Pharmaceutical and telecoms shares are in the spotlight as leading shares slip back after three days of gains.
The FTSE 100 is currently 17.90 points lower at 6401.25, with a weak Chinese property market, disappointing results from Amazon overnight and a confirmed case of Ebola in New York all helping to take the shine off shares. UK GDP has little effect so far, meeting expectations of a 0.7% rise. Mike McCudden at Interactive Investor said:
Despite some positive corporate and economic news the latest Ebola scare in the US has given nervous investors cause to retreat. With the risk of the virus spreading being very low this may appear to be an opportunity to invest. However, with on-going global economic concerns and upcoming data from the euro zone investors may be well advised to sit on the sidelines.
On the stock front, Amazon has not helped the outlook for the US open today after reporting a huge third quarter loss.
Shire is down 19p at £38.76 ahead of third quarter figures due later. US predator AbbVie recently called of its proposed bid for the company due to changes in tax inversion rules, so the results will be examined to see where Shire intends to go from here.
Meanwhile Hikma Pharmaceutical has dropped 105p to £17.95 after US regulator the Food and Drink Administration raised issues regarding its plant in Portugal. The warning letter follows an inspection by the FDA in March. Analyst Savvas Neophytou at Panmure Gordon said:
The stock is not priced for downgrades. Just as well the warning letter by FDA regarding the Portuguese manufacturing facility seems to be relatively low grade and is unlikely to affect manufacturing.
The warning letter relates to the Portuguese manufacturing facility, a site that is involved in the manufacture of mainly injectable products. The warning letter relates to investigations and environmental monitoring at the facility, which a low grade warning and should not necessarily impact production short-term. Worryingly, though, Portugal also set the blueprint for the management of sites in the US (e.g. Cherry Hill) so although on the face of it, this letter is not a particular worry, it will remind investors that pharmaceutical manufacturing is not without risk and in fact Hikma itself has benefited in recent years from manufacturing constraints of competitor Hospira.
The stock had risen significantly in recent weeks in anticipation of an involvement in the transformative acquisition of CorePharma LLC, a portfolio company of PE house RoundTable Healthcare, which has now been sold for $700m to Impax Laboratories. Hikma is unlikely to enter a competitive bid situation. The transaction – had it happened - was expected to add around $250-350m revenues and $90-105m EBITDA sort of range. To us, the deal would have made strategic sense.
Among the telecoms groups, BT is down 8.8p at 367.8p after Morgan Stanley moved its recommendation from equal weight to underweight. The bank pointed to increased broadband competition and growing pension liabilities, and suggested it may pay up to £1bn a year for future Premier League rights for its sports channel, compared to around £246m now. The bank said:
The next Premier League auction is set for early 2015. BT currently broadcasts matches at Saturday 12:45pm. Our AlphaWise survey shows that this slot is the least popular over the weekend. Hence, BT could bid aggressively for the more popular Sunday 4pm viewing. BT currently pays £246m per annum on Premier League content. If BT were to spend £1bn per annum for rights to the 2017/18 season, this would represent a 25% downgrade on 2017 estimated free cash flow and lower the free cash flow yield from 7.9% to only 5.5%. Of course, BT could charge more for BT Sport and target new customer wins, but there are clearly greater risks to the BT equity story, as it faces the transition to pay-TV.
As for the pension, Morgan Stanley estimated a pre-tax pension deficit of £5.5bn as of June 30, 2014 from the last triennial valuation of £3.9bn.
TalkTalk Telecom has slipped 5.5p to 286p as Nomura cut from buy to neutral with its target price lowered from 330p to 300p. Dealers had heard talk earlier in the week that Vodafone, up 2.2p at 199.05p, or BSkyB, 9.5p better at 869p, might be interested in the business. Nomura said:
We have been increasingly concerned that TalkTalk would not be able to maintain the earnings momentum required to justify its valuation premium. First, it was the UK’s VAT ruling on early payment schemes, second, it was Ofcom’s final decision on [BT’s superfast broadband] charges, which were less than favourable for resellers. And now consensus figures suggest a mountain for TalkTalk to climb in the second half in order to meet the market’s full-year estimates. Even if last year’s seasonality in marketing spend is observed and there is a large price hike to affect the fourth quarter, we expect that an 80% second half over first increase in EBITDA may prove challenging and earnings momentum is set to stall at best. In addition, the unexpected departure of the chief financial officer does not fill us with confidence that his replacement may not take a natural opportunity to revise targets.
Meanwhile Morgan Stanley’s note indicated it preferred Vodafone over BT.
Back among the fallers, Pearson has fallen 27p to £11.42 after the publishing and education group reported flat underlying nine month revenues and said chief financial officer Robin Freestone would step down by the end of next year. Numis said:
All in another in line statement is a small positive, the loss of the CFO negative. No change to forecasts. We remain comfortable with our Hold, we see better safer value elsewhere in the sector.
