FTSE falters as RBS and Antofagasta disappoint, Arm hit by Apple slowdown

Discussion in 'Market News' started by Lily, Jan 27, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Ahead of US Fed rate decision, investors remain cautious as China falls again

    Further falls in the oil price, continuing worries about China and some poor company results have sent shares lower after Tuesday’s gains. The US Federal Reserve’s interest rate decision later is also causing some uncertainty.

    Brent crude is down 2% at $31.15 as Russia said there were no specific plans to co-ordinate action (presumably with Opec) to support the tumbling oil price. Meanwhile Chinese markets fell again following profits at the country’s industrial firms fell 4.7% in December, the seventh successive monthly decline.

    Implied second quarter iPhone units from the Apple results overnight are in line with US expectations as downgraded in recent weeks, but suggest that there is further royalty-related downside to come for Imagination. However, the group has at last started to take action on cost; we estimate that up to around £25m per annum is relatively easily attainable. We retain our target price [of 160p] and buy recommendation on the basis that there is a sea change in financial discipline on the cards at Imagination; combined with a well-below trend rating and strong intellectual property backing.

    STMicroelectronics has announced that it is closing its set-top box business. These products are primarily based on Arm’s V8 technology. The closure will result in a reduction in licensing payments to Arm (around $10m per annum). No change in royalties as other companies (Broadcom, MediaTek) will pick up the volume from STM. We think consensus licensing expectations for Arm are too high in 2016 (up 10%). Arm’s licensing backlog is down more than 20% since the peak and over 50% of licensing booked in the profit and loss account is pulled from backlog. Arm’s licensing follows backlog with a lag and the decline in backlog is likely to impact the profit and loss in 2016.

    The first quarter 2016 statement reported net outflows of £9.1bn. This was better than the £11bn we had feared. It also indicates a slowdown in net outflows. The third quarter 2015 number was £9.9bn and the fourth quarter was £12.7bn. We take that as a positive but do note the cautious statements from the chief executive on the analyst conference call. He stated that, “Sentiment was fragile and is even more fragile now” post the performance of China and other markets in January 2016. The second quarter of 2016 looks like it will also be a testing period for flows and investors might want to wait for more visibility before committing. That said, we are happy to re-iterate our buy recommendation at this stage.

    New evidence suggests Just Eat is losing share of UK delivery restaurants as alternative platforms expand. This erosion of its network effect reduces barriers to entry and puts long-term growth and margin forecasts at risk.

    For example, our web data gathering shows that Deliveroo restaurants represent around 12% of Just Eat’s total and over 50% in certain cities. Deliveroo was launched in 2013 and it only started expanding outside of London in 2015. We envisage a scenario in which Just Eat does not have most restaurants on its platform, losing the network effect which is its main barrier to entry.

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