From UK-Analyst.com: Wednesday 3rd February 2010

As the Ministry of Defence published a Green Paper in preparation for a post-election spending review, the government said that the British armed forces would fight alongside allies in future wars; the lack of enthusiasm shown by some of our NATO partners for the Afghan war would seem to make this an excellent idea. As both main parties continue to dodge the issue of the nation's ballooning deficit, the Institute for Fiscal Studies said that 13 billion pounds of tax rises or spending cuts would be needed in 2015-16 to reassure global investors. Greece (birthplace of democracy) is set to be placed under stringent monitoring by Brussels commissars to ensure it obeys orders regarding deficit reduction. At the London close the Dow Jones was down by 53.3 points at 10,244.55 and the Nasdaq was down by 7.98 points at 2,182.08.

In London the FTSE 100 fell by 30.16 points to 5,253.15; the FTSE 250 dropped by 62.96 points to 9,417.81; the FTSE All-Share slipped 15.22 points at 2,695.83; and the FTSE AIM Index lost 1.55 points to close at 674.85.

Brokers' Notes

Citigroup upgraded its stance for shares in the London Stock Exchange (LSE) from 'sell' to 'hold', and increased its target price from 660p to 675p, commenting that it saw "modest" evidence of a recovery in trading volumes in January, while fixed income and clearing activity improved markedly during the third quarter. However, the broker also views the exchange's business mix as being too biased towards cash equities execution and data sales; these continue to be under threat from competitors. It is also expects to lose market share to its multilateral trading facility rivals, with terminals taking live data likely to be slow to recover. These will also come under pricing pressure as a result of lost market share. LSE shares rose by 5p to 654p.

Daniel Stewart upgraded its stance for Healthcare Locums (HLO) shares from 'hold' to 'buy', saying that the trading background in Britain is still "very positive" and that 2010 "looks to have started well". The Report on Jobs for January indicated that demand for temporary staff rose from 53.2 to 55.7; this is particularly important for Healthcare as most of its UK business falls into this category. The demand reading for the 'Nursing/Medical/Care' category was in the middle of the results table. Demand for permanent staff rose strongly, at 62.9, well above the average of 56.6 of the last two years. The broker's price target was left unchanged at 290p. The shares gained 2.25p to 258.25p. 

After a visit to the mineral sands project in Mozambique, Canaccord Adams raised its 'buy' target on Kenmare Resources* (KMR) from 40p to 50p. The broker said that it has been reassured that the commissioning problems experienced in the past were now "well under control", with this mineral resource "now set to deliver value to [the firm's] shareholders". Estimating the per share value in the project to be around 58-63p, the broker urged the management to undertake expansion at the site as soon as possible. It expects the expansion to be "fully embedded" by 2014, with forecast operating cashflow of 160 million dollars per year. "A solid set of production numbers for the first quarter of 2010" would help to remove some of the current discount in the share price, Canaccord added. Kenmare shares rose by 0.5p to 24.5p.

Panmure Gordon initiated its coverage of Italian restaurant chain Carluccio's (CARL), saying that it is poised to enter "a new growth era" as it is able to exploit strengthening sales, declining cost pressures and growing economies of scale. New stores and forecast like-for-like sales growth are expected to drive earnings forward over the next three years, and the broker said that the cash balances and infrastructure exist to support an acceleration of the opening programme. Trading in the period from October to December is expected to have gone well, although sales at the turn of the year will have suffered from the weather conditions. An increase of its return on invested capital is forecast, from a current level of 22.5% in FY2009 to 28% in FY2012, with a return to dividend growth expected from FY2011 "given the strong and growing cash balances". The stance was set at 'buy' with a price target of 103p. The shares fell by 1.5p to 90p.

RBS said that ARM Holdings (ARM) is the best way to play "the growing smartphone market", but it added that the company is well-placed in other areas as well. Maintaining its 'buy' stance, the broker increased its price target from 220p to 235p, commenting that it expects the firm to benefit from "a resurgent semiconductor market" in the home, enterprise, embedded and mobile PC sectors. Royalty revenues are also expected to gain from the increasing popularity of smartphones over 'traditional' mobile 'phones, increasing to 65% of sales by 2014, from a present level of 50%. This is due to the fact that smartphones carry around 20-45 cents of royalty per device, compared to 3-10 cents for standard mobile 'phones. EBIT margins are also expected to rise from 31% in 2009 to 40% in 2011. The shares rose by 5.2p to 205.5p.

Blue-Chips

Standard Life (SL.) exceeded expectations as it reported a 7% fall in sales during 2009, better than forecast thanks to a recovery in the second half of the year. Pensions and life insurance sales for the year were 14.7 billion pounds, with the UK recording a 10% fall to 10.1 billion pounds, again above forecasts. Sales in the fourth quarter were up 29% year-on-year at 4.2 billion pounds. European sales fell 24% but Canada and Asia rose 16% and 30% respectively. Europe is expected to remain "tough" but good performance is anticipated from Canada and opportunities for its Asian business are seen. Finance director David Nish has now assumed the helm of the firm, replacing long-time chief executive Sandy Crombie; no change of direction is expected from the new man. Standard Life is the first UK insurer to report results, and ING said that it was a "good kick-off to the reporting season". Standard Life shares rose by 7p to 204.7p.

Scottish & Southern Energy (SSE) said that dividend for the year would be at least 70p, a rise of 6%. The utility also expects a "moderate increase" in underlying profits for the year. In the nine months to December 31st 200,000 customers joined the company, for a total of 9.2 million accounts. The firm said it saw sound performance in day-to-day operations and good progress in its investment projects. The shares fell by 17p to 1,173p.

Software firm Autonomy (AU.) reported a 47% rise in revenue for the full year to 739.7 million dollars and pre-tax profit for 2009 up 55% at 323 million dollars. The share price rose by 25p to 1,594p. Adjusted earnings per share rose by 35% to 33 cents, close to analyst expectations of 34 cents. The firm said that it is seeing strong growth in sales of its patented search technology and in cloud computing. During the last three months of 2009, the company won contracts from BAE Systems, Boeing and Santander, which has given it confidence for the 2010 outlook. Panmure Gordon said that it liked the firm's expanding global technology franchise and its regular introduction of new products to drive new revenue growth. It raised its 'buy' target price from 1,817p to 1,920p.

Eurasian Natural Resources (ENRC) said that 2009 ferrochrome output jumped 56.7% to 351,000 tonnes compared to 2008, while iron ore extraction leapt by 74.1% to 10.639 million tonnes. ENRC said that the low cost of its businesses allowed it to stage a recovery from the poor results of 2008. The shares fell by 25.5p to 951.5p.

Mid-Caps

Partygaming (PRTY), the firm which owns the Partypoker.com site, reported that its acquisitions of Cashcade and World Poker Tour helped its 2009 sales to rise 32% to 131.2 million dollars. Removing acquisitions, sales rose 12% year-on-year, with strong performances in casino and sports betting. January trading has been in line with expectations, and 'clean' EBITDA for 2009 is also expected to be ahead of forecasts. Active player days for the year increased by 24% over 2008 to 7.8 million. The firm said that it sees further opportunities for consolidation in the sector, and it is rumoured to be in talks with Austrian firm Bwin Interactive Entertainment. Shore Capital retained its 'sell' stance, saying that it sees better value elsewhere in the online gaming sector. The shares rose by 1p to 285.9p.

Carpetright (CPR) shares fell by 33p to 939p said it would not meet forecasts as heavy snow and low temperatures hit sales. The firm saw like-for-like sales growth in the UK of 2.3% in the 13 weeks to 30th January; analyst predictions had been in the range of 5-10%. Like-for-like sales in the European division fell by 3.7%. Weak comparatives, increasing numbers of housing transactions and market share gains at the expense of Allied Carpets all helped the firm, which had seen double-digit growth in the first weeks of the period. Carpetright said it was hopeful of recovering some lost trade in the coming weeks. Seymour Pierce downgraded its stance on the stock from 'hold' to 'sell', saying the stock looks "more than fairly valued".

Power solutions provider Chloride Group (CHLD) saw third quarter trading in line with expectations, and the positive trend in its order intake has continued. Service revenues continued to grow organically, and the firm said it continued to invest in "higher potential growth markets". Strong cash generation partially offset increased net debt from strategic investments made. Chloride said that it remains cautious about the outlook for the year but the order intake gave it "confidence in the outturn for this financial year". Arbuthnot Securities called the order growth "an encouraging forward indicator", and it increased its target price from 195p to 210p. The shares inched up by 0.3p to 187p.

Small Caps, AIM and PLUS

Marketing firm Creston (CRE) said that expectations for the full year remain unchanged and that it is trading in line with expectations. In the nine months to 31st December, revenue fell by 4%, but new business wins helped the new year got off to a good start. The headline operating profit margin remained unchanged from the first half of the year at 17%. Like-for-like third quarter revenue is in line with that of the previous year, and the decline for the year has improved from 6% at the half year to 4% at the end of December. An "encouraging number" of new business opportunities was reported. The shares rose by 4p to 86.5p.

Technology products and services provider Acal (ACL) said that it has returned to profitability as trading has improved since September. The improvement has been achieved through increases in gross margins and reductions in operating expenses. Improving sales trends are also being felt, and the firm said it is "cautiously optimistic" of a sustained improvement in marketing conditions. Acal shares gained 4.25p to 141p.

Business space firm Workspace Group (WKP) announced that targeted sales in the period 1st October to 2nd February were achieved at good yields without compromising the quality of the portfolio. In December, the firm acquired 18 former Workspace Glebe joint venture properties for 83 million pounds, a deal which the group said increased its scale and underlying potential. Seven disposals were completed during the period, for a gain of 22 million pounds, and two more for 12 million pounds are planned for February. The total valuation of the group's property increased by 17% to 711 million pounds. Panmure Gordon said the results demonstrated "an encouraging uplift in the level of enquiries and lettings", and it kept its 'buy' stance and target price of 25p. The shares rose by 1.25p to 23.25p.

Dawson Holdings (DWN), the media services company, issued a profit warning, saying that it has been affected by a number of UK publishers substantially reducing their promotional copy. As a result, it will not reach forecast pre-tax profit for the year. The Marketing Services division has not yet seen a recovery in client spending, but the Books arm has performed largely in line with expectations thanks to export and eBook sales which have offset a weaker UK print performance. The group said that its businesses remain cash generative and that it is focussed on managing its cost base. Shore Capital said that it continues to view the firm as having recovery potential, but it cut its FY2010 pre-tax profit forecast from 2.1 million pounds to 1.1 million pounds. Even so, investors shunned the stock, which fell by 1.5p to 5.875p.

Anglo-Asian Mining (AAZ) shares jumped by 3p to 13.75p as it announced that gold production in January at its Gedabek mine in Azerbaijan jumped by 21% to 3483 ounces. The mine has now produced 14,838 ounces since production started in July. Ongoing increases in production are anticipated in 2010, and the firm hopes to exceed its 12-month operational target of 25,000 ounces. Numis Securities said that the company has made "significant progress overcoming its technical problems", and it upgraded its stance from 'sell' to 'hold', raising its target price from 6p to 11p.

Plastic shopping trolley manufacturer Supercart (SC.) said that its North American subsidiary, Plasti-Cart, has received a further order from Toys'R'Us for its products. The order, worth over 480,000 pounds, is scheduled for delivery in the first quarter of 2010. The shares pushed on 2p to 13.75p.

Straight Group (STT), the environmental products and services firm, reported that it has been appointed by the Eastern Shires Purchasing Organisation and the Central Buying Consortium - local government quangos which cover an area from Hampshire to Norfolk - to supply a range of products under a three-year refuse and recycling programme which is expected to generate revenues of over 8 million pounds for the group. Straight shares rose by 10p to 106.5p.

Shares in online gaming group Webis Holdings (WEB) dropped by 0.5p to 1.75p as it announced a 21% fall in turnover to 56.4 million pounds in the half year to 29th November, as wealthy players abandoned its games. EBITDA for the period plummeted 77% to 83,000 pounds, although gross margin increased from 2.38% to 2.59%. Good turnover performance was recorded at European Wagering Services, up 22% as a result of gaining additional players from the link2bet.com website. The betinternet.com turnover fell by 33% to 37.9 million pounds.

Rheochem (RHEP), the oil and gas services group, said that a change of customer attention towards larger and longer-term projects has affected first half trading. Revenue for the six months to 31st December is expected to be 11-12 million dollars, as customers shift to coal seam gas ahead of several proposed onshore liquid-natural-gas (LNG) projects. The introduction of government grants in Australia for geothermal drilling is expected to benefit Rheochem, with its expertise in this area. Improved revenue visibility is expected in the second half, along with significant growth. Annual revenue is forecast to be 28-30 million dollars, but this could increase due to offshore drilling activity. The shares fell by 0.875p to 7.375p.

*Kenmare is a corporate client of RSH, the ultimate owner of this website.