China’s GDP news gives support to mining shares, while ENRC stake sale swirls around Kazakhmys again
Mining shares led the market higher, as the latest data from China showed the country’s economy was still growing, albeit more slowly than previously.
China of course is a major consumer of commodities, and the figures eased fears that mining companies’ revenues could come under pressure. So Rio Tinto rose 94p to £30.20, Eurasian Natural Resources Corporation climbed 15.2p to 408.8p and BHP Billiton was 54.5p better at 1805.5p.
Kazakhmys climbed 42.5p to 744p on renewed talk that it could swap its 26% in ENRC for Glencore’s 51% stake in zinc and gold group Kazzinc. Analyst Paul Cliff at ING said any deal would have to include a $500m payment from Glencore to make up for the difference in valuation between the two businesses. He said a deal would benefit Kazakhmys, but it was not clear whether Glencore would want to sell the business. Cliff said:
Any potential deal would likely generate operational and capital expenditure synergies, as well as an improved growth profile for Kazakhmys.
An asset swap is more likely than a cash sale of Kazakhmys’ ENRC stake: a cash exit appears unlikely following ENRC’s poor share price performance, in our view. Kazakhmys has little need for additional cash as its balance sheet is strong and its key growth projects enjoy low-cost Chinese funding. We believe returning cash proceeds from any potential sale of ENRC to shareholders could also result in Kazakhmys being relegated from the FTSE 100 index. We think management would rather swap Kazakhmys’ minority stake in ENRC for a controlling stake in additional base metals assets in central Asia.
While we feel comfortable that Kazzinc would be a good strategic fit for Kazakhmys, Glencore might not, of course, be a seller. Glencore has already agreed with Verny to increase its ownership in Kazzinc from 50.7% to 93% for $3.2bn. However, we note that the average equity value of mid-tier zinc producers has almost halved since Glencore’s IPO, while the intended IPO of Kazzinc’s gold assets is no longer likely to generate additional value, in our view.
Our [estimated value] for Kazzinc (100% basis) is $4.3bn, valuing Glencore’s 50.7% stake at $2.2bn. Our [valuation of Kazakhmys' ENRC stake is] $2.65bn.
We think the potential for a value-accretive exit from ENRC remains too speculative at this stage, and we maintain our sell recommendation for Kazakhmys. We continue to believe the market is underestimating Kazakhmys’ cost-inflation problem and consensus earnings per share is too high (albeit falling rapidly). Our 630p target price represents a 15% discount to our net present value estimate for the company.
Anglo American added 35p to £20.45 despite Liberum Capital moving its recommendation from buy to hold ahead of the company’s half year figures on 27 July. Analyst Dominic Okane said:
We expect pre-reporting by key divisions [Amplats, Kumba, De Beers] will deliver disappointment ahead of the plc’s results, triggering another cut to consensus estimates. Anglo has performed in line with the pack year to date but has had the worst earnings momentum alongside bid target Xstrata.
Long term Anglo holders have held out in hope of an Amplats de-merger or a bid materialising. Both now look remote and a premium-justifying bid by Glencore Xstrata is simply wide of the mark.
Elsewhere in the sector Polymetal recovered 56p to 877p after a fall earlier in the week on news it had been ordered to pay $27m in taxes and fines relating to the pricing of silver contracts.
Overall the FTSE 100 finished 57.88 points higher at 5666.13, as investors shrugged off Moody’s downgrade of Italy and further details of Spain’s budget cuts. Over the week the leading index was virtually unchanged, amid protests in Europe over austerity and disappointment that the US Federal Reserve appeared reluctant to take more aggressive measures to boost the world’s largest economy. The US reporting season began with many companies showing the scars of the global downturn.
Among the risers, Burberry recovered 71p to £12.29 following Thursday’s falls on signs of a trading slowdown.
ITV added 2.7p to 74.95p, helped by news that US cable group Comcast had sold its 15.8% stake in History Channel owner A&E Television Networks to Disney and Hearst Corporation for a better than expected $3.02bn. There was also a spot of Friday afternoon bid speculation.
BT rose 7.6p to 222.3p after a positive note on the telecoms sector from Credit Suisse. It said:
We are now more positive on the European telco sector, having increased our house overweight stance versus the market. We continue to see scope for BT to beat consensus on cost cutting. Business spend is likely to be weak again, but expectations are lower now.
Aggreko added 17p to £19.36. The temporary power supply company was hit on Thursday by a warning on sales from US group Cummins, one of its key suppliers. Cummins said US demand for power generation equipment had weakened, and it saw no improvement in sales from Brazil, China and India. But Caroline de La Soujeole at Seymour Pierce said:
Although we acknowledge that Aggreko is a significant customer of Cummins power generation segment (at around20% according to some market estimates), we do not believe Cummins downgrade is a precursor of bad news from Aggreko. One of Aggreko’s key strength is its scale which enables it to respond quickly to any changes in demand. In its pre-close trading update, which was less than a month ago, Aggreko raised its capital expenditure guidance by £50m to £415m. We remain comfortable with our positive stance on the company. Forecasts remain unchanged. The recent weakness in the share price represents a buying opportunity in our view with the shares trading on a prospective PE of 18 times.
But continuing criticism of G4S over its poor performance in providing security for the London Olympics saw its shares fall 4.3p to 278.7p.
Experian lost 19p to 932p despite the credit information company announcing a 14% rise in quarterly revenue, driven by a strong performance in north America. Caroline de La Soujeole at Seymour Pierce said:
Overall this is a very good performance from Experian. However we are concerned by the slowdown in UK and Latin America credit services – combined these two segments account for 25% of group sales. We retain our reduce recommendation and 840p target price.
Power group SSE dropped 12p to £14.08 after sell notes from both Citigroup and SocGen, while Barclays fell 1.35p to 162.15p as the libor scandal continued to cast a shadow over the bank despite the departure of chief executive Bob Diamond. Poor results from US bank JP Morgan did not help sentiment.
Defence companies were in focus during the Farnborough Air Show, on hopes of a boost to business. BAE Systems rose 6.4p to 306.4p while Chemring – which was also the subject of takeover talk – climbed 1.2p to 279.2p.
But Booker led the FTSE 250 fallers, down 2.35p to 88.95p as Shore Capital downgraded the cash and carry wholesaler from hold to sell. Analyst Clive Black said:
Booker’s stock valuation is now amongst the global consumer stars. Such ratings imply no disappointment whatsoever in our view; and whilst we are not suggesting a disappointment is around the corner, we note the inclement British summer cannot be doing Booker any favours, noting evidence of soggy trading in the soft drinks market.
Penny Stock Picks