FTSE falters despite Dow record but graphene company shares …
Much of the market focus last week was again on how long central banks would keep the money taps switched on. Optimism that any easing of the economic stimulus would not happen until next year helped push the Dow Jones Industrial Average past the 16,000 level for the first time, and gave support to European markets. But lower down the pecking order, a UK high tech company caught the eye as it joined the Aim market and made an even better start to public life than Royal Mail1.
Applied Graphene Materials, a business spun out of Durham University and backed by intellectual property fund IP Group, was floated at 155p on Wednesday 2valuing the business at 26m. But by the end of the week, the shares had more than tripled to close at 471.5p. The company specialises in producing graphene, a one-molecule thick layer of graphite which is stronger than diamond and conducts electricity better than copper.
Enthusiasts believe the material could revolutionise the fields of medicine and manufacturing, and investors seem to have bought the story. IP Group, which still owns 14%, added 5.2p to 158.2p. There is unlikely to be a government inquiry into Applied Graphene’s share price performance.
But bankers behind the flotation of Royal Mail were not so lucky, appearing before a select committee on the same day as the Applied Graphene float amid accusations they may have priced the postal company’s flotation too cheaply. As it happened, on the same day as the hearing, analysts at one of those banks, UBS, issued a note advising clients to sell the shares. Other banks also began issuing research on the business, with opinion fairly mixed.
Barclays was also negative, although it shied away from a sell recommendation despite a target price some 16% below the level when the bank’s note was issued. At Investec, analyst John Lawson advised clients to hold the shares, but Shore Capital analyst Robin Speakman was a buyer:
We see long-term opportunity and so take a long-term view of the investment potential.
Royal Mail closed 6p lower at 539p, following a warning from regulator Ofcom to improve its services.3 Overall the FTSE 100 finished at 6674.30 on Friday, down 7.03 points on the day and down 19 points on the week.
There were mixed signals from the Federal Reserve about the continuation of its $85bn a month bond buying programme, following the minutes of its latest minutes and comments from various board members. But with the dovish Janet Yellen increasingly likely to replace Ben Bernanke as the head of the Fed, investors came round to the view any slowdown in the Fed’s stimulus would not come until next year. Hence the Dow Jones reaching a record close of 16,009 on Thursday, and adding another 17 points by mid-afternoon on Friday.
Meanwhile the Bank of England’s statement from its recent meeting suggested it was in no rush to raise interest rates, while there was much talk the European Central Bank could even sanction negative rates. This was reinforced by disappointing manufacturing data for the eurozone in November, while the latest Chinese purchasing managers index also came in below expectations. Worries about the Chinese economy hit metal prices and left mining shares out of favour. Vedanta Resources4 lost 28p to 895p and Fresnillo5 fell 23p to 840.5p. Antofagasta6 dropped 7.5p to 789.5p after a sell note from Investec.
Analyst Marc Elliott said:
Copper concentrate producers are negotiating treatment and refining charges for 2014, and face cost increases. Recent settlements are moving from around $70 a tonne and 7 cents a pound toward $90 and 9 cents reflecting greater copper concentrate availability. Antofagasta produces copper concentrate from its two key mines, Los Pelambres and Esperanza.
Applying higher charges reduces our valuation to 716p from 737p adding around 5 cents a pound in cash costs; we maintain a sell recommendation.
Finnish nickel miner Talvivaara Mining Company7 dropped 11% to 3.01p, continuing Thursday’s fall after it had failed to raise ‘ 40m from a group of shareholders to restructure its debt. It repeated it could face bankruptcy unless it found new sources of finance. The miner said earlier in the month it was seeking a court supervised restructuring.
It ran into problems when its production was disrupted by floods, and was also hit by falling nickel prices. Tui Travel8 lost 30.3p to 359p after a major shareholder disposed of his stake. Norwegian shipping magnate John Fredriksen sold his 5.4% shareholding at 366p, valuing it at 220m, it was announced late on Thursday.
But at the same time Fredriksen increased his stake in Tui Travel’s parent, tour operator Tui AG, to more than 20%, raising the prospects of a renewed attempt to merge the two businesses. But another big stake sale had the opposite effect. Essar Energy9 jumped nearly 4% – up 3.5p to 100.6p – after the Indian group said its major shareholder, the Essar Global Fund, would sell some of its shares.
The move is designed to ensure Essar meets the UK listing authorities’ minimum free float requirement of 25%. The fund added:
We believe the shares of Essar Energy represent exceptional value and will therefore only sell such minimum number of its shares in the company to enable Essar Energy to meet the minimum free float requirement.
We expect Premier Inn to outperform on the back of its dynamic pricing and benefit from its asset heavy structure in an upswing.
Medium term margin pressure from the move to London and at Costa International should be largely offset by faster top line growth. Our new forecasts are 3% and 6% ahead of consensus in 2015 and 2016.
The Africa-focused group said it had struck oil at the Agete-1 well in northern Kenya. This is its fifth discovery in the region, and follows disruption at Tullow sites in Kenya last month after protests by local residents demanding jobs and other benefits. A deal was reached on 8 November with local leaders, allowing Tullow’s operations to resume.
At the same time as the Kenyan disruption, Tullow announced a field in the Norwegian Arctic where the company has a 20% stake came up with a dry well which would be plugged and abandoned. On the new find, Tullow’s exploration director Angus McCoss said:
This highlights the emerging world class exploration and production potential within our rift basin acreage. An intensive campaign for 2014 includes appraisal and exploration within this first basin and pioneering wells targeting the prospectivity throughout the entire chain of similar rift basins.
Resolution14 rose 0.3p to 345.1p after the insurer said it was in talks to sell its Luxembourg-based Lombard division, which sells life assurance products to rich clients in Europe, Latin America and Asia.
Oriel analysts said:
Press reports suggest the sale could raise around 400m. We think it quite likely that any proceeds would be returned to shareholders by way of a special dividend, which could excite some interest in the shares.
We could however see two issues. Firstly it is not clear who would buy it.
As a business it is small, somewhat niche and unique. It does not obviously fit with anyone else. A private bank could be interested but this could impact its relationships with other private banks.
Private equity may be an option except for the second problem. The second issue is financial. Lombard generates a lot of value but not much cash.
Lombard had an embedded value of 651m at 30 June 2013, of which net worth (realisable) was 80m and value of in force was 571m, which is not cash. Private equity is usually interested in businesses that generate cash now, rather than businesses that generate value now and cash in the future. Lombard paid a dividend of 4m to group in 2012.
Morrisons outlined a very credible and well thought out strategy for its online offer to be launched in January 2014. However, we remain deeply concerned about the damaging impact to the industry from the exodus to online shopping.
Morrisons continues to suffer like for like declines in its core estate; we remain underweight with a 260p target price .
He anticipate that its chief executive’s attention in 2014 will move towards M&A to offset the impact of the anticipated genericisations over the next three years.
Creative corporate finance such as a restructuring of the existing diabetes joint venture with Bristol-Myers Squibb, coupled with “long runway” acquisitions such as Actelion could provide a useful bridge to organically fuelled growth.
Potential acquisition of Actelion could provide 12% earnings accretion through (i) potential pipeline driven revenue growth (ii) operating expenditure reduction. Astra’s chief executive has previously indicated that they are looking for “long runway assets”. It was reported that Astra was a late stage bidder for Onyx (subsequently acquired by Amgen for around $10bn).
We note the ongoing reports of M&A speculation around Actelion which shares a similar market capitalization to Onyx.
Finally, it was a bad week for the UK’s outsourcing sector. Serco17 saw the departure of a second senior director, amid its attempts to rebuild its reputation with the government after accusations of overcharging taxpayers. The company announced on Thursday its UK and Western European head Jeremy Stafford would follow chief executive Chris Hyman out of the door.
Analysts at Oriel said:
Serco’s business has hit a wall, while the UK government completes its audits and reviews, and then decides on the relationship that it wants with Serco going forward. We view the share price as discounting available public information, but it is what happens next that matters.
What happened next was that Serco lost out on a 30m contract to run three prisons in Yorkshire. Serco was the only remaining bidder for the contract, but the prisons will now be kept in public hands.
It revealed long standing chief executive Paul Pindar was stepping down to return to private equity.
- ^ More from the Guardian on Royal Mail (www.theguardian.com)
- ^ was floated at 155p on Wednesday (www.theguardian.com)
- ^ a warning from regulator Ofcom to improve its services. (www.theguardian.com)
- ^ More from the Guardian on Vedanta Resources (www.theguardian.com)
- ^ More from the Guardian on Fresnillo (www.theguardian.com)
- ^ More from the Guardian on Antofagasta (www.theguardian.com)
- ^ More from the Guardian on Talvivaara Mining Company (www.theguardian.com)
- ^ More from the Guardian on Tui Travel (www.theguardian.com)
- ^ More from the Guardian on Essar Energy (www.theguardian.com)
- ^ More from the Guardian on Whitbread (www.theguardian.com)
- ^ More from the Guardian on William Hill (www.theguardian.com)
- ^ a few recent disappointments (www.theguardian.com)
- ^ More from the Guardian on Tullow Oil (www.theguardian.com)
- ^ More from the Guardian on Resolution (www.theguardian.com)
- ^ More from the Guardian on Morrisons (www.theguardian.com)
- ^ More from the Guardian on AstraZeneca (www.theguardian.com)
- ^ More from the Guardian on Serco (www.theguardian.com)
- ^ More from the Guardian on G4S (www.theguardian.com)
- ^ More from the Guardian on Capita (www.theguardian.com)
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FTSE falters despite Dow record but graphene company shares …