Special Sit: Luxury – Our thoughts following YTD performance + pair trading recommendation
Luxury – our thoughts following YTD performance + pair trading recommendation
Ø 2016 was a challenging year for the luxury sector. After five years of strong performance and accelerating growth rates, in 2016 most of the companies experienced slower revenue growth and operational de-leverage. This was strongly felt in the first half of 2016 which was the weakest since 2009 in terms of growth.
Ø The overall deceleration in 2016 was led by numbers of factors. The first and most obvious one was weaker Chinese consumption, specifically in Mainland and HK which were tough markets with declining revenues. Another negative factor was the strong dollar which resulted in declining tourist spending. To that, external events such as terrorist attacks in Europe and the uncertainty surrounding the UK Brexit and US election also didn’t help to improve the sector’s sentiment.
Ø However, in 3Q16 many luxury companies showed improved performance supporting a better second half and positive outlook for 2017. Last week Hugo Boss raised its guidance for 2016 after better-than-expected sales for 4Q16. Burberry also reported good growth in revenue and comps, beating analyst estimates. Both companies stated they have benefited from an improving environment in China. This echoes to Cucinelli, Richemont and Tiffany’s recent updates that Asia is returning to growth. This is clearly a bullish signal for the sector that may suggest that the negative trend in China is reverting, setting the stage for another uptrend in the industry. Next page we discuss what we expect will drive the sector in 2017.
Ø On the back of the positive sentiment, estimates were upgraded and the market now expects the luxury sector to return to mid-single digit growth in 2017, and to renewed operating leverage. This is supported by better consumption trends globally and favorable y/y numbers.
Ø The renewed estimates upgrades have boosted valuation multiples in recent weeks (the sector had a very strong start to the year with most of the companies significantly outperforming the market). Though there are encouraging signs of recovery, we believe that investors should also keep in mind that the recovery seen in 3Q16 is still fragile, and could be proved short lived.
Ø On a relative value basis, we recommend the following pair trade: Long - SFER: IM + MONC: IM /Short – CFR: VX + TOD:IM (see more details on page 4).
Full report attached!
Regards,
Dafna Yagur | Head of Research (Israel)
Makor Capital
Direct +972 3 5453747
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Fintechs warned to expect tougher regulation
BoE’s Carney says disruptive technology could signal end to traditional bank model
The governor of the Bank of England has put banks and fintech companies on notice to expect tougher, more intrusive regulation as the use of disruptive technology in financial services becomes more sophisticated and widespread.
Mark Carney, who is also chairman of the Financial Stability Board that makes recommendations to G20 nations, said on Wednesday that fintech could signal an end to the traditional universal bank model. He added that it could also increase “herding” risks and make the system more interconnected and complex.
“As those risks emerge, authorities can be expected to pursue a more intense focus on the regulatory perimeter, more dynamic settings of prudential requirements, a broader commitment to resolution regimes, and a more disciplined management of operational and cyber risks,” he told an audience in Wiesbaden, Germany.
The Basel-based FSB is already scrutinising what risks and rewards fintech might present, and what regulators should do about it. It will report to the G20 in July.
Mr Carney pushed London as the “world’s leading fintech centre”, a remark that will not go unnoticed among his audience. German regulators are preparing to meet as many as 20 foreign banks next week to explain how to move some of their operations to Frankfurt in the wake of the UK’s Brexit referendum, according to a Reuters report earlier on Wednesday.
The BoE has embraced fintech innovation under Mr Carney. It has even recognised how the technology behind bitcoin might improve central banking services, and is at the early stages of examining a digital currency.
Mr Carney said on Wednesday that the burgeoning peer-to-peer lending sector, which in the UK now represents about 14 per cent of new lending to small businesses, “does not, for now, appear to pose material systemic risks”.
This sentiment runs against comments made last year by Adair Turner, the former chairman of the now-defunct Financial Services Authority and a former contender for the job that Mr Carney now holds. Lord Turner said last year that P2P loans could be the source of losses that would “make the worst bankers look like absolute lending geniuses”.
Earlier on Wednesday, Bundesbank president Jens Weidmann, who is also involved in the FSB, echoed the views of his Bank of England counterpart, saying that while enhancements in financial technology could bring banking services to more people, they could also “exacerbate financial volatility”.
Mr Weidmann also warned on the threat of cyber crime, saying that the more markets relied on digital technology “the more vulnerable the interconnected global financial system becomes to a cyber attack”.
Both Mr Carney and the Bundesbank president warned that there were risks emanating from the use of so-called robo-advice, where algorithms are used to manage risk.
The Bank of England governor said this could lead to excess volatility from “herding”, particularly if the underlying algorithms proved overly sensitive to price movements or all worked a similar way.
Intesa chief faces challenges in selling merits of Generali bid
Regulators and investors need convincing of deal that would reshape Italian finance
The vast arched stone windows of the fortress-like headquarters of Intesa Sanpaolo were lit until well past midnight on Tuesday. Italy’s largest bank by assets had just confirmed it was weighing a bid for Italy’s largest insurer Generali, sending shockwaves through Italy’s tight-knit financial community.
The mooted deal if successful would reshape Italian finance, creating a financial colossus in Italy with a combined market value of €60bn, dwarfing Intesa’s nearest rival UniCredit.
But in the cold light of day on Wednesday, people close to the discussions admitted any plan is embryonic. The European Central Bank, which would need to give approval for any offer, has not even been informed as “there is no firm project yet,” said one person close to the deal.
The sensitivity is understandable. Carlo Messina, Intesa’s well-regarded chief executive, has a task ahead of him to convince the owners of the bank’s shares — 60 per cent of which are in the hands of foreign investors — of the merits of a deal merging banking with insurance.
With a market capitalisation above €24bn, a takeover of Generali would be the biggest acquisition by a bank since the financial crisis of 2008. Regulators have gone sour on the idea of mega deals in banking, reflecting the political backlash against lenders becoming “too big to fail”.
In addition, regulators have been pushing most Italian banks to reduce their high levels of non-performing loans and may be reluctant to allow Intesa to embark on a potentially risky expansion into insurance at a time when there are worries about both the health of the eurozone banking system and the region’s political stability.
Moreover, Mr Messina does not want to put at risk either its capital nor its rich dividend policy, two pillars on which the bank’s investment story has been based and factors that may sink any deal before it begins, said a person close to him.
“It is not without risk or complexity,” says one person briefed on Intesa’s plans. “People can see the potential benefits, but also the risks.”
Nonetheless, Intesa, which had started to look at the potential of a bid in the run-up to Christmas, sees Generali as the answer to the long-running question of how to grow its fee-earning asset management business, say people close to the bank. The insurer has a 15 per cent share of the Italian life insurance market, and its strategy has focused on growing its fee-earning business rather than more traditional, capital-intensive insurance products.
Bankers say there is scope for Intesa to improve distribution of Generali’s products by selling them through its own branches.
The two also have history in Italian life insurance. They were partners in a joint venture called Intesa Vita until 2009, when the bank bought Generali’s share for about €700m.
Generali, the largest shareholder of which is Italy’s Mediobanca, has been seen as vulnerable to break up since the exit of its well regarded CEO Mario Greco last year and the arrival of new CEO Frenchman Philippe Donnet.
And Mr Messina is not alone in his interest, say people with direct knowledge of the matter. Allianz chief executive Oliver Bäte has expressed interest in Generali’s French and China operations, said two people informed of the matter. Allianz declined to comment.
Italy only accounts for about two-fifths of Generali’s operating profits, and bankers say Intesa is unlikely to want the overseas operations. The two largest are France, which generates €650m in annual profits, and Germany which produces €800m. Analysts at UBS value Generali’s French business at about €4bn. France’s Axa has been linked with the German business, valued at about €5bn.
Both Axa and Allianz want to make acquisitions, but see property and casualty insurance businesses as a higher priority than life insurance. The Generali units would contain large doses of both. And Axa in particular has said several times that it is not interested in deals with large rivals.
“Tomorrow I will have new competitors such as Google, Microsoft and Facebook coming into my garden. I’d rather focus on the competition of tomorrow than combine with the competition of today,” Thomas Buberl, Axa chief executive, said recently.
Allianz, meanwhile, has an M&A budget of about €1bn per year, but has not fully spent that amount for the past few years. Analysts have been pencilling in a share buyback of up to €2.5bn if it does not find any suitable targets.
People close to the discussions said they expected if Intesa makes a move on Generali other operators may also enter the fray. Analysts suggested even UniCredit, if its CEO Jean-Pierre Mustier succeeds with a €13bn capital raise next month. A person close to UniCredit said Mr Mustier would prefer an independent Generali.
James Shuck, analyst at UBS says: “This is a once-in-a-generation opportunity. Assets like these just don’t come up.”
Stryker has capacity for more buys; ‘actively looking across our portfolios’
Stryker [NYSE:SYK], the Kalamazoo, Michigan-based medical technology company, has the financial capability and desire to pursue further acquisitions, according to CEO Kevin Lobo.
On Tuesday’s 4Q16 earnings call, Stifel analyst Rick Wise asked if Stryker was less likely to pursue M&A in 2017 due to its share repurchase and recent acquisitions of Sage Products and Physio-Control International.
“You should definitely not read that in to it,” Lobo replied, noting that the company’s USD 250m buyback was a modest sum. “We continue to be actively looking across our portfolios for acquisitions and we have the financial capacity to do more deals.”
The CEO said Stryker might pursue further share repurchases if deals did not materialize, adding that its capital allocation philosophy had not changed from before the Sage and Physio transactions.
“We have the capacity and the willingness to do more deals,” he added. “Certainly, Medical had a terrific year organically, while integrating two big acquisitions, but our other divisions all have bandwidth to be able to take on acquisitions.”
Stryker offers products and services in three main business divisions: Orthopaedics; Medical and Surgical; and Neurotechnology and Spine.
The company announced in February last year its agreement to buy Washington-based Physio, a portfolio company of Bain Capital that provides monitors/defibrillators, automated external defibrillators and CPR-assist devices, for USD 1.28bn. Earlier that month, Stryker said it had agreed to purchase Sage, an Illinois-based medical supplies manufacturer, from Madison Dearborn Partners for USD 2.775bn.
In addition to these two large acquisitions, Stryker made several much smaller buys in 2016. While the company has been consistenly active on the M&A front over the past decade, last year was its most active in terms of both acquisition spend and number of notable deals.
JPMorgan and Sullivan & Cromwell advised Stryker on the Sage deal, while Skadden, Arps, Slate, Meagher & Flom was used for Physio. Both law firms have been used on a number of other deals in the last 10 years. Covington & Burling, Baker & McKenzie and various in-country law firms have also been used on occasion.
Stryker reported cash and marketable securities of USD 3.4bn and total debt at year end of USD 6.9bn. The company has a market capitalization of USD 45.4bn.
Eurogroup chief Dijsselbloem: Greece is on track to meet 2016 budget goals - press
Colruyt: "Une sortie de la Bourse est une suggestion intéressante"
Jef Colruyt a réagi au rapport de la banque Degroof Petercam qui met en avant la solide position financière du distributeur et qui pourrait lui permettre de quitter la Bourse. L'idée n'est pas écartée par la famille Colruyt, mais il est encore trop tôt pour y penser sérieusement.
La note quotidienne de la banque Degroof Petercam s'est attardée ce mercredi sur l'action Colruyt
COLR 0,51%
. L'analyste Fernand de Boer y explique que l'enseigne de grande distribution peut se mettre à "rêver" d'une sortie de Bourse.
Après le sommet atteint en juin dernier par le cours de l'action Colruyt, la correction à la baisse a été de plus de 15%, restant toutefois en ligne avec les projections du groupe. De plus, Colruyt a racheté pour 100 millions d'euros d'actions propres. Tout ceci fait dire à Degroof Petercam, exemple à l'appui, que le distributeur peut à présent profiter du prix actuel de son action pour racheter encore plus de titres. Dans le scénario où le free float de Colruyt est inférieur à 40%, l'analyste se demande alors pourquoi la famille Colruyt ne change pas de philosophie pour désormais détenir 100% des actions. Il reste que pour atteindre cet objectif, la famille Colruyt doit mettre 2,7 miliards d'euros sur la table...
Le patron du groupe, Jef Colruyt, estime que le scénario d'une sortie de Bourse n'est pas inintéressant en soi. Et même si aucun plan n'a encore été établi dans cette direction, il précise qu'"une sortie n'a jamais été pour nous inimaginable."
"Nous continuerons sans doute à racheter des actions", souligne encore Jeff Colruyt, rappelant que "notre politique a toujours été de racheter nos actions quand le marché est bon. C'est avantageux pour les actionnaires qui pourront avoir un plus grand dividende par action".
Pour conclure, Jef Colruyt indique que "la cotation en Bourse ne nous apporte pour l'instant pas d'avantages, mais pas d’inconvénients, non plus. La Bourse nous tient bien éveillés.
Gapping down
In reaction to disappointing earnings/guidance:
In reaction to disappointing earnings/guidance:
- TXT -8.9%, (also acquired ACAT for for $18.50/share) VIVO -8.8%, FMBI -6.3%, EAT -5.6%, FCX -3.3%, CA -2.9%
- MIK -2.9%, (Michaels Stores sees Q4 EPS of $0.94-0.96 vs $0.96 Capital IQ Consensus Estimate; announces secondary offering of 18 mln shares)
- HA -2.5%, APH -1.8%, UTX -1.2%, STLD -1%, COF -0.9%, DFS -0.9%, TRCO -0.9%, SC -0.7%, RES -0.7%, HOPE -0.6%,BKU -0.6%
Select metals/mining stocks trading lower:
- AUY -1.8%, RIO -1.3%, BBL -1.2%, SLV -1%, GFI -0.6%, CLF -0.5%
Other news:
- HZN -10.2% ( to offer 3.5 mln shares of common stock and $100.0 mln Convertible Senior Notes due 2022 in separate registered public offerings; updates guidance to reflect impact from Westfalia acquisition)
- NAK -7.2% (modestly pulling back following strength early this week)
- NCIT -5.9% (NCI says that numerous prior financial statements should no longer be relied upon in connection with the previously disclosed internal investigation), NEWT -5.2% (announces 1.5 mln share common stock offering)
- MRCY -2.7% (to offer 5 mln shares of its common stock pursuant to an underwritten public offering )
- SSI -2.5% (Varex Imaging will replace Stage Stores in the S&P Small Cap 600)
- BHP -0.9% (releases 1H op update; full year production guidance maintained for petroleum, iron ore and coal (copper reduced))
- ABX -0.8% (announces preliminary full-year gold production)
- ASYS -0.7% (after 45% move higher on Tuesday)
- PAA -0.5% (Plains All American announces agreements to acquire Permian Basin gathering system for $1.2 bln and to sell assets for $380 mln; sees Q4 EBITDA near midpoint of guidance; guides FY17 cap-ex)
Analyst comments:
- VZ -5.3% (downgraded to Mkt Perform from Outperform at Raymond James)
- AKS -4.1% (downgraded to Neutral from Overweight at JP Morgan)
- VOD -2.7% (downgraded to Neutral from Buy at BofA/Merrill)
- NOK -1.9% (downgraded to Sell from Hold at Danske Bank)
- CONE -1.6% (downgraded to Sell from Neutral at Citigroup)
- LUV -1.3% (downgraded to Neutral from Overweight at JP Morgan)
- COH -1.2% (downgraded to Outperform from Buy at CLSA)