Leading shares are ending the week on a strong note, with investors buoyed by continuing hopes that the US Federal Reserve will refrain from raising interest rates this year.
The FTSE 100 is up 39.15 points at 6377.82, but is still on course for a slight loss over the whole weak (currently down 0.6%). Weak US consumer price figures added to the feeling there would not be a rate rise this year, while a fall in jobless claims also suggested the country’s economy was not slowing down too dramatically.
Industrial production and consumer confidence figures later could give more clues about how the US economy is progressing.
But Primark owner Associated British Foods is missing out on the rally, down 20p at £32.76 as Societe General reduced its recommendation from buy to hold on valuation grounds and some slight concerns about its US expansion. Analyst Warren Ackerman said:
Yesterday, ABF’s chief financial officer John Bason, and head of Primark Paul Marchant, hosted an analyst trip to Madrid, ahead of the opening of Primark’s flagship store in Spain. Primark has been in Spain for a decade (its first European location) yet it is only now that it has opened in a prestigious high street location in Spain, illustrating just how much runway Primark still has in Continental Europe. Located on Gran Via - the Oxford Street of Madrid – it is situated next door to H&M. At 132,000sq ft, it is the second largest store in the entire Primark estate and is the 41st in Spain and 6th in Madrid. Primark has been a huge success story in Spain with a 9% volume share (more than 300 basis points more than #2 player) in a very fragmented market. Cannibalisation could be a short term issue in Spain (as it has been recently in Germany and Holland) but it’s not something we consider to be a fundamental concern.
We are downgrading on valuation as it has hit our £33 target price. ABF trades on 33 times 2016 PE which implies around 40 times for Primark and 20 times EBITDA implied in our sum of the parts. We continue to think Primark will compound with like for like growth averaging 2-3% per annum and double digit space growth, but this is now fairly reflected in valuation. We also confess to being a little nervous about its US debut. Inevitably there will be many lessons to learn as the Primark brand is not known in the US and it will take time to gain traction. We see the potential in North East US and Primark’s ‘pull model’ means its learns quickly, but we think the roll-out programme beyond its initial 8 US locations is likely to be slow and steady. Early comments that it has been a little surprised by customer shopping patterns (Sundays busier than Saturdays) and the uniqueness of every location suggests it’s very much in learning mode. This isn’t in anyway a surprise, but does suggest there could be some ‘growing pains’ in the US. ABF will update on its debut in the US at its 2015 results in November.
In terms of LFL growth, at its last trading statement it was confirmed that 2015 like for like will be 1% but with a strong final quarter up 2-3%. Comps are undemanding in the first quarter of 2016 so we would expect a further acceleration in like for like growth in the short term but currency remains a very significant headwind across the business and the key reason that 2016 is likely to see little earnings per share growth. Belatedly marking to market for foreign exchange, we downgrade 2016 earnings per share estimates by 4% which means waiting to 2017 until we see a meaningful earnings bounce-back, assuming foreign exchange headwinds don’t get in the way again. We continue to like the fundamental story but 33 times PE for 2017 earnings per share recovery and some risk in Primark US means that the risk-reward is more balanced from here (in our view).
Mining shares are among the gainers with Glencore up 3.5p at 121.25p and Anglo American adding 3.5p to 680.5p. Rio Tinto has risen 11p to £25.24 as a strong performance in iron ore lifted its third quarter results. Bernstein analysts said:
Rio unsurprisingly reported record high levels of iron ore shipments in the third quarter. Rio’s competitive position remains unbeaten in iron ore due to the world-class quality of its assets, especially in the current price environment. The picture looks quite different in copper. Production fell as much as 24% year on year in the third quarter despite the ramp up at Oyu Tolgoi. Moreover, Rio has revised downwards its production guidance for this year to 510kt, from a range of 500-535kt previously. We think that the current copper prices should encourage all producers, even the low-cost miners, to curtail the highest-cost portion of their production. Overall, operational results were broadly in line with our expectations. We reiterate our outperform rating on the stock.
But with gold and silver edging back as investors turn away from supposedly safer assets again, Mexican precious metals miner Fresnillo has fallen 6p to 754.7p and Randgold Resources is down 6p at £44.88.
Among the mid-caps Icap is down 3% to 448p as Barclays downgraded the inter-dealer broker from buy to equal weight. According to Thomson Reuters, no analyst covering the stock now has a buy rating. Barclays said:
The Icap share was a strong outperformer between January and May but since then has come off and is now only up 1% year to date (versus FTSE Allshare down 3%). Our analysis of Icap’s electronic volumes shows weakening trends in recent months contributing to this. Volume comparisons get tougher from September 2015 onwards and the European Investment banks are continuing to shrink their FICC [Fixed Income, Currencies and Commodities] divisions. With Icap management suggesting its cost response is likely to be limited to support function rationalisation and slowly lowering comp. ratios, we believe the earnings per share recovery story is stalling. We cut our rating to equal weight and target price to 500p [from 600p], reflecting lower earnings per share estimates and raised discount rate to 10.5%.
