Gapping up
In reaction to earnings/guidance:
- MNDY +5.6%
Other news:
- APE +27.5% (AMC won court approval of a revised stock conversion plan according to Bloomberg)
- X +27.3% (receives proposal to be acquired by Cleveland-Cliffs (CLF) for total consideration of $35.00 per share; company committed to maximize stockholder value after receiving multiple unsolicited proposals)
- PLSE +5% (files for 10022937 shares of common stock by selling shareholder)
- PHG +3.8% (Exor becomes a long-term investor in Philips supporting the company's strategy)
- CD +2.7% (enters into definitive agreement for "going private" transaction)
- APLS +2.7% (Investors are growing confidence in safety of APLS eye treatment according to Stat News)
- WLK +2.1% (raises dividend by 40% to $0.50 per share)
- CPA +1.6% (reports July traffic increased 9.9% yr/yr)
Analyst comments:
- PSN +2.3% (upgraded to Buy from Underperform at BofA Securities)
- CWCO +1.9% (upgraded to Buy from Neutral at Janney)
- CTRA +1.2% (upgraded to Overweight from Neutral at Piper Sandler)
Early premarket gappers
- Gapping up:
- X +28.5%, APE +26.4%, PLSE +5%, PHG +4.7%, CD +3%, FOXA +1.8%, CPA +1.6%, SPWR +0.6%, QSI +0.5%
- Gapping down:
- AMC -27.8%, NKLA -14.4%, PCYG -8.5%, NOVA -8.2%, VALN -7.4%, SSL -5%, XAIR -4.7%, JKS -3.1%, OPAL -2.1%, HE -1.2%, CHH -0.7%, HLI -0.7%
Airlines rush to avoid cancellations after engine recall
More than 1,000 Pratt & Whitney engines are affected, forcing carriers to change schedules and ground craft
Airlines in the US and Europe are rushing to find spare parts and engines and avoid flight cancellations after engine-maker Pratt & Whitney issued a product recall last month.
P&W’s announcement in July that more than a thousand engines would need to be removed from Airbus aircraft and inspected has forced a number of airlines — including Spirit Airlines, JetBlue Airways and Hawaiian Airlines in the US, and Wizz Air in Europe — to change flight schedules or ground aircraft.
Wizz has cut its growth target, is considering temporarily scrapping some flights or routes, and had warned that the engine problems are putting pressure on maintenance operations. Spirit told investors this month that with fewer aircraft to fly “we will likely be overstaffed” in the fourth quarter and early in 2024.
JetBlue chief operating officer Joanna Geraghty told investors this month that the company was looking to lease engines to minimise the fallout of removing “a handful” of engines from aircraft next month.
“We are trying to take whatever self-help measures are available,” she said. “But as you know, the supply is pretty constrained.”
P&W issued the recall after it discovered that contamination in the metal used to manufacture certain engine parts could cause cracks. Parent company RTX said that about 1,200 of the company’s 3,000 geared turbofan engines would need to be inspected earlier than planned. Roughly 200 of these inspections will take place by mid-September.
The GTF engine, which was introduced in 2016, is one of two that can be used in the Airbus A320neo narrow-body jet, the world’s best-selling aircraft. The recalls threaten RTX’s free cash flow, said Melius Research analyst Rob Spingarn, but “arguably worse is the damage to Pratt’s reputation as a provider of reliable large commercial engines”.
RTX has promised to compensate airlines. Chief executive Greg Hayes said on an earnings call last month that the recall was “not an existential threat” to either RTX or P&W, but he acknowledged, “it will be expensive”.
Aircraft engine supply has been tight for more than a year as the big manufacturers Boeing and Airbus have struggled to meet demand for new planes.
P&W’s current manufacturing issues add to ongoing durability issues that have dogged its GTF engine.
More than 57 airlines have their GTF powered aircraft parked or stored, according to consultancy IBA.
Analysis by data provider Cirium found that around 11 per cent of the GTF-powered A320 fleet delivered so far is currently parked, compared with just over 2 per cent for aircraft powered by rival Leap engines made by CFM International.
Almost one-third of those parked aircraft belong to Indian carrier Go First whose operations remain suspended pending bankruptcy proceedings.
The P&W engine recall is “simply another unwelcome issue which leaves airlines potentially short of capacity,” said Rob Morris, head of Cirium’s consultancy business Ascend.
Wizz has cut its summer growth target from 30 to 25 per cent year-on-year because of the recall. Chief executive József Váradi said it had added to the “creep” of supply chain problems. Together with too few spare engines and packed repair schedules, “that affected the availability of the aircraft, that affected the integrity of the operations”.
At the same time, airlines are extending lease agreements in response to booming travel demand, and demand for older aircraft is outstripping supply.
Aengus Kelly, chief executive at the world’s biggest lessor, AerCap, said about 40 per cent of used aircraft sales in the second quarter went to airlines, up from 20 per cent before the pandemic. Engines are in demand too, representing up to 40 per cent of AerCap’s second-quarter asset sales.
Lufthansa bought four wide-bodied A350 planes in May that Latam Airlines offloaded during a bankruptcy process, while Finnair leased two A330s to Australia’s Qantas after the closure of Russian airspace limited its long-haul operations.
“Airlines need to ensure they have access to aircraft to be able to maintain schedule integrity, and the leasing channel is the best option currently,” said TD Cowen analyst Helane Becker. “Lessors are generally happy to sell . . . as they are usually able to book a gain.”
Paul Geaney, chief commercial officer of lessor Avolon, said aviation’s “fundamental supply and demand imbalance” would last for several years.
China stocks hit after developer Country Garden suspends some bond trading
Property group’s shares slide to record low after company missed international coupon payments last week
Shares in Country Garden slumped to a record low on Monday after the Chinese developer suspended trading in at least 10 of its mainland bonds, spurring a wider sell-off in property-linked stocks.
The company, formerly the largest developer in China by sales, missed international bond payments last week in a sign that a two-year liquidity crisis across the real estate sector was threatening to escalate.
Shares in the group fell as much as 18.4 per cent in Hong Kong following a statement released over the weekend that said several bonds issued by the company and its subsidiaries would be suspended from trading this week.
Shares in developer Jinmao Holdings also fell as much as 9.8 per cent after the company issued a profit warning late on Friday. A Hong Kong index tracking the mainland property sector dropped as much as 4.8 per cent, while the broader Hang Seng index fell 2.5 per cent and China’s CSI 300 shed 1.3 per cent.
One of the Shanghai-listed Country Garden bonds in question matures next month and was last trading at 27 cents on the dollar, compared with close to par in January this year when China lifted Covid-19 restrictions and investors were optimistic about a strong recovery in the world’s second-largest economy. The bond was trading at 50 cents a few weeks ago.
Until recently Country Garden was seen as a safer prospect than many of its highly leveraged peers. Its battle to survive is a crucial test of the health of China’s property sector, and Beijing’s policies towards it, as homebuyer confidence dips.
On Monday analysts at Morgan Stanley downgraded Country Garden to underweight, warning that the company’s “worsening liquidity may lead to higher chance of default in the near term”.
Beijing has so far stopped short of bailing out any of the country’s developers, dozens of which have defaulted since the failure of Evergrande in 2021, and focused instead on the completion of residential properties. But officials have stepped up their supportive rhetoric about the sector in recent weeks amid concerns over widespread defaults.
“Two weeks ago, the government insisted that it was going to support the property sector and that simply isn’t happening,” said Dickie Wong, head of research at Hong Kong-based Kingston Securities. “The next 30 days are going to be really critical for Country Garden.”
Beijing launched a deleveraging campaign in 2020 designed to cool overheating house prices. It limited access to credit at private homebuilders, who typically sell residential apartments before they are completed and rely on the rapid circulation of cash.
Evergrande, the world’s most indebted developer, last month disclosed losses of $81bn over 2021 and 2022, revealing the scale of the debt crisis at the company, which is going through an opaque restructuring process.
In a further sign of debt woes, multiple listed companies in China said in stock exchange filings over the weekend that they had not received payments due from companies linked to Zhongzhi Enterprise Group, a private creditor to property groups including Evergrande.
Country Garden on Friday said it would “spare no effort in self-rescue” as it disclosed expected losses of Rmb45bn-55bn ($6.2bn-$7.6bn) for the first half of the year. From January to July, its sales were Rmb140.8bn, down 61 per cent compared with the same period in 2021 before a sector-wide cash crunch took hold.
“You can see the shares tumbling and all they can do at the moment is stop trading to try and stabilise sentiment,” said Wong.
Elsewhere in the region, Japan’s Topix and South Korea’s Kospi both fell about 1 per cent.
Billionaire Agnelli family takes 15% stake in Philips
Exor says it backs Dutch group’s shift from consumer electronics to healthcare
Italy’s billionaire Agnelli family has acquired a 15 per cent stake in Dutch conglomerate Philips, promising to back the group’s effort to shift away from consumer electronics to healthcare.
As part of the deal announced on Monday, Exor, the Agnelli’s holding company, can increase its stake to 20 per cent. Exor said it intended to be a “long-term minority investor”.
Philips, which was founded 132 years ago, is counting on a shift from electronics towards health technology to help revive a share price that has tumbled more than 60 per cent since April 2021.
John Elkann, the chief executive of Exor, said: “The path of change taken by Philips in recent years has created a company that combines two areas — healthcare and technology — to which we are committed.”
Exor said it acquired the 15 per cent stake through “on-market” purchases of the stock and existing Philips shareholders would not be diluted.
>>> Up
* Bechtle Raised to Buy at Hauck & Aufhaeuser; PT 54 euros
* Europris Raised to Buy at SEB Equities; PT 78 kroner
* Quilter Raised to Neutral at JPMorgan; PT 90 pence
* Siemens Raised to Buy at Berenberg; PT 170 euros
>>> Down
* Braemar Hotels Cut to Neutral at B Riley; PT $3.50
* Mosaic Cut to Underweight at Barclays; PT $40
* Novartis Cut to Market Perform at ZKB
* Oncopeptides Cut to Hold at DNB Markets; PT 8.50 kronor
* Schweiter Cut to Market Perform at ZKB
>>> Initiation
* Volvo Reinstated Equal-Weight at Morgan Stanley; PT 210 kronor
>>> Call
* Gerresheimer Gets Another Buy as Jefferies Sees Strong Growth
* JPMorgan Stock Strategists Underweight Euro-Area, Prefer Japan
* RBC Strategist Sees US Stock Market at Risk of a Pullback
- Philips (PHI1 TH) +6.3%
- *JOHN ELKANN’S EXOR BUYS 15% STAKE IN PHILIPS; NO TERMS
- Hexagon (HXG TH) +1.1%
- Rio Tinto (RIO1 TH) +1%
- Metals at Risk on China Property Ructions
- Vodafone (VODI TH) +1%
- Anglo American (NGLB TH) +0.7%
- Copper’s Supply Gap Needs Shorter Greenfield-Project Timelines
- Bechtle (BC8 TH) +0.4%
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- Thyssenkrupp (TKA TH) -1.1%
- Thyssenkrupp Reader Interest Increases
- Eni (ENI TH) -1.1%
- TotalEnergies (TOTB TH) -1.3%
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- Rolls-Royce (RRU TH) -1.5%
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- Fresenius Medical (FME TH) -2%