FTSE slips from record highs, as Primark owner ABF falls on euro woes
|
Version 0 of 1. The FTSE 100 tried and failed to hit yet another new closing peak, after mixed economic data from around the globe. The leading index closed down 17.99 points at 7019.68 after reaching a new intra day high of 7065.08. Disappointing Chinese manufacturing data unsettled the commodities sector, but this was followed by positive eurozone PMI figures and news that UK inflation was at zero, pushing back the idea of any interest rate rise, which all served to support the market. But in the background was the continuing concern about Greece, which needs to find a deal with its creditors before the cash runs out, an outcome which is still by no means guaranteed despite this week’s public show of amiability between Greek prime minister Alexis Tsipras and German chancellor Angela Merkel. And an opening fall on Wall Street meant the negatives outweighed the positives. Associated British Foods, the Primark and sugar business, was the biggest faller, down 86p at £29.25 as Credit Suisse pointed out it could be hit by recent currency movements. It said: We lower our current year earning by 3% and new year earnings by 8% to reflect the continued weakness of the euro. ABF doesn’t usually feature in our regular foreign exchange updates on the sector, but given the severity of the euro’s demise it should. For ABF the impacts are more transactional than translational, and the 8% reduction comes in equal measure from Primark and Sugar. Primark largely sources in dollars, but increasingly has a euro revenue exposure. Nothing new in this, and we already had anticipated a 110 basis points margin decline. The last time the dollar rose 25-30% (2009) against pound Primark’s margins fell 160 basis point - and this now forms the basis of our 2015/16 forecast. In sugar the group’s costs are in pounds (paying the UK beet farmers), but sellingcontracts are in euro. Though the beet price is set to fall in the new year the revenue line (in sterling) will be softer too unless euro prices rise (which at this stage isn’t in our expectations). Among the gainers, British Airways owner International Airlines Group added 21.5p to 613.5p as Morgan Stanley issued an upbeat note: IAG stands apart from its EU peers in terms of financial and share price performance since fourth quarter results season. We believe that gap will persist in 2015, with IAG actively sourcing further revenue leverage from BA and Iberia, as well as ongoing synergy and targeted cost savings across fleet, labour, operations and back office. We forecast IAG earnings before interest and tax of €2.4bn for 2015 (10.5% margin) well ahead of Lufthansa and Air France-KLM at 5.2% and 1.3% margins for the same period. Housebuilders moved higher as the idea of a rise in borrowing costs receded, with Persimmon up 41p at £17.16 and Barratt Developments 8.5p better at 542p. But Wolseley dropped 112p to £40.98 as the building materials group announced a disappointing update and a £245m write-off at its Nordic business. British Gas owner Centrica slipped 2.2p to 256.6p as Deutsche Bank warned on the political risks of the forthcoming UK elections: Do you want to be holding Centrica shares on May 8? The UK’s energy utilities are facing the riskiest general election since 1992 and Centrica looks most exposed. We believe Centrica’s shares could be worth at least 20% less under a Labour-led government than a Conservative one. The valuation gap could be much bigger given that Labour leader Ed Miliband’s mooted 10% energy retail price cut would wipe out Centrica’s group earnings. The outcome looks too close to call yet the shares appear to be pricing in a Conservative win. We downgrade from hold to sell and cut out target price to 225p, based on a 50:50 weighting of Labour and Conservative victories. Among the betting community 888 added 5.75p to 158.5p as it unveiled a special dividend and a 33% rise in 2014 earnings. The company, which ended talks about a takeover by William Hill last month, said it was looking at acquisitions of its own. Betfair rose 46p to £22.20 after an upbeat note from Barclays: There are many reasons to own Betfair: i) This is an online growth story with top-line momentum and high operational gearing. ii) Management are open to returning cash to shareholders (despite a £200m cash return this year, we still forecast net cash of £149m in 2016). iii) Betfair has focused on product development and can offer customers disruptive pricing as it utilizes the full benefits of syncing the fixed odds sports book with the exchange. iv) Cash conversion from 2015-2017 averages 81%. Finally Stobart Group added 2.75p to 104.75p as it agreed a deal to supply biomass to a new plant to be built at Tilbury Port in Essex. |