Wednesday’s Stock Market report featuring Rolls Royce, M&S, JD Wetherspoon, Centamin and UK Oil & Gas

The Markets

At the London close the Dow Jones was up by 70.86 points at 17,454.70 and the Nasdaq was up by 1.3 points at 4,157.52.

On a good day for the markets in London the FTSE 100 rallied by 85.17 points to 6,539.14 and the FTSE 250 closed up by 132.22 points at 15,526.33. The FTSE All-Share rose by 42.29 points to 3,500.83 while the FTSE AIM Index inched up by 1.14 to 716.20.

Broker Notes

Shares in Associated British Foods (ABF) jumped by 159p to 2,942p after Citi lifted its stance on the stock from “neutral” to “buy” on the back of strong prospects for its fast-growing retail chain Primark. “Primark’s international expansion programme remains very successful,” said Citi, “a theme we expect to continue for many years to come.” The bank said that Primark’s current trading patterns are similar to that of H&M in 2001, and the business has the potential to replicate H&M’s space growth since then of 12% per annum. However, the bank reduced its profit estimate for the current financial year by 56 million pounds to 1.09 billion, assuming no growth from last year due to declining profits in ABF’s struggling sugar division as prices continue to fall.

Panmure Gordon downgraded its stance on Rolls Royce (RR.) to “sell” from “hold”, calling its recent restructuring announcement “just another profit warning”. Analysts at Panmure pointed out that the plans have reduced underlying profit guidance for this year by 60 million pounds, compared with previous expectations of a flat outcome from last year. “More importantly, it suggests that far from being ‘well positioned in growth markets’ the management is now dealing with a group in decline, despite record order books, and is struggling to stay on top of events,” said Panmure. “Cash will be scarce next year and we are confident that the share buyback will be cancelled,” it added. Rolls shares moved up by 6p to 854p despite the negative note.

Panmure not a fan of engine maker

Blue Chips

Iconic retailer Marks & Spencer (MKS) saw its shares rise by 39.4p to 444.1p as it posted its first rise in half-year profits in four years, as cost cutting and rising food sales offset a slide in clothing revenues. First-half pre-tax profit before one-off items was 268 million pounds, ahead of analysts’ average forecast of 252 million pounds and up from 262 million pounds last year. Group sales rose by 1% to 4.9 billion pounds, with general merchandise sales down 2.3% and food sales up 3.6%. M&S raised its interim dividend by 0.2 pence to 6.4 pence a share and said it would update on further potential shareholder returns when it publishes full-year results in May. “The bull case for M&S has always rested on gross margin growth potential in clothing and the scope for cash returns, so M&S has delivered what they want today,” commented independent retail guru Nick Bubb.

In its third downgrade in a year, aerospace & defence engineer Meggitt (MGGT) said it now expected organic revenue growth in the low- to mid-single digits in 2015, down from its previous forecast of mid-single digit growth. However, shares in the company rose by 33.2p to 473.2p after it announced a further buyback of shares, with the intention of achieving a ratio at or slightly above 1.5x net debt/EBITDA by the end of 2015. Meggitt said reported third-quarter organic revenue grew by 5%, driven by an 18% rise in civil aerospace original equipment orders. Reported revenue fell 2% because of the effects of foreign exchange. Analysts at Liberum said that Meggitt’s share buyback goes some way to restore confidence in the investment case, although “people will inevitably still be concerned by underlying trading.”

Old Mutual (OML) said gross sales fell to 6.2 billion pounds in the third quarter, down from 6.5 billion in the same period last year, mainly due to weakness in the rand and outflows from institutional investors, though funds under management rose on the year. The Anglo-South African financial services firm aims to expand in sub-Saharan Africa and has increased its focus on wealthy British private investors, which it has highlighted as a growing and profitable market. “We continue to see sense in restructuring of the group over the medium term… and nearer term we see possible capital return and dividend catalysts, which may materialise over the next 1-2 years,” commented analysts at Bank of America-Merrill Lynch. Shares in the company sneaked up by 0.4p to 192.4p.

Mid Caps

Pub owner JD Wetherspoon (JDW) performed well at the top line in the 13 weeks to 26th October, with total sales up by 11.3%. LIke-for-like sales grew by 6.3% in the period but slowed in October after a good previous two months. However, due to a 5% pay increase for certain workers, a 4% increase in utility bills and cost increases from suppliers the firm’s operating margin fell by 60 basis points to 7.7%. JD once again took the opportunity to complain about how heavily the pub industry is taxed, saying that a little recognised change in the VAT treatment of pub gaming machines cost it 3.6 million pounds from February to July this year. The shares closed the day down by 34p at 798p, with investors noting that operating margins are expected to be between 7.2-7.8% for the full year to July.

Another mid-cap drinks company having a bad day was Stock Spirits (STCK). Shares in the Central European branded spirits producer plunged by 75.4p to 225p after it revealed that the latter half of Q3 was tough, particularly in Poland due to disruption in supply chains caused by a duty increase. While the firm has maintained market share in Poland aggressive pricing from competitors has further squeezed margins. Stock Spirits, which listed in London just over a year ago, warned that unless trading conditions improve in the crucial Q4 period then full year EBITDA could be €5-€10m below expectations.

It hasn’t been a good few months for shares in gold miners, on the back of the precious metal falling by 15% since mid-July. Egypt based miner Centamin (CEY) continued this trend today after reducing its production forecast for its flagship Sukari gold mine. The firm now expects to produce between 370,000-380,000 thousand ounces in 2014, down from previous expectations of 420,000. The revision is mainly due to reduced monthly plant productivity during October and lower than expected average grades in Q3 from underground development ore. Nevertheless, Q4 is expected to deliver record quarterly gold production. The shares closed down by 3.26p at 48.99p.

Power provider Drax Group (DRX) has experienced challenging market conditions since the end of July but still expects to meet forecasts for the full year to December. In reaction the shares fell by 4.5p to 580.5p. The firm, which provides 7-8% of Britain’s electricity demand, said that it has seen a good operational performance from both its coal and biomass generating units, with additional power sales of more than 3 terawatt hours contracted for 2015 compared to the position reported in July. The news comes a week after analysts at Deutsche Bank cut their target price on the shares from 700p to 650p.

Drax soild but not powering ahead

Small Caps

At the top of the small cap risers was copper-gold exploration and development company Bezant Resources (BZT). Its shares surged by 2.125p to 6.25p after revealing an updated financial model for its Mankayan copper/gold project in the Philippines. At current metal prices the report suggests a post tax NPV for the project of $739 million at an 8% discount rate, with capital infrastructure costs of $1 billion. Broker Shore Capital wasn’t quite so confident as the markets, commenting that with, “…Philippines-associated difficulties, we believe it likely that Bezant will continue to struggle to achieve a favourable deal for Mankayan.”

At the other end of the scale shares in pumped up private investor punt UK Oil & Gas  (UKOG) halved to 0.44p. This came after the firm announced that drilling of the Triassic target at its Horse Hill-1 well near Gatwick Airport failed to find gas. This follows last month’s news of a 3.1 million barrel (mmbbl) oil discovery in the well’s upper Portland section, with a further gross unrisked in place prospective hydrocarbon volume of 16.8 mmbbl of oil in a separate lower sand. Shares in a raft of other AIM companies which have a stake in Horse Hill also plunged, with Doriemus (DOR) down by 0.0525p at 0.0875p and shares in Solo Oil (UKOG) collapsing in value by 0.22p to 0.57p.

More gas on the bulletin boards than in the ground so far for Horse Hill mob

Also in the oil sector, Rose Petroleum (ROSE) has decided to focus on its assets in Utah after withdrawing from its Konstanz and Biberach exploration licences in Germany. Rose commented that the current political situation for exploring unconventional hydrocarbons in Germany remains unclear. Along with there only being 15 months left on the licences the company does not see any benefit in pursuing them. Earlier this week the firm announced that it has acquired an additional 4,005 acres within its Mancos development in Utah, as well as 658 acres in the Gunnison Valley Unit for $188,024. The shares ended the day down by 0.125p at 2.8p

In a trading update the advanced plastics technologies company in Symphony Environmental (SYM) announced the registration of anti-microbial product SANAFOR PO-5 by the US Environmental Protection Agency. The product is part of Symphony’s d2p anti-microbial product range and was developed by partner and biological products business Janssen. Symphony has now launched the world’s first anti-microbial “bag for life” with SANAFOR technology inside, hoping to benefit from shoppers being forced by legislation to re-use and buy thicker bags. The shares climbed by 0.75p to 7.875p.

Africa focussed low cost airline Fastjet (FJET) carried a total of 59,830 passengers from its operations in Tanzania in October, up by 77% over October 2013. The rise was driven by the firm adding additional flights to Entebbe in Uganda and recorded strong passenger increases on flights to Harare. The firm also achieved a load factor of 74% for the month and 95% of flights arrived on time. Fastjet shares remained flat at 0.78p.