16 November 2010
Results: Vodafone, British American Tobacco, BP Plc
State of the market
Uranium is the new gold?
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Dear Subscriber
Having touched 5,900, the FTSE100 Index closed at 5,875 on November 5th - lifting the Index to a 29-month high.
Is this the highest we will see for 2010? Today, the FTSE100 closed at 5.693. I would say, there are plenty of reasons to worry about from Europe's "small PIG's" (Portugal, Ireland and Greece) to UK and Chinese inflation creeping up.
Furthermore, a recent survey showed that many fund managers are cash-poor in their equity portfolios, i.e. pretty much fully invested in equity. While US individual investors are at their most bullish since the subprime crisis broke out.
Is Uranium the new gold?
Last week has seen some substantial newsflow regarding the re-emergence of the nuclear power industry. Timely, if you had the opportunity to read our previous Dividend Alerts and acted upon this.
Several announcements focussed on major new projects in China which appear to have had a clear impact on the uranium spot prices.
We initiated coverage on AIM-listed Emerging Metals Plc as a new play on the fluctuating uranium spot prices. A number of uranium miners' share prices have also started to move up, including AIM-listed Kalahari Minerals Plc. Although the latter has seen its share price come down substantially, today.
Vodafone's half year results
Vodafone has raised its profits forecast for the current year, announcing also that it is to focus on a lesser number of geographical markets and selling off minority shareholdings.
Vodafone's future strategy will now be focused more on Europe, Africa and India, which are areas in which it has been growing steadily in the last few years. As well as exploiting the demand for mobile data services in more developed markets.
Top line earnings per share for the half year were stated at 14.3 pence per share, but the adjusted figure is nearer at 8.8 pence – not different from last year. An interim dividend of 2.85 pence per share was declared, which is a welcome rise of 7.1 per cent.
Vodafone expects adjusted operating profits for the 2011 financial year to be in the range of £11.8bn to £12.2bn, up from its previous range of £11.2bn - £12bn. Profits in the six months to September increased from £5.75bn to £8.24bn, which include gains on the sale of its China Mobile stake, on improved sales of £22.6bn against £21.8bn.
Earlier, Vodafone had announced that it’s selling its shareholding in Japanese mobile phone operator Softbank Corp for £3.1bn. Almost half of which will be used to pay down some of Vodafone's huge debt pile rather than embarking on a new acquisition spree.
BAT's 9 months earnings up, volumes down
Last week, while announcing increased overall market share across its top 40 markets, British American Tobacco's third-quarter results came in below market expectations as volumes fell by 1pc. Volumes rose in Asia – but fell everywhere else.
More importantly though, from our income investing perspective, Paul Adams, BAT’s chief executive, disclosed, that "We are on track for another year of good earnings growth."
This should translate in enhanced dividend prospects. Some brokers are already forecasting a 2011 dividend of 124.4p which would represent a mega inflation busting increase of almost 20 per cent re-confirming the company’s outstanding dividend sustainability and track record.
Unfortunately, earlier this week BAT suprised the markets when it announced that it is expecting a 17 percent decline in the Japanese cigarette market next year, after a record tax increase in October. Japan has raised the tobacco tax by 40 percent in October to discourage smoking in the country, where 36.6 percent of men smoke.
Overall cigarette sales in Japan plunged 70 percent in October after an 88 percent surge in September, according to the Tobacco Institute of Japan. Thousands of smokers bought cigarette cartons at convenience stores and other retailers before the tax took effect.
BAT increased its market share in Japan to 10.6 percent so far this year, from 9.1 percent in 2005, while Japan Tobacco remains the market leader with 65 per cent.
BAT's shares prices where almost 3 per cent lower, today, closing at £23.60 per share.
BP returning to the dividend list, sometime soon in 2011?
BP is expected to return to paying a dividend in 2011, albeit at a substantial reduced level. BP's new CEO, Robert Dudley has said “the company can again pay a dividend beginning next year, and the firm has the funds needed to cover its liabilities from the Gulf of Mexico oil spill”.
BP's third quarter replacement cost profit amounted to $5.5bn, excluding exceptional items like the oil spill, up 18 per cent on last year’s comparative. The company stated that these results demonstrate that BP is well on track for recovery after the accident. We may well initiate coverage of the company, in due course
The state of the market
The FTSE100 rose to a 29-month closing high on Friday November 5th as investors cheered the U.S. Federal Reserve's commitment on Wednesday to extend quantitative easing. Gold subsequently breached $1,400 an ounce.
Nevertheless, on Monday, November 8th, doubts about peripheral euro zone economies and lousy 2011 UK car sales forecasts depressed the FTSE100 Index somewhat.
This was all again 'forgotten' on Tuesday when investors and speculators alike returned en masse to the perceived “health” of the UK corporate sector, with Vodafone's and Barclays' positive announcements.
Barclays mentioned a sharp improvement in its bad debts that lifted the bank's underlying third-quarter profit. Miners also provided strong support to the index as gold hit a record high and copper hit a 27-month peak – you may wonder why?
Energy firms added further to the strength for the FTSE100 Index as crude futures hit a two-year high after the International Energy Agency said oil may exceed $100 per barrel by 2015, further fuelling future inflation. BP shares added some 2.9 percent.
A week earlier, Mark Dampier, at Hargreaves Lansdown, commented “A lot of this rally is driven by QE in the States. But not enough credit is given to retail investors – private shareholders – in Britain. They have started to come back to the market and have been buying shares in earnest in recent months”.
Alarm bells ringing in my ears . . .
And what about the technical wizard's views of the market?
Well . . . "As the FTSE100 Index has broken through resistance around the 5,833 level, the 5,930 level -- which is a 75 percent retracement of the drop from December 2007 to 2009's low -- will be watched" (whatever that means?), according to Nicole Elliott, technical analyst at Mizuho Corporate Bank. She added that after this there is “a cluster of resistance levels around 6,000”
The City Index chief technical analyst added that "Currently the index seems to be en route for the next key level of 6,050 - 6,117," "As long as short-term support (at) 5,748 is not violated, the week ahead should remain positive with minor pullbacks taking place along the way”. Instead, on November 16th, the FTSE100 index closed at 5.682.
At least analysts at Commerzbank cautioned: "The injection of fresh liquidity into the market should increase inflation risks, which could strengthen the demand for certain assets as a store of value and thus result in further gold buying."
Finally, a more sobering note came from outspoken investor Jim Rogers, chairman of Rogers Holdings - this is the Rogers who predicted the start of the global commodities rally in 1999 - "investors should put money into “real” assets such as metals and agricultural products".
Rogers told Oxford students to scrap career plans for Wall Street or the City, and to study agriculture and mining instead.
So here you have it: head for the hills with your spades and buckets, tinned beans, some seeds, an agricultural degree and some ounces of gold!
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Until next time.
Kind regards
Steven Dotsch
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