Anglo ‘rescues’ Sirius, Sainsbo’s makes grocery progress, Greggs performance baked in to shares

Equities

Anglo American is to play white knight to Sirius Minerals. Anglo is in advanced talks to but Sirius for 5.5p a share, valuing the business at £386m. The offer is a roughly 40% premium to yesterday’s close price although we can hardly call that undisturbed. AAL has until Feb 5th to make a firm offer. AAL shares were down 2.25% on the news – the project still requires major investment.

Shares in SXX jumped 35% after Anglo confirmed its bid – there was bid for the stock yesterday clearly as news of the offer leaked. Whilst this is great news for the holdouts and many retail investors still clinging to the stock, the valuation is still barely a tenth of what it once was.

If anyone can, Anglo can. As one of the largest miners in the world, it has the financial clout and expertise to make this project happen. We also wonder whether the government may have offered certain assurances. The fact this offer is public could make raising cash for other sources very tricky now, if not impossible, forcing SXX into something of a corner – even if the price is not the best they will have to accept it. The market knows they need cash ASAP but with this offer on the table, it’s now the only show in town – they have to recommend it or it’s curtains. Anglo is picking up a distressed asset on the cheap.

Sainsbury’s numbers don’t look fabulous but grocery remains broadly positive with a second straight quarter of growth amid a very challenging market. The problem lies with Argos.

Total grocery sales rose 0.4% but general merchandise (Argos) was down 3.9%. This was more disappointing than expected and seems to be down to a poor performance in toys and gaming. Clothing was very strong at +4.4% and delivered a particularly robust online performance.

That left total like-for-like sales -0.7%, which was broadly in line. Whilst, as we noted in November, tentative signs of recovery in the core grocery division, it cannot be ignored that under Mike Coupe the business has delivered five straight quarters of LFL sales declines (ex-fuel). Whilst Q2 showed some arresting in the decline, Q3 has not continued in the same vein. Shares were up and down around the flat line in early trade – it’s hard to really make a case for these results changing the narrative meaningfully – I think most of us would have hoped for a little better but grocery is good.

Greggs delivered again with another upgrade to add to November’s. Company-managed shop like-for-like sales were 9.2% with total sales up 13.5%. Fourth quarter like-for-like sales grew by 8.7%. Full year profits seen slightly higher than previously expected. Despite exceptionally tough prior year comparisons trading remains remarkably strong and with plans for more outlets there is still some growth in there, albeit you have to assume the kind of double digit growth won’t last. Shares dipped 3% on profit taking for sure. But with the company now valued at £2.4bn, is all the future growth fully baked in?

HSBC jaws fears, BHP, Greggs, Bitcoin’s ramp

Equities
Forex

After US markets were closed yesterday, the week begins in earnest today. US futures are steady with the SPX and DOW unmoved around 2,775 and 25,880. European markets are opening on the flat. Looking ahead to this morning’s FTSE session, HSBC figures will likely weigh after the shares dipped in Hong Kong following a disappointing set of annual results. HSBC missed on both the top and bottom line as profits came in more than $1bn short and revenues were also c$1bn short despite rising 5% year-on-year. Pre-tax profits came in at $19.9bn versus $21.3bn expected as the market came off in the final quarter. Nevertheless profits jumped 16% from 2017 levels and the bank is still producing cash.

Big numbers to consider –   

  • Jaws were negative at -1.2% and this is a worry if you are looking at how the shares might perform over the medium term. 
  • CET1 ratio down to 14% from 14.5% a year before, against the trend we have seen but still a healthy number. 
  • Return on average tangible equity rose to 8.6% from 6.8%, which is encouraging but doubts remain around the 10% target.

Clearly HSBC’s focus on China and Asia is a double-edged sword. There are still huge returns and opportunity in these markets, but the bank’s exposure to this region means the recent slowdown in China in particular, as well as fears about what the trade landscape will look like going forward, can bite.

BHP – H1 missed forecasts, with revenues flat at $21.59bn and EBITDA -3%, but management sees a stronger H2. Supply disruptions hit BHP hard in the first half, with management having warned in Jan of a $600m hit to earnings as a result of problems at copper and iron ore sites. Improved iron ore prices because of the Vale disaster suggest a better second half of the year is coming. Risks remain from a slowdown in China.

Greggs – on a roll, of course.

The vegan sausage roll is proving to be a marketing masterstroke. Total sales were up 14.1% in the first seven weeks of the year, with LFL sales up 9.6%. Management has called the performance ‘exceptionally strong’ and this means full year underlying profits will be ahead of expectations. There is such a thing now as Veganuary and Greggs tapped into this trend with precision. More importantly the core offering remains strong and the focus on delivering value is still there, meaning consumers are continuing to head to Greggs. This could be even more important should food prices rise after Brexit.

In currencies, the dollar has firmed, with DXY back to 96.70 having sunk to 96.50. A recovery above 87 again depends on the twin factors of the FOMC minutes and a slew of EZ PMI data later this week. EURUSD has eased back off the 1.13 handle having failed the test around 1.1340. Support on the round number 1.13 level and then at 1.1290 before the lows at 1.1240.

Sterling was unmoved by the political drama for once, and remains supported at 1.29 for the time being. All quiet on the Brexit front for now as the Independent Group take the headlines away from the government’s floundering – a welcome distraction for some but this won’t last. The pound still looks overly sanguine on the risks ahead. On tap this morning is the UK wage data at 09:30.

Bitcoin ramped yesterday and is showing signs of recovery. Futures were last changing hands at 3,887.50, marking a 9% recovery in the last week, but there does seem to have been a rejection of anything close to $4,000. This is a notable resistance area now, therefore a break on the upside would be meaningful.”

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