EmailAhead of the crucial Scottish independence vote and the latest US Federal Reserve meeting, leading shares continued to edge lower.
The FTSE 100 finished 11.97 points lower at 6792.24 as the referendum in Scotland looked too close to call, despite Betfair apparently paying out on a no vote. As for the US, analysts believe there might be more hawkish noises about a rise in interest rates from the Fed.
Continuing concerns about the effect of sanctions against Russia over its involvement in Ukraine helped push German confidence lower, while there were also worries about China's growth after a fall in inward investment, although news the central bank was boosting liquidity to its leading banks helped markets recover from their worst levels.
Meanwhile UK inflation figures were in line with expectations, giving little clue as to the timing of the next move in the country's borrowing costs. Jasper Lawler, analyst at CMC Markets UK, said:
Shares in Europe fell across the board today as investors took a more defensive stance leading into tomorrow's Fed meeting particularly given the reported weak capital flows into China and a further drop in German investor confidence.
With Brent crude adding 1% after recent falls, Royal Dutch Shell A shares rose 23p to 2411.5p while BP was 4.05p better at 472.35p.
Among the other risers Antofagasta added 0.5p to 762p as Deutsche Bank moved from sell to hold with an 820p price target, while Anglo American was up 9p at 1497.5p as the bank issued a buy recommendation.
Other analyst notes also had an influence.
Publishing group Pearson put on 20p to £12.26 after analysts at Morgan Stanley moved from equal weight to overweight, and raised their price target from £11 to £13.50. They said:
We think the restructuring is complete, 15%-20% earnings per share growth is in prospect for 2015 and Pearson now addresses a bigger market with a more flexible cost base. It is time to own Pearson again.
Reckitt Benckiser added 35p to £54.95 as Berenberg Bank restarted coverage with a hold recommendation and £55 price target. Analyst James Targett said:
Reckitt Benckiser is an impressive operator with strong fundamentals – solid organic growth, high margins, excellent cash generation, best-in-class return on invested capital, a strong balance sheet – and it pursues an active M&A agenda. This has led to the company's total shareholder returns and cumulative earnings per share growth being among the best of its peer group over the last decade. However, after a 50% increase in the last two years, the stock is expensive on 20 times 2015 PE. Although the proposed spin-off of the RB pharmaceutical arm in 2015 is positive (we estimate 385p per share), this is now priced in. Reckitt's underlying markets, both developed and emerging, will provide little relief in the second half.
Reckitt's active M&A strategy has pros and cons: it has used its free cash flow generation (more than £1.5bn per annum, 100% conversion) and balance sheet to its advantage, spending over £15bn on M&A over the last 10 years. These have taken their toll on return on invested capital, down from 32% in 2005 to 18.5%. While still above peers, we only expect modest improvement to 20% by 2016. Reckitt has £3bn-£4bn of excess cash to spend each year. Recent consolidation in consumer health will put upward pressure on invested capital.
Management is not afraid to make divestments to create shareholder value: RB Pharmaceuticals is expected to be spun off in 2015, at a value of £2.8bn. The Food and Portfolio divisions could fetch £925m and £300m respectively and be accretive to organic growth, in our view.
But AstraZeneca slipped 33.5p to 4511.5p despite the pharmaceutical group unveiled a partnership with US group Eli Lilly for its experimental alzheimer's drug. Under the deal, Lilly will pay up to $500m to share rights to the drug, depending on how successful it ends up being. AstraZeneca also announced that the US Food and Drug Administration had approved its Movantik tablets as a treatment for opioid-induced constipation.
Retail shares were under the cosh after poor updates from online fashion group Asos, down 215p or 9% to £22.07 after it warned investment would hold back full year profits, and Jacamo and Simply Be owner N Brown, 19.6p lower at 385.4p following a 0.6% dip in first half revenues.
Meanwhile Thomas Cook fell 8p to 122p after the tour operator said it expected to meet full year forecasts, but cautioned on a slowdown in bookings in the German market.
But Ophir Energy added 10.5p to 238.5p as it announced it was a new gas discovery at its Silenus East-1 well in Equatorial Guinea.
Inmarsat climbed 14p to 725.5p after a buy note from Jefferies with a 925p price target. Analyst Giles Thorne said the shares had languished despite Inmarsat announcing in June it planned to launch a hybrid cellular/satellite air-to-ground network to allow in-flight broadband on airliners. There had been worries about delays to its next Global Xpress satellite launches following problems with the Proton rockets, but these should now take place next year. Thorne said:
Inmarsat's shares remain muted, the market seemingly unwilling to look through to the upside from Global Xpress and air to ground/satellite network until the overhangs from the Global Xpress launch delay/Russian sanctions are overcome. Our forecasts are largely unchanged, other than to lower our 2015 Global Xpress revenue number (from $50m to $30m) to reflect the later global commercial service introduction, as guided to by management at the second quarter results. We nudge our price target up from 920p to 925p, mostly on the appreciation of the dollar against sterling since our last published note (which more than offsets the tax provision impact).
On 24 September, Inmarsat management (both senior and sector leads) will host a capital markets day at its head office in London. The agenda has been circulated. Investors will receive a thorough update of the entire business, not just the recent air to ground/satellite network investment programme, though we do expect the latter to perhaps dominate airtime. Inmarsat's "sector silo" approach suggests we should expect each industry lead to talk to L-band/Global Express/air to ground. We expect management to update on future capital expenditure requirements.
Finally Game Digital added 2p to 277p after Monday's news it was buying the Spanish stores owned by US rival GameStop. Liberum issued a buy note, saying:
Game has announced it is to acquire Spanish stores from GameStop, as its US-based competitor exits the Spanish market. The transaction will see the only other major specialist video games retailer in Spain leave the market and will be a clear positive for Game, in our view. The terms of the transaction are undisclosed, but management expects a broadly neutral earnings impact for 2014, with modest benefits thereafter. Given the lack of financial details, we make no changes to our forecasts at this stage, but see risks on the upside.
