March 12, 2018
Melrose and GKN were under pressure after the latter rejected a sweetened final takeover offer from the former. The new Melrose bid of 1.69 new shares and 81p in cash per share valued GKN at about 440p on intraday prices.
“While GKN’s assessment of its own value at 503p per share is transparent, it particularly depends on execution and the achievement of ambitious targets by 2020, especially in Aerospace,” said Citi. “There is no clean ‘all cash’ option, and so the choice continues to hinge on which management team investors believe will be more likely to deliver.”
Hikma Pharmaceuticals and Vectura slipped after the US Food and Drug Administration rejected an appeal by the drugmakers to avoid having to put their generic version of GlaxoSmithKline’s Advair asthma inhaler through an additional clinical trial. Analysts had already expected no generic Advair from the companies before 2020 so were not changing forecasts.
Next edged higher after a Kantar Worldpanel survey of the UK clothing market showed its sales growth moving back into positive territory for the most recent 12 weeks. All the major listed clothing retailers grew sales for the period apart from Marks and Spencer, which saw sales fall 0.6 per cent, according to Kantar.
Galliford Try was squeezed to the top of the FTSE 250 gainers awaiting an update on its planned £150m rights issue, which the construction group announced in February to cover costs related to the collapse of Carillion. The stock had dropped 30 per cent in the year to date in spite of management reassuring on current trading at its recent interim results.
Canaccord Genuity put a £10 target price on Galliford but cut its rating to “hold” on valuation grounds.
Innogy led the Stoxx 600 risers after Eon announced a complex carve-up with RWE, the German utility’s majority shareholder. The multi-stage deal would see Innogy merged by way of an asset swap with Eon, which will get the networks and retail divisions while RWE takes conventional and renewable energy assets.
“What we know today appears favourable for RWE, which gets a new perspective with an enlarged global renewables business and a high price for Innogy,” said Kepler Cheuvreux, which added that the proposed transaction is “more mixed for Eon, as it pays a high price, doubles up in networks, whose valuations are probably at their structural peak, and in retail, which is a trouble house”.
Switzerland’s Aryzta, whose brands include Delice de France and Otis Spunkmeyer, fell after its half-year results proved no better than flagged by a January profit warning and came without medium-term guidance. The bakery group said revenues and margins in North America remain under pressure and reported net debt equivalent to 4.2 times ebitda. An ongoing disposal programme needs to get Aryzta’s debt below 4 times ebitda before the banking covenant steps down in July 2018.
Goodbody told clients: “We consider Aryzta’s results to be broadly in line and are unlikely to change 2018 forecasts. We await clear signs of stabilisation before becoming more constructive on the story.”
US-listed optical components stocks climbed after Lumentum agreed a $1.8bn takeover of Oclaro, which is better known to UK investors as Bookham Technology. Bookham entered the FTSE 100 soon after floating on the London market in 2000, then transferred its primary listing to the US four years later having delivered a string of profit warnings and lost 98 per cent of its value.
“We believe this transaction is an excellent fit with complementary product lines and significant cost savings and will create the largest optical component company in the industry,” said Piper Jaffray, which expected peers to trade higher. “Investors have been waiting for this industry to consolidate for the past 2-3 years, given too many companies are chasing the same customers and the industry has massive redundant research and development expenses.”
● Deutsche Bank cuts Just Eat to “sell” with a 630p target price. Expanding into delivery services to defend Just Eat’s leadership position comes at the expense of profitability, said Deutsche, which cut the earnings forecast by between 20 and 30 per cent for the next three years.
“We think Just Eat’s investment plan makes strategic sense but with substantial implementation risks, additional costs and an uncertain return. Management hasn’t committed to a particular level of spend beyond 2018 but we think investment will continue at a rapid rate [ . . .] The scale of investment and the urgency to face competition were much greater than we expected.”
● Morgan Stanley raises Cairn Energy to “overweight” with a 300p target. The research highlighted the potential of key offshore project in Senegal and its 5 per cent stake in Vedanta Resources, which could be worth between 0p to 100p per share depending on the result of arbitration on a tax claim made by the Indian government.
“Assuming a $65 a barrel real Brent price, the SNE project in Senegal could be worth around 160p or 80 per cent of the share price. We believe the market is only rewarding for 60 per cent of that value. Cairn has been making steady progress on SNE and a final investment decision is now less than a year away in end-2018. We expect the market to place more confidence on the SNE project as we approach the project-sanction date.”
● In brief: Jefferies raises CYBG to “buy” and cuts Virgin Money to “hold” — Citi cuts Aveva to “neutral” — Investec cuts Conviviality to “hold — Peel Hunt upgrades Hostelworld to “buy” — Smurfit Kappa cut to “neutral” at UBS — Invested raises Esure to “hold” and upgrades Admiral to “reduce” — Galliford Try cut to “hold” at Canaccord — Peel Hunt raises JD Wetherspoon to “hold” — Numis raises Inmarsat to “hold” — Goldman Sachs starts coverage of CRH and HeidelbergCement with “buy” — JPMorgan upgrades Poste Italiane to “overweight” — Lagardère raised to “buy” at HSBC — ProSieben cut to “sell” at UBS — Bernstein raises AB InBev to “outperform”.
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