The Santa rally continues, albeit in thin trading as traders wind down for Christmas, but some are missing out on the optimism.
Reckitt Benckiser has completed the demerger of its pharmaceuticals business, the heroin substitute specialist now known as Indivior, after shareholders gave their approval. Reckitt chief executive Rakesh Kapoor said:
We wish the company well and believe both businesses will benefit from being able to focus on their core competencies. Reckitt will continue to pursue its strategy of being a global leader in the health, hygiene and home categories.
Reckitt shares have fallen as a result of the demerger, down 60p at £52.50, while Indivior is sitting at 145p.
Reckitt has not been helped by Exane BNP Paribas issuing an underperform rating in the light of the split. The bank said:
Don’t forget that Indivior will leave Reckitt with around $40m-$50m of stranded costs i.e. cost allocations that will no longer be covered by Indivior. As a consequence of this, we need to rebase our continuing ‘core’ margins by around -30 to -40 basis points.
We materially revise our earnings to reflect the Indivior spin-out, updated foreign translation and the aforementioned stranded costs. We revise our 2014 earnings per share by -15%, 2015 earnings by -14% and 2016 earnings by -13%.
In light of the Indivior spin and our earnings revisions, we revise our target price from £50 to £45. We maintain our underperform rating.
Overall the FTSE 100 is currently 26.30 points higher at 6603.04 after an overnight rally on Wall Street. With oil fairly stable - Brent crude is up just 0.37% at $60.3 a barrel - investors are reasonably calm ahead of the festive shutdown. But there could be some volatility with the latest Greek election vote and US GDP figures later.
Weir, which supplies pumping equipment to the energy industry, has recovered 46p to £19.20 but BG Group continues to be weak, down 17.5p at 868.6p.
Afren has added another 1.61p to 51p after Monday’s revelation of bid interest from Nigeria’s Seplat. But Oriel Securities was sceptical a deal would be done. Analyst Dragan Trajkov said:
In our view, while such a combination has advantages in terms of geographic focus and balance sheet strength, typically an early leak of a possible transaction results in no transaction (for instance, Petroceltic/Dragon Oil, CEPSA/Salamander, Bowleven/Dragon Oil). We note that an agreement on valuation is made more difficult post a significant share price movement.
Furthermore, in this particular case, you would have a company with a free cash flow and dividend (Seplat) buying a company with high debt (Afren), probably causing some Seplat shareholders to at least question the deal at present (ie it would have to be cheap). Given these arguments, and the fact that this seems to be an early stage of approach and that Seplat has only until 19 January to make an offer, we believe that, at this stage, there is more likelihood than not that this transaction will not happen. Therefore, we would not encourage investors to buy into Afren simply on the back of this announcement.
Supermarkets are higher on hopes of a Christmas boost, with troubled Tesco up 3.65p to 184.65p and Morrisons 3p better at 179p.
