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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 23 February 2015 at 10:00 GMT

Week Ahead: Defence cuts to hurt BAE Systems

Chief Executive / Prime Wealth Group
United Kingdom
  • Equity markets ended last week on positive note
  • Anglo American forecast tough times ahead
  • BAE Systems and Centrica likely to disappoint this week
By Patrick Butler

In a Nutshell: Worries about hostilities in Ukraine, the possible breakdown of negotiations between Greece and the EU on an extension of bailout terms and the overall state of the Eurozone saw the FTSE trading lower at the start of last week. 

With a new version on implementation of the Minsk agreement for a ceasefire in Ukraine following a meeting between Merkel, Poroshenko, Hollande and Putin, signs of movement towards a compromise over Greece and a surprisingly strong 0.7% quarterly growth figure reported for Germany on Friday for the last three months of 2014, the market ended the week up 0.29%.

European and other international markets were propelled higher still; the FTSE being held back by concerns over a slowdown in the UK’s rate of growth and by its relatively high weighting of mining stocks.

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FTSE 100 last five trading days: source – www.cnn.com

Announcing its full year numbers last week, for instance, the mining giant Anglo American announced $3.9bn of write-downs, most of which were taken on its huge Minas-Rio iron ore project in Brazil. Underlying earnings for 2014 fell by a quarter to $4.9bn and the company reported a third straight loss (of $2.51 billion). Mark Cutifani, the CEO, expects the situation to remain pressured. “It is going to be a tough one or two years,” he said in a conference call on Friday. “The supply we’re seeing on the bulk side [in iron ore, coal etc.] will weigh heavily on the market.”

A couple of other news items from other sectors are worth noting: 

  • Kier Group, the construction and property company, announced that it had secured new contracts worth £177m in hospital building, road improvements, and housing maintenance contracts.
  • As we anticipated, Rolls Royce, the engineering giant saw full-year revenues and profits fall. Underlying pre-tax profits in 2014 fell 8% to £1.62bn, roughly in line with October’s guidance. The company also cautioned on the outlook for 2015. “Since we last gave guidance, the external environment has deteriorated in some of our major markets. In particular, oil prices have halved over this period, creating increased uncertainty for many of our markets and customers, particularly in Marine Offshore."
  • Sky fought off a challenge from BT to keep its current share of the live UK broadcasting rights to the Premier League from 2016 to 2018 at a price of almost £1.4bn a season. The market reacted negatively to the news – welcoming the outcome - but fretting at the 83% increase in cost.
This week, data releases should underline the strength of the US economy data, with the two first important regional manufacturing sentiment surveys for February, the Empire State Index (Tuesday) and the Philadelphia Fed Index (Thursday) probably showing a slight uptick. We anticipate that Industrial production (Wednesday) will probably continue at or around the pace of the last six months, 0.3%. 

Data from the Eurozone should also be relatively positive. ZEW surveys on Germany and the euro area should show strong improvement. We also anticipate that the February purchasing managers’ indices in Germany will be buoyant.

Centrica is likely to announce a round of cost cuts as the energy price fall hits annual profits. The new Chief Executive, Iain Conn, will almost certainly take the opportunity presented by the annual results release on Thursday to outline his plans to restore the company’s profitability, which we anticipate will be down around 30% on 2013.

Also on Thursday, BAE Systems will be announcing a fall in profitability as defence cuts take their toll.

Betting companies will remain in the spotlight after 888 confirmed that it had received an approach from William Hill on a possible offer. It added, however, in its statement last week that there is “no certainty..any firm offer will be made nor as to the terms.” Another announcement will be made within 28 days. The news has sent online group Bwin’s shares 4.85p higher to 103.2p and 888’s shares have soared by 20% or so. William Hill’s share price traded down a touch following the news. The company will have to pay a substantial premium to acquire 888. A successful acquisition would, however, almost certainly increase William Hill’s revenue growth rate and put the pressure on rival Labrokes.

Keep an eye on Serco. Its shares have spectacularly outperformed the market this year but timing is everything: they are still lower than they were three months ago. The company is looking to sell assets and launch a rights issue to raise cash. The price is likely to come down in the near term as the market prepares to absorb the additional stock.

Key Statistics and events:

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 UK corporate earnings announcements: Final Result Fidessa Group PLC (FDSA) Hammerson (HMSO) Acacia Mining Plc Ord 10p (ACA) Afarak Group (DI) (AFRK), Trading Statement Infinis PLC (INFI)
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UK corporate earnings announcements: Interim Result Sinclair IS Pharma PLC (SPH) Monitise PLC (MONI) Hargreaves Services PLC (HSP), Final Result Pendragon PLC (PDG) John Wood Group PLC (WG.) InterContinental Hotels Group PLC (IHG) Brammer PLC (BRAM) Dragon Oil (DGO)
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UK corporate earnings announcements: Interim Result Mucklow (A & J) Group PLC (MKLW) Galliford Try PLC (GFRD), Final Result PAO Severstal (SVST) Coca-Cola HBC (CCH) TBC Bank Joint Stock Company GDR (REGS) (TBCB)

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 UK corporate earnings announcements: Interim Result Go-Ahead Group (The) PLC (GOG), Petra Diamonds Ltd. (PDL), Final Result Rexam PLC (REX) BAE Systems Plc (BA.) Rathbone Brothers PLC (RAT) Primary Health Properties Plc (PHP) Centrica PLC (CNA) Morgan Sindall PLC (MGNS), Trading statement Sports Direct International PLC (SPD)

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 UK corporate earnings announcements: Final Result Standard Life PLC (SL.) Essentra (ESNT).

– Edited by Clare MacCarthy

Patrick Butler is chief executive of the Prime Wealth Group 

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