Freddie George Comments: FTSE Edges Higher Despite BAE and BG Sliding

December 20, 2013,

Despite markets moving higher again, there have been some notable fallers so far.

BAE Systems is down 21.9p to 420.1p after Thursday’s news that the United Arab Emirates had pulled out of talks to buy the Eurofighter Typhoon aircraft.

BG has fallen 16p to 1241.5p as it declared commerciality on the Carioca field in the Santos basin in Brazil, but with lower than expected oil volumes. Investec said:

This is one of the smaller fields on the block. The announcement is not a surprise as the partners (Petrobras 45%, BG 30%, Repsol/Sinopec joint venture 15%/10%) had a legal deadline of end-2013 to declare commerciality.

There is a small wrinkle in the separate press releases – Petrobras states that recoverable oil volume from Carioca is 459m barrels. BG does not repeat this number but states that Petrobras’s figure is based in the initial stage of development and that is sees upside from further drilling.

It was clear that Carioca was likely to be smaller than initial expectations a couple of years ago (up to 1.7bn barrels) but the Petrobras figure today is likely to be below market expectations.

Overall the FTSE 100 has added 24.72 points to 6609.42, with investors relieved the US Federal Reserve suggested interest rates would remain low even as it announced a surprise $10bn trimming of its $85bn monthly bond buying programme. Mike van Dulken, head of research at Accendo Markets, said:

The prospect of Fed tapering has finally been taken as a positive, implying belief in economic recovery and faith in US interest rates staying low. This could help equities maintain a northerly course.

On the flip side volumes are low (normal pre-holiday) which can be both a positive and negative in terms of volatility.

With tapering no longer a taboo subject, we also acknowledge the potential for markets to revert their gaze to any other issues (China cash crunch, Eurozone growth, etc) and stick the boot into current optimism.

Elsewhere Carnival cruised up another 73p to £23.85 after Thursday’s better than expected results, prompting UBS, Credit Suisse and Nomura to raise their price targets. UBS said:

We have upgraded Carnival to buy from neutral based on higher conviction in the forward outlook. We have raised 2014 earnings per share to $1.87 from $1.71 and 2015 to $2.54 from $2.42, and raised our price target to $41 from $34.

The biggest upside [from the company’s conference call] was hearing Costa brand, in its first quarter of positive pricing since Concordia in January 2012, saw yields increase double-digits. Aside from benefit to yields from having 15% of fleet recovering yield at a double digit rate in the fourth quarter, more important is the idea that if Costa can recover to that degree, then Carnival should also be able to recover from Carnival brand’s image issues from a far less serious issue.

Marks & Spencer has recovered 9.2p to 453.4p following recent worries about discounting hitting its margins and despite news of a 30% off sale on Saturday. But Freddie George at Cantor Fitzgerald kept his sell rating:

We are downgrading our 2014 pre-tax profit forecast from £645m to £630m, taking earnings per share down from 31.5p to 30.8p and making similar revisions to our subsequent year forecasts.

We are retaining our sell recommendation but downgrading our target price from 445p to 425p reflecting the downgrade to forecasts. We continue to believe it will take a number of seasons before there is a marked improvement in performance in womenswear. The strategy still appears to be evolving and not set in stone. Debt levels remain over £2bn restricting the potential for an accelerated dividend payout, and there remain accounting issues relative to peers. In the meantime, the stock has declined by more than 10% in the last quarter.