Morning Comment - 12.07.2010.
Good morning! Something I will take no credit for – but so rightly pointed out. Computer and software shares have slumped to the lowest valuations in two decades, a sign they will rebound as Standard & Poor’s 500 Index companies start spending their RECORD CASH.
“Record cash” (aka liquidity) is key here. We have been pointing out somewhat relentlessly
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that liquidity is there sitting on the sidelines waiting for the summer lull to finish to get put into action. Corporate cash rose six straight quarters through March, boosting speculation executives will upgrade computers after reducing investments for THREE (!) years. A good hint comes from the S&P 500 Information Technology Index which rose 5.6 percent last week, the BIGGEST gain in a year!
As a lad who graduated into sales-trading in 1999 and formed as a trader in the bear mauling of NASDAQ and UK TechMark between 2000 and 2003, I’d be the last one to preach on techie stocks
However, what I am seeing here is that falling valuations and a rebound in spending may lift shares EVEN if U.S. growth slows.
It may sound absurd but this market (and this amount of cash in the market) may make our beloved ECO numbers coming out of the US irrelevant. Q2 earnings season starts today with Alcoa to be the first to report (after market close), but attention mostly will be paid towards JP Morgan, Citi, Bank of America & GE reporting end of week. Surprises are welcome to trigger the indices determine a direction. For S&P 500 index ~ 1,5% left to breach a major resistance line and here earnings reports might be a trigger.
RUSSIA:
1. X5 Retail Group (FIVE LI) 2Q10 retail sales: traffic likes low prices. NEUTRAL Discounters remain on the uptrend. Last Friday, X5 Retail Group disclosed its 2Q10 and 1H10 trading update, which showed that company’s pricing policy (price discounts on target assortment), aimed at increasing consumer traffic, still works, though at the cost of average basket. In 2Q10 X5`s net retail sales increased by 18% y-o-y in ruble terms (vs. 20% y-o-y growth in 1Q10), which consists of 4% y-o-y growth in LFL sales, 11% y-o-y growth from organic selling space expansion and 3% y-o-y sales growth contributed by Paterson stores (acquired in 3Q09 and already fully integrated). FY10 guidance confirmed; store openings comply with full-year target. Earlier X5 said its plans to spend this year RUR18 bn (about $582 mn) for opening of 7-10 hypermarkets, 15 supermarkets and 200-250 discounters and reach at least 20% y-o-y growth in sales (in ruble terms). X5 Retail Group plans to disclose its 1H10 financials on 26 August. Investors would pay much attention to the management comments which are expected to follow the results disclosure. We maintain our BUY recommendation on the stock with end-2010 target price at $50 per GDR. A reason for concern – CFO leaves the company. Also on Friday, X5 reported that its CFO, Evgeny Kornilov, would leave the company in October, 2010 to join another company senior management position. Evgeny Kornilov has worked for X5 since 2006 and is regarded as the true professional in the industry. X5 has started executive search process. Though we see this as a point of investors’ concern, we believe the company will manage to find the best successor.
2. RusHydro’s (HYDR) shareholders bought under the pre-emptive right 42% of additional share issue for RUR9.2 bn. NEUTRAL. RusHydro’s shareholders bought under the pre-emptive right 42% of additionally issued shares worth RUR9.18 bn, according to the company’s press release. The shareholders acquired 7.982 bn from 19 bn shares (par value of RUR1). The placement price is RUR1.15 per share. RusHydro last closing share price stood at RUR1.545. The state bought 23.67% of the total additional share issue. RusHydro started the placement of its additional share issue on 12 December, 2009, pre-emptive rights expired on 2 July. Taking into account the purchase of shares under the pre-emptive rights there are 11 bn shares left. Earlier, the company reported that it accepted offers from market participants to buy the shares of this issue until 12 July inclusive. However, RusHydro stated that it plans to exercise its right not to comply with the offer. In this case, RusHydro can independently buy its own securities, by increasing the number of treasury shares. Given the fact that the company already has 1.78% treasury shares, with the full redemption of the balance of the additional issue, their number could grow to 5.6%. RusHydro expects the state registration of additional issue to be held in November, 2010. Transactions with the additionally issued shares on the stock exchanges will be possible following the state registration. Additionally issued shares will be consolidated with the shares in outstanding in three from the date of the state registration. Transactions with depositary receipts (GDR), which were placed for shareholders – the owners of depositary receipts, which have implemented pre-emptive rights, will be available starting from July, 2010. We believe RusHydro share placement is a good investment opportunity, and recommend taking advantage of it.
3. Novatek’s (NVTK) gas production on the rise. NEUTRAL Novatek increases gas production by 15% YTD. Novatek reported 1H10 operating results. The company’s natural gas production rose 15.4% y-o-y to 18.39 bcm and liquid hydrocarbon – up by 18.5% to 1.747 mn tn. Novatek is on track of achieving its full-year production target of 37 bcm (up by 13% y-o-y). At the end of the year the company plans to launch a third phrase of Yurkharovskoye field that will bring its aggregate capacity to 55 bcm p.a.
GOOD TRADING TO YOU!