles Stanley forecasts profit before tax of $1,960m, up from $1,920m last year, on revenue of $13.7bn, up from $13.36bn last year. The broker has pencilled in 86.0p for earnings per share (2009:80.0p) and a 2p hike in the interim dividend to 19.0p.

“The improved trading environment means beer volumes have strengthened and it has been possible to push through price increases. Lower raw material prices and favourable currency movements will also have been beneficial,” the broker said.

The high reputation of the management of Halfords, the cycles and car parts firm, has taken a buffeting this year, with the company admitting it had got things wrong with its core cycles range in its second quarter.

After peaking at 550p back in June the shares are now struggling to keep their head above 400p so Thursday’s interim results will see shareholders looking for some good news.

There won’t be much of interest in the rear view mirror. The company has already set out guidance for profit before tax of £67m to £69m.

KBC Peel Hunt says the focus will be on whether management has “successfully addressed problems over bike ranges, pricing and marketing that had such a detrimental impact on second quarter trading.”

The broker notes that after the first quarter, the company was projecting sales levels that would have required year on year like for like sales growth in the second quarter of 2%, so the 5% or so slide “was a sizeable shortfall”.

“On this front, we expect management to provide details of a more forthright marketing and promotional programme for the second half,” the broker continued.

“Having set out the basis for 15% compound EPS growth in June, the company then missed revenue plans for the next two consecutive quarters. Consequently, to gain investor support and re-rating, we believe Halfords needs to start meeting revenue expectations and proving the 15% EPS [earnings per share] target is not a one-year phenomenon, but a sustainable medium-term KPI [key performance indicator],” the broker said. Peel Hunt has a “hold” recommendation for the shares.

Peel Hunt’s prediction for profit before tax is at the top of the guidance range at £69m; Charles Stanley is slap bang in the middle at £68m. It also thinks revenue will rise to £457m from £425m at the interim stage last year, while earnings before interest, tax and amortisation is tipped to advance to £71m from £62m.

Charles Stanley is expecting Halfords to announce an interim dividend of 7.6p, up from 6.0p last year.

The broker is looking for an update on the integration of the Nationwide Autocentres purchase. The goal is to rebrand all 240 centres by March 2011.

Power grid operator National Grid releases interim results on Thursday that should be solid, according to Charles Stanley, while confirming “that the outlook remains positive for another year of underlying growth.”

Market consensus is for earnings per share of 17.6p and an dividend of 12.9p.

“Net debt is expected to fall following the £3.2bn rights issue, offset by the net cash outflow from the capital investment programme. The financing charge will be broadly flat year on year with the anticipated reduction in pension interest largely negated by the pick-up in inflation on index-linked debt,” Charles Stanley predicted.

Shifting focus to the economy, public finances data for October is due to be announced at 9:30, as are retail sales figures.

Public sector net borrowing is expected to narrow to £8.9bn from £15.6bn in September, while retail sales, including fuel, are tipped to have risen 0.4% in October after dipping 0.2% the month before. If the forecast is correct, that would leave retail sales unchanged from October 2009’s level, down from September’s 0.5% year on year gain.

The Industrial Trends Survey for November from bosses’ lobbying group the Confederation of British Industry is expected to show that the percentage of manufacturers reporting that orders are at normal levels will be 24 points lower than the percentage reporting sub-par levels of activity. A -24% score would, at least, be an improvement on October’s -28%, but below September’s -17%.


Wall Street fell late again despite signs that Europe is moving closer to resolving the debt crisis currently centred on Ireland.

Talks over the Irish situation continue, with a team consisting of members of the various organisations in Dublin Thursday to thrash out what to do next.

Ireland confirmed it will open its books to the team of EU, European Central Bank and International Monetary Fund experts, suggesting a bail-out is nearer.

Dow Jones fell 15 to 11,007, though Nasdaq added 6 at 2,476 while the S&P was flat at 1,178.

Elsewhere, General Motors is to raise $20.1bn in its initial public offering. The car maker priced its common shares at $33, the upper end of its price range.

GM's common shares will begin trading Thursday morning on the New York Stock Exchange under its traditional GM stock symbol.

Earlier, a key gauge of inflation – the Consumer price Index (CPI) - increased by 0.2% in October, up from 0.1% the month before, but less than the 0.3% rise predicted by economists. Core CPI, which excludes volatile food and energy costs, remained unchanged for the second month.

Housing starts were down a much bigger than expected 11.7% in October to an annualised rate of 519,000, an 18-month low. The Commerce Department also revised down September’s original read of 600,000 to 588,000.

Building permits were a little higher month-on-month at 550,000, but came in below expectations of 568,000.

In company news, discount retailer Target moved higher after it grew third quarter earnings by 28% to 74c a share and issued a bullish outlook, which pleased investors during pre-market trade.

Warehouse store operator BJ’s Wholesale Club moved ahead after reporting third quarter earnings of 43c a share.


Yesterday’s release of US CPI data continue to show that inflationary pressures remain benign, and thus lending support to the Fed’s assertion that the new stimulus measures are justified. As a result the dollar has slid back from its recent highs, having also been given a helping hand by Boston Fed President Rosengren who has pushed back against critics of the easing policy, saying that the Fed was doing the right thing, and should do more if the need arose. However the policy remains deeply divisive with various Republican senators vehemently opposed to it and some misgivings within the Fed itself.

However the markets main focus remains on Ireland and peripheral European countries bond prices. Portugal yesterday had to pay a sharply higher rate on a 12 month T-Bills sale with a yield of 4.81% against a previous yield of 3.26% a fortnight ago, while a Spanish auction today of €4bn worth of 10 and 30 year bonds could also prove to be a key test.

In any event the fact that European finance ministers, officials from the IMF and ECB have flown to Dublin and appear to be working to lay out a plan over the next few days, for bailing out Ireland’s banks if the need arises, has seen the euro recover some ground after its recent losses.

The stakes remain high, however as overshadowing all of this remains the concern that a contagion effect could take hold and spill over to countries like Portugal and Spain and today’s bond auction will be a key test of investor sentiment in this regard.

Yesterdays Bank of England minutes contained no surprises with the same three-way split on policy remaining. The pound gained a brief boost yesterday from better than expected unemployment data for October, which showed that unemployment claims dropped by 3.7k against an expectation of a rise of 5k.

It is hoped that today’s October retail sales data will be similarly positive with expectations of a monthly rise of 0.2%.

Public finances data for October will also come under particular scrutiny, given the current market focus on sovereign debt at the moment. Expectations are for the PSNBR to fall to £8.9bn from last months £15.6bn.

In the US weekly jobless claims are expected to rise slightly from last weeks 435k print to around 440k while the Philadelphia Fed Index for November is expected to improve to 5 from last months 1.


Crude oil futures fell over 2% on Wednesday, near a one month closing low, on lingering concern that China, the world’s second largest oil consumer, will take official steps to cool inflation.

Crude for December delivery settled $1.90 lower at $80.44 a barrel on the New York Mercantile Exchange, the lowest close since 19 October.

Demand fears overshadowed a surprise drop in US oil and gasoline inventories.

US government data showed a much larger than expected 7.3m drop in crude stockpiles last week, mostly due to lower imports. The Energy Information Administration data did lift oil prices to an intra-day high of $82.67 but prices later declined on demand concerns.

Meanwhile European sovereign-debt problems continued to simmer away. A team of international officials are expected to arrive in the Irish Republic for more talks about the country’s debt crisis following a meeting in Brussels on Wednesday.

Ireland remains reluctant to ask for financial aid but there is growing concern that its debt problems will lead to a domino effect in an already weakened euro zone.

Gold prices struggled to get off the ground, after the previous session’s sell-off, and as investors continue to assess Ireland’s debt problems.

Gold for December closed down $1.50 at $1336.90 an ounce on the Comex division of the New York Mercantile Exchange.

Demand for bullion was also hurt by weaker than expected US inflation data. The consumer-price index rose 0.2% in October, lower than the 0.3% predicted by analysts.

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