News Column

FTSE slips as Diageo drops on emerging market woes and G4S and Serco slide

January 30, 2014

Nick Fletcher, theguardian.com

Leading shares fell back for the third day - albeit marginally - marking their seventh decline in eight trading sessions, with outsourcers and companies exposed to emerging markets among the main losers. The decision by the US Federal Reserve to trim its monthly bond buying programme by $10bn to $65bn , although expected, put more pressure on emerging markets, and with weaker than expected Chinese manufacturing data, investors were battening down the hatches again. The effect of a slowdown in emerging markets was starkly illustrated by drinks giant Diageo , down 90p at 18.20 and the biggest faller in the leading index. The company reported sales of 1.8% in the first half, down from 2.2%, hit by weakness in China , Thailand and Nigeria . In particular a crackdown by the Chinese government on gift giving and personal spending by civil servants has hit sales of spirits. Diageo plans to cut costs by an extra 200m a year. SABMiller , another company with a strong presence in emerging markets, was down 48.5p at 27.53p while Unilever has fallen 54p to 23.37, Prudential is down 27p to 12.17 and Standard Chartered is 25.5p lower at 1262p for similar reasons. Michael Hewson , chief market analyst at CMC Markets UK , said: Europe's markets have continued to weaken with companies with particular exposure to emerging markets starting to feel the draught as investors wake up to the possibility that the recent rate hikes in these various markets are quite likely to prompt a slowdown in these parts of the world. Overall the FTSE 100 closed down 5.83 points at 6538.45. Mid-cap outsourcing group Serco slid 86.3p to 423.2p after it issued a profit warning. It said 2014 profits could be up to 20% below forecasts after its high profile UK government contract failures. Ironically the warning came minutes after the government said it had decided the company would be allowed to win new work. Both Serco and FTSE 100 rival G4S charged for tagging criminals who were not monitored, were in prison or even dead. Analyst David Greenall at RBC Capital Markets said: If we assume 20% hit to consensus for 2014 - then earnings per share would be 27.7p so still trading on 16 times PE. Note we have 2015 earnings also down on 2014 at present. This takes no account of further contract risk ( Australia's Department of Immigration and Citizenship , Northern Rail, Docklands Light Railway are all major renewals over the next two years). The bigger issue may be that net debt to EBITDA could go to around 2.7 times...we would note that other outsourcers have raised money when the ratios have moved to these levels, while potential customers may think twice about outsourcing to a company which is more financially stretched. The incremental corporate renewal costs could also be a feature at G4S when it reports. One would also thought there may well be greater one-offs at G4S if for example the tagging contract is deemed to have a similar negative hit (ie around 70m at Serco ). G4S fell 8.2p to 237.7p while another outsourcer, Capita , closed 10p lower at 10.01. Among a host of company results, BSkyB was 33.5p better at 878p following its figures while Royal Dutch Shell B shares rose 24p to 2266.5p.. British Airways and Iberia owner International Airlines Group added 15.5p to 418.7p after positive comments from Bank of America Merrill Lynch . Elsewhere gaming group 888 was steady at 140p despite announcing record revenues in the fourth quarter. Nick Batram at Peel Hunt said: We recognise that the short-term uncertainties may hold back the shares in the near term, but the underlying proposition is strong and the progress in the US is promising (the platform has now surpassed Party/Borgata in New Jersey ). We also see the potential for further special dividends. Therefore, we are happy to stick with our buy recommendation. Mitchells & Butlers , whose pub brands include Toby Carvery and All Bar One, enjoyed its biggest ever sales week as part of the Christmas festivities. The company said like for like sales rose 2.6% over the three weeks to 4 January, with food volumes up 1.3%. The positive news pushed M&B shares up 10.6p to 449.1p. But Premier Oil slipped 4.7p to 272.8p as Goldman Sachs moved from buy to neutral: While valuation remains relatively attractive, we forecast little medium-term growth and see better opportunities elsewhere in the sector. Finally blinkx , the video search and ad group spun out of Autonomy, fell sharply after criticism from a US blog by Harvard Business School professor Benjamin Edelman , which raised questions about its advertising tactics and the value it provided for advertisers. The company belatedly responded to the fall, saying: As a matter of course, the company does not normally comment on such matters. However, blinkx has noted a recent blog post by a consultant paid by unnamed third parties, in which he discloses, "I prepared a portion of this article at the request of a client that prefers not to be listed by name." blinkx strongly refutes the assertions made and conclusions drawn in the blog post. The company confirms there has been no material change to the operational and financial performance or outlook for the business, and that fiscal third quarter trading was in line with management expectations. This did little to limit the damage, with blinkx losing 32% of its value to 1189.75p.


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Source: Guardian Web


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