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FTSE climbs for second day ahead of Fed but Arm falls on iPhone concerns

Discussion in 'Market News' started by Lily, Dec 17, 2015.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Investors push shares higher as they await expected US rate rise

    Leading shares recorded their second day of gains as investors decided to take the long-awaited US interest rate rise - due after the UK market closed - in their stride.

    But there were some exceptions. Arm was the biggest faller, down 31p to £10.21 on concerns about slowing sales for Apple’s iPhone, which uses the Cambridge company’s designs. There have been growing suggestions that the overall smartphone market is under pressure, while Arm has also been hit by recent disappointing updates from semiconductor group Dialog and graphic chip specialist Imagination Technologies, 22.5p lower at 123.5p.

    Following smartphone market seeing 28%/10% unit growth in 2014/2015, we now expect unit growth slowing to 5%/4%/4% in 2016/2017/2018 (6%/10% lower volumes in 2016/2017 versus our previous estimates) as smartphone market becomes more saturated (3.3bn smartphone subs ending 2015 on our estimate of 5.3bn long term total available market implying 63% penetration).

    As such, we lower our 2016/2017 revenue (dollar) and earnings per share estimates for Arm by 3%/4% and 3%/6%, and also introduce 2018 earnings per share of 44.2p. However, with royalty rates on the rise and long term opportunity around networking, internet of things and auto, we believe Arm can deliver around 10% sales and 15% earnings per share compound annual growth rate over 2015-2018. As such, we reiterate our outperform rating.

    The markets appear to be prepping themselves for the announcement of a rate-hike and with it some much needed clarity. Any questions surrounding tonight’s announcement are now more focused on how fast the Fed will raise rates, rather than if they will raise rates at all, with analysts arguably looking for a ‘dovish hike’ and plenty of reassurance that Yellen and co will be taking things slowly. Of course the central bank still has the capacity to disappoint, though there seems to be more certainty from analysts and investors this time around when compared to the last feasible moment for lift-off back in September.

    We do not believe that Bonmarche’s warning and disappointment will be the last to be recorded by British retailers with a high participation in the fourth quarter and the festive season.

    [Challenging] conditions mean that we await the January trading updates with increasing nervousness surrounding the robustness of present earnings forecasts for the non-food retailers. At the weekend we noted window discounting clothing at Marks & Spencer, which underscores the nervousness from a general merchandising perspective, albeit the group’s food business if the Nielsen & Kantar data are to be believed, is flying. We have not had high hopes for sales for M&S UK general merchandising but can the recently robust gross margins hold up? In this respect, can the mighty Next also withstand the aforementioned processes?

    We argue that GVC’s reverse take-over of bwin.party should drive multiple upsides: substantial value creation from the €125m cost savings; a broader spread of geographic, regulatory and product risk; around 11% free cash flow yield and around 8% dividend yield in 2017; a more than £1bn proforma market capitalisation and move to the main market (with FTSE 250 inclusion targeted in mid-2016). We initiate with a 580p price target for GVC.

    We also upgrade bwin.party to buy (from sell) with a new 159p price target (from 65p) to reflect the terms of its acquisition by GVC. Deal completion is due in early 2016.

    We turned more cautious on housebuilders in early November. We see the valuations of the three largest builders coming under pressure if gross margins peak in 2016 as selling price inflation cools but cost inflation does not. Our view has not changed as the autumn statement changes are mixed for the sector and the Financial Policy Committee’s inaction is a delay rather than a cancellation.

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