Ahead of the US non-farm payroll numbers later, markets are heading higher for the third day running.
Following ECB president Mario Draghi brushing talk of rifts at the central bank and suggesting it would act further to stimulate the flagging eurozone economy, investors have become more optimistic. And with reasonable US data ahead of the jobs figures, Wall Street hit a new high on Thursday before coming off its best levels, although Asian markets were more mixed. Michael Hewson at CMC Markets said:
Optimism about the US recovery has also been helped by recent employment data with weekly jobless claims hitting a 14 year low of 264k last month, while Wednesday’s ADP report was also fairly positive coming in better than expected with an upward revision to the September number as well, though the market seemed to overlook the 60k downward revision to August.
Despite this recent data would appear to suggest that markets could well be underestimating this month’s non-farm payrolls number. Expectations are for a number of 232k slightly below September’s better than expected number of 248k, but it wouldn’t be a surprise to see a number well above 250k, towards 300k.
So the FTSE 100 is currently 47.32 points higher at 6598.47.
Royal Mail is among the leading risers, up 12.3p at 464.6p after Goldman Sachs resumed coverage with a buy recommendation and 575p price target. The bank said:
We believe Royal Mail should benefit from margin improvements, as the restructuring gathers pace, and from the potential disposal of the London real estate (which we value at 80p a share).
Despite its relatively weak positioning, owing to high competition in both parcels and mail, we believe Royal Mail offers significant earnings growth potential, as it strives to increase its efficiency levels and continues to grow in parcels. While the parcels market remains competitive in the UK, Royal Mail has been able to increase its market share from 35% in 2011 to 38% in 2013.
On the other hand, its staff costs represent 60% of the total costs, compared to 45%, on average, for the other postals under our coverage; bringing this down to the average cost of the other postals could result in as much as £1.3bn of savings. With 31% of the employees over 30 years old, we believe that natural attrition, in addition to specific efficiency plans, will help to reduce costs and gradually bring Royal Mail margins within the lower end of the regulatory range of 5-10%, from 4.5% in 2014. We forecast earnings before interest and tax margins to improve to 6.0% by 2017 and 6.9% by 2019, and we expect Royal Mail to be able to deliver 8.7% EBITDA and 16% earnings growth over 2014-2017.
Supermarkets have also moved higher in the wake of better than expected figures from Morrisons, 2.9p better at 175p. J Sainsbury is up 11.5p to 273.7p ahead of its latest update next week, while Tesco is 7.7p better at 189.2p.
Mining shares have gained ground as metal prices recover, with Fresnillo adding 24.5p to 724p and Rio Tinto rising 76p to 3043.5p.
But RSA Insurance continues to fall after Thursday’s update, down another 11.7p at 448.4p.
Admiral has lost 15p to £12.44 as it said third quarter turnover fell 3% in the face of a competitive car insurance market. Chief executive Henry Engelhardt said:
We anticipate that future earnings will be impacted by the decline in premiums experienced across the market in recent years, couple with a return to higher claims inflation.
National Grid has risen 4p to 921p after its half year profit rose 16% after a strong performance in the UK. But Angelos Anastasiou at Whitman Howard issued a sell note:
The group’s adjusted pretax profit is slightly ahead of market expectations, but in line with our number, while the earnings per share is slightly ahead of both our and the market’s expectations. Overall UK returns are said to be likely to improve in the current year, whereas the US overall return for 2014 is likely to be in the range 8.5%-8.9% (compared with 9.0% in 2013. This is due to “headwinds from the removal of bonus tax depreciation (leading to additional rate base growth) and additional gas main repair costs”.
We remain wary of the longer term story at NG, especially in the US, and still see a lack of value at present levels.
Canary Wharf owner Songbird Estates added 2p to 322p after it rejected a 295p a share bid from Qatar Investment Authority and Brookfield Property Partners as materially undervaluing the business. Peel Hunt’s James Carswell said:
The offer price is a 13% premium to the share price prior to the announcement, but an 8% discount to the last reported net asset value and a 16% discount to our December 2014 net asset value forecast. Given the inherent value within the development portfolio, we are not surprised by today’s rejection of 295p. An improved offer remains a real possibility, and this would likely need to be around 350p or higher to be successful.
