Markets not live, Tuesday 18th February 2020


What can we possibly add on Apple’s coronavirus warning that has not already been written? Nothing, of course. And how many search hits would we lose if we didn’t mention Apple and coronavirus at least a couple of times in the first few paragraphs? Enough to justify this laboured intro, unfortunately. 

So. Toy maker Apple warned overnight that Covid-19 has been affecting both supply and demand. Prior revenue guidance for the second quarter of $63bn to $67bn won’t be met given constrained iPhone supplies and Chinese consumers having things to worry about other than whether their handset has a slo-mo selfie mode.

Important to note they’re delayed sales, though. Full-year guidance unchanged. Apple assumes the Chinese consumer will become fatuous again, and that whatever revenue lost in Q2 will move to the second half. On the supply side, strong global iPhone demand (ex-China) translates into three weeks of iPhone channel inventory remaining at the end of the March quarter, versus the normal six weeks. 

Raymond James cares so little it won’t even do new quarterly forecasts:

If this were a thesis-changing event that would affect out-year estimates, we would be more inclined to take a guess about the impact. But we don’t consider this to be thesis-changing, but rather to be transitory. Since this is occurring at the seasonally weakest time of the year for Apple, it minimizes the effect of lost China demand, and it also makes it easier to catch up on lost production since production facilities don’t generally operate at full production at this time of year. And as long as production facilities have returned to normal by about the June timeframe, we wouldn’t expect this issue to have any effect on the upcoming 5G iPhone cycle, and would therefore expect this to have zero impact on out-year estimates.

Morgan Stanley puts a little more work in, guessing at a $7.5bn shortfall to make up before the year end. The main problem, it says, is the extra costs needed for Foxconn to find available labour and ramp up production lines:

How quickly can channel inventory and Apple revenue recover from the March quarter shortfall? Importantly, June is typically Apple’s weakest revenue quarter such that if manufacturing partners exit March at full labor participation, Apple will be able to rebuild iPhone channel inventory to normal levels and fully re-capture the $7.5B revenue reduction to our March quarter estimates in the June quarter. However, without full visibility into when China labor, and therefore iPhone unit production, will return to normal, we currently assume 80% of the supply-related revenue shortfall (or $5.5B) will be captured in June, with the remaining 20% (or $1.4B) recognized in the September quarter.

Could the production ramp impact margins near-term? Apple provided its gross margin guidance of 38-39% in the March quarter, and while the company will do what is necessary to return to normal production levels, it doesn’t currently see meaningful costs associated with the supply dislocation in China. Notably, the March quarter shortfall is entirely tied to labor, rather than component, constraints and Apple doesn’t expect any meaningful component cost inflation at this time. While our March quarter revenue shortfall of $7.5B is largely recovered by the end of FY20 in our model, our FY20 EPS falls slightly, by $0.05 (to $13.50), to reflect minor costs and timing issues associated with the iPhone production ramp.

Apple, also, has a wall of money to use for share buybacks should its market value edge too far below the $1 trillion mark. The same isn’t true of most China-reliant hardware makers that are likely to be seeing similar supply-side problems, and can’t rely on such a docile uni-brand customer base, so Apple’s warning probably matters more to investors in them. Here’s a chart from Citigroup:

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HSBC’s strategic review serves as an argument for a permanent chief executive. It’s all a bit crap, really, with a lot of work required to get to a place that doesn’t look dramatically better than where HSBC is right now. Acting CEO Noel Quinn suspends buybacks this year and next to fund $6bn of restructuring costs, which if all goes to plan will deliver $4.5bn in cost saves. Targets for a CET1 of 14-15 per cent and a ROTE of 10-12 percent in 2022 are a tad above consensus but don’t really suggest the market was pessimistic to put HSBC on 0.8 times book value. Nearer term numbers are walked backwards, with capital getting hoarded for the transition and group 2020 revenues guided to decline versus a consensus for 1 per cent growth. Covid-19 gets a mention too, as it always does now, though the effect is unquantified.

“Running hard to stand still”, says Barclays. 

While HSBC targets exit of $100bn of gross RWAs, this will incur sizable restructuring charges ($7.2bn) and is not expected to drive net RWA reduction over the plan period – and we note HSBC is signaling regulatory risk-weight inflation beyond 2022 – with plans to redeploy capital into higher growth Asia businesses where the outlook is uncertain. Our interpretation of guidance suggests a back-end loaded improvement in profitability, with PBT in-line with consensus in 2020/21 … 4Q19 underlying earnings were broadly in-line when adjusting for one-off revenue items. Overall, we expect the shares to be weak today with HSBC seemingly running hard to stand still on restructuring, a weaker near-term earnings outlook and expensive valuation start-point (11.2x 2021e EPS).

Credit Suisse is more optimistic, about costs if not revenue:

[T]his is a very clear, detailed plan that highlights for us the commitment to reduce Group costs below <$31bn which is supportive of consensus pre-provision profit even if the market is sceptical of revenue growth ambitions. CET1 ratio of 14.7% is 50bps better than consensus and total restructuring costs (including disposal losses) of $7.2bn consume c70bps. No buybacks for 20-21 during the period of restructuring is disappointing but is a timing issue in our view given capital generation will be better than consensus (CSe c$19bn of surplus capital >14% by YE22).

And whatever happens you’ll keep getting a dividend. Probably. Here’s Investec.

[T]he fourth quarter is traditionally weak, impacted by the UK bank levy and seasonally weaker markets within Global Banking and Markets. However, in Q4 2019, the underlying performance was (perhaps surprisingly) resilient, with the reported loss entirely attributable to (largely irrelevant) goodwill write-downs of $7.3bn (with no impact on CET1 capital or tNAV).

The following chart summarises the evolution of earnings per share and dividends per share through 2000-2023e. The fact that the 2019 dividend is “uncovered” is a technicality relating to the goodwill write-down. HSBC has today confirmed its intent to maintain a 51c dividend, (yield 6.6%) whilst suspending share buybacks through 2020/21, which is consistent with our existing assumptions and forecasts.

InterContinental Hotels’ full-year results are quite dull, which matched the consensus. An initial drop for the stock was on soft revpar and a lack of cash return a few investors had apparently hoped for, but has since been recouped as analysts struggled to say anything interesting about the report and took their lead from the conference call instead. 

Revenue was up 8 per cent as IHG’s room count grew at the fastest pace in more than a decade. But revpar deteriorated nearly everywhere, with the group level reading down 1.8 per cent for the fourth quarter versus down 0.8 per cent in the third. Occupancy was down in the Americas, with the US suffering on SME caution and increased supply in the upper midscale. China Q4 revpar dived 10.5 per cent and Hong Kong’s off 63 per cent, for obvious reasons. Germany leading a respectable performance from continental Europe.

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IHG’s statement didn’t offer much about coronavirus exposure but management made reassuring noises on the post-results call, saying the crisis was a “short term blip” for the international lodging industry. About 160 of the company’s 470 hotels in China are currently closed and visits are down elsewhere, unsurprisingly, but the February drop in revenue was pinned at just $5m, which is not too significant within a $1bn ebitda business.

To sellside, and Weir Group’s down on quite a bit of caution ahead of the pump maker’s full-year results due February 26. JP Morgan Cazenove’s December 2020 price target moves to £13 from £14.

Updating our model drives [results in] downgrades in 2020E/21E driven by a combination of: 1) weaker than previously assumed Minerals orders, 2) further deterioration in the 2020 oil & gas outlook, and 3) FX headwinds. For 2019E we are close to consensus at all lines; for 2020E, however, we are now 7% below standing consensus adj. EBITA ….

Despite year-to-date share price weakness, we have a cautious tactical view on the stock ahead of the results given our below-consensus forecasts for 2020 and see a rebasing of forecasts as a starting point for the stock to work. More fundamentally, the current valuation provides some support even on our below-consensus forecasts. Additionally, we continue to believe that the Mining businesses, Minerals particularly, have strong market positions and fundamentals, there are a range of portfolio options for management and both businesses at some point could see improved trading, mining as order bottlenecks ease and oil & gas with 2020 hopefully/potentially a trough. While we are perhaps more conservative than the market on the SoTP value, we do acknowledge a discount here and see any improvement in end markets increasing the likelihood of value being crystallized.

And Shore Capital says this:

Since the Q3 update in November and the associated downgrade in the Oil & Gas division, consensus (adj. EPS) has come down by c9-11% for each subsequent period. We feel the shares have not fully adjusted to the downgrade cycle given the fundamentals within the Oil & Gas market remain challenging in the short to medium term. Additionally, given Weir’s exposure to the Asia Pacific region and the recent outbreak of the coronavirus in China, we wait to hear any comments on the potential impact if any on Minerals and ESCO. We retain our Sell recommendation.

Take profit in Coca-Cola HBC, says Citigroup:

CCH’s shares have risen +12% (in USD) in the last 12 months and +9% YTD, ahead of both EU staples and MSCI Europe. This has meant CCH’s valuation is now back close to peak levels vs Coke bottlers (17% premium). Although the core underlying story remains attractive, with OSG compounding at 5-6% over the next few years, margins expanding 20-40bps per year and some remaining balance sheet optionality, near-term catalysts for a further re-rating and earnings upgrades are limited. After this period of strong out-performance and solid organic growth delivery we are downgrading our rating on CCH to Neutral (from Buy).

And JPMorgan has a long note on the water utilities if that’s your thing. There’s fantasy M&A in there, though it’s mostly just Pennon selling Viridor, which the company quasi-announced in September.

[W]e are upgrading our UK Water estimates following the recent publication of water sector final determinations and five year dividend policy decisions for United Utilities and Severn Trent. With political and regulatory headwinds now behind us, we are also moving our valuation grid higher: removing nationalisation discounts, increasing asset multiples and lowering discount rates. We are upgrading SVT to Neutral (UW) as we see sector valuations continuing to benefit from improved cash flow profile, dividend security and M&A speculation. We maintain our preference for UU/ as we see the deep discount to the peer group fading over time. ….

PNN has been the best performer in the UK utilities in recent months. This is at least in part due to M&A speculation surrounding Viridor, with press articles implying valuations of around 16x EBITDA, but elevated multiples might apply to the water business too if a break-up scenario is considered. We incorporate an M&A valuation into our price target, but with the shares rallying c.50% since Q3, we remain Neutral.

Amigo, the socially corrosive guarantor lender, has said it has said that as a result of putting itself up for sale, it’s for sale:

In accordance with the announcement made on 27 January 2020, Amigo launched a strategic review and formal sale process in accordance with the City Code on Takeovers and Mergers. As part of the formal sale process, parties with a potential interest in making an offer were requested to contact the Company’s financial advisers by no later than 5 p.m. on 17 February 2020.

Amigo has received indications of interest from several parties. Interested parties have entered into non-disclosure agreements with the Company and discussions are ongoing.

The announcement also notes that Richmond Group, the vehicle of founder and key shareholder James Benamor, has scrapped a plan announced early December to nominate a second director to the board — suggesting either that he believes he’ll get a result or he wants as few conflicts as possible if the only endgame available is a take-private at a severe discount to his float price. Here’s Goodbody;

While it is encouraging to see a number of parties register interest in the business, it is important to note that an indication of interest is completely non-committal (as there is no cost in registering interest) and it does not mean that formal offers will necessarily follow. Nonetheless, this morning’s announcement will surely be welcomed by the market and should see some strong stock price gains following a significant sell-off in recent days (the stock price is down c.12.5% in the last 3 days). Our readers will know that we have already been of the strong view that there would be significant interest in this business – and we think Provident Financial Group (PFG) will pursue discussions. So, the news is, in effect, no surprise to us.

What else? … Franklin Resources is buying Legg Mason, the WSJ reveals, as asset managers continue to seek the kind of defensive mergers that make the author look a right idiot. … Glencore results are okay. … Sirius Minerals is using the local press to address directly its unorthodox shareholder base. … Grainger’s bought a 348 home “build to rent” development in a train station car park in Nottingham. … ITM Power’s been given some public money to do something with hydrogen pumps. …. And the new UK chancellor ‘hasn’t been given a computer and can’t reach his phone’, evidence suggests

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What are we missing, valued reader? Tell us below.


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