Leading shares ended the week on a downbeat note, albeit off their worst levels following stronger than expected US jobs data.
The FTSE 100 finished down 12.49 points at 6853.44 as concerns about the standoff between Greece and the eurozone intensified ahead of a key Eurogroup meeting called for next week.
But news that the US added 257,000 jobs in January, compared to expectations of a 236,000 increase, helped give some support to the markets, lifting the Dow Jones Industrial Average by around 50 points by the time London closed.
Chris Beauchamp, market analyst at IG, said:
Of all the epithets to employ to today’s non-farm payrolls up, ‘Goldilocks’ might be the best. Jobs growth was strong, but not too strong. Meanwhile earnings growth was better as well, providing the rationale for a stabilisation that still leaves the index tantalisingly close to 6900.
Yet again it is the mining sector that has contributed most to the losses today, as the tale of oversupply that has caused such woe for the sector overall rears its head again.
The biggest fallers were in fact precious metals miners following a drop in gold and silver prices in the wake of the US jobs figures, which prompted renewed talk of a US interest rate rise. So Randgold Resources dropped 240p to £53.10 and Fresnillo fell 37p to 860p.
Barratt Developments lost 10.5p to 459.7p as Liberum, in a hefty note on housebuilders, downgraded the business from buy to hold. On the sector the broker said:
The sector’s valuation is retesting highs, but is likely to push on as strong, cash-backed returns become relatively more attractive. The calmness of the land market makes this cycle genuinely different, and industry structure underpins returns. There is a wall of worry to climb, but the risks are all known and fairly limited. A 5% dividend yield is attractive in a low-return world.
The four big concerns for the sector are valuation, the General Election, margin risks and rate rises. Each of these poses credible but limited risk, all of which should be offset by the stock market’s rising appetite for high returns and yield. The General Election may only create risk if it proves inconclusive; and rate rises are only an issue if their pace exceeds wage growth.
But Aberdeen Asset Management added 10.1p to 440.9p after Societe Generale issued a positive note on the asset management group.
Meanwhile Numis analysts suggested Aberdeen could be interested in asset management group Russell Investment, put up for sale by the London Stock Exchange. Numis said:
The LSE said that it has “already received a number of expressions of interest” and the press are suggesting there are “at least three interested buyers” (of which CIBC is named as one, others unnamed). It is our speculative view that Aberdeen could be among those who have taken a look. In our view, at the press rumoured price of $1.4bn (assuming there is no material surplus capital to be injected into the business before sale) is correct, then relative to historic earnings of around $80m, it does not stand out as being obviously cheap (around 17.5 times earnings) on a headline basis for an asset manager.
However, Russell Investment appears to be cost inefficient compared to most other asset managers with scale ($256bn assets under management and $784m revenue but only around 17% operating margin versus 30%-50% industry norms). Aberdeen as a known (and successful in our view) cost cutter could therefore possibly add value. In our view, they would need to extract a 30% plus margin to make it value enhancing at a price of $1.4bn.... Additionally, Aberdeen management (for better or worse) have made it widely known they want to diversify the business away from its reliance on emerging markets and related equities, which this deal would do. They have also said that the US is a market they want to expand into. Finally, management also appeared to give the impression recently that they would look to seek shareholder approval for any future deals, possibly hinting that they are looking at a transaction of more than 10% new share issuance (which $1.4bn would be).
We bring this to the attention of investors purely as something to look out for in the near future and be aware of (particularly with regards to the potential for a dilutive rights issue). It is a speculative view based on us piecing together various bits of information and clearly it might not happen, but we can nonetheless see logic as to why management might consider it.
Capita climbed 15p to £11.58 as it was chosen to provide services such as IT and personnel services, worth up to £5bn, to the National Health Service.
GlaxoSmithKline added 17p to 1517.5p as the pharmaceuticals group announced positive results from a phase 111 trial of its dabrafenib and trametinib combination for treating melanoma. Analyst Brian White at Shore Capital said:
Importantly a positive overall survival benefit in the COMBI-d study forms part of the oncology asset sale to Novartis, $1.5bn contingent consideration determined by a positive overall survival outcome. This puts the final price paid by Novartis for GlaxoSmithKline’s oncology assets to $16bn, £4bn of which is due to be returned to investors via a B Share scheme following completion of the asset swap which also includes Glaxo’s purchase of Novartis’ Vaccines unit and the establishment of a Consumer Health joint venture controlled by Glaxo.
But AstraZeneca fell 62p to £44.67 as Credit Suisse issued a downbeat note. The bank put a neutral rating on the business, saying:
Fourth quarter earnings were significantly below expectations, as management invested heavily in R&D and SG&A. This highlights AstraZeneca’s dilemma: the pipeline is rich with innovation but needs heavy investment to realise its full potential. At the same time, Nexium, Crestor, and EU Symbicort are going generic, and key launch brands in respiratory and diabetes need continued investment in highly competitive categories. To mitigate this, the chief executive has introduced a new source of earnings (“externalisation revenue”) selling/partnering non-core pipeline assets to prop-up earnings. The problem is the magnitude and consistency of earnings that ‘externalisation’ needs to generate. We estimate that AstraZeneca needs to realise at least $1.5bn of proceeds from asset sales annually in 2015, 2016 and 2017 in order to keep earnings per share flat at 2014 levels and support the dividend.
But should investors really pay 15-20 times PE for one-time gains on partnering/disposals? We see better opportunities elsewhere in EU Pharma (Novartis, Sanofi, Bayer).
Among the mid-caps, Poundland put on 55.2p to 413p after agreeing to pay £55m for rival 99p Stores.
But Tate & Lyle lost 91p or nearly 14% to 573.5p as it said profits would be below the level it expected in September, its third warning in a year.
Finally Aim listed Clean Air Power closed 51% higher at 2.65p as it received certification from the US Environmental Protection Agency for the US version of its dual-fuel engine system preparing the ground for commercial launch.
