Economic growth returns
But now there's withdrawal of QE and other monetary tightening measures to face

The UK economy limped out of recession with growth of 0.1% in the last quarter of 2009. Hardly conclusive evidence of a turnaround, especially as in the future such a figure could be revised up or down. With billions of pounds pumped into the system as part of the government's quantitative easing (QE), it was hoped that the economy would have soared over this hurdle. But no, these figures simply showed just how fragile and tentative the UK recovery is. Looking ahead, global economies will now have to deal with the withdrawal of economic stimulus packages and the continuing fears that an earlier than expected base rate rise could now be on the cards. Around the globe there are plenty of signs of monetary tightening. In the US, the Federal Reserve has already stopped buying long term US Government debt and there is now talk about the need for an exit strategy to end its programme of supporting the economy. Equity markets in the West have been thoroughly spooked by fears of further Chinese policy tightening, after the central bank in Beijing seemed to adopt firmer measures to slow down new lending and may well delay some new infrastructure projects. Heavyweight mining stocks stumble on anything less than positive news about Chinese demand for metals, and so this story served to push the FTSE 100 lower.  Last week, one well respected UK equity strategist reckoned that 2010 was shaping up to be like 2004 and 1994; and although there would still be growth, monetary tightening was likely to be accompanied by a 10% plus fall in the market which would last for more than six months. The recommendation here was to look to switch out of cyclical stocks and companies that tend to perform well when the economy is growing such as durable goods and travel companies, and move into quality growth stocks. This could be another example of the tale of 2010 being a year of two halves; but what is fast becoming clear is that whoever wins the general election has been dealt a pretty poor hand.

Accelerating future growth

Oil stocks proved to be quite a feature of the market last year as the price per barrel doubled from $40 to $80, although the oil price has since struggled to hold on to this level. JKX Oil & Gas is focused on oil exploration in the countries that once made up the Soviet Union and concentrates on the Ukraine and Russia. JKX has just raised £38m at 265p and it's not hard to see why this issue was successful as the board expects oil production to rise by 46% to an impressive 20,000 barrels of oil equivalent per day by 2011. The new money will allow JKX to speed up the development of its core assets in the current year. This means that in the Ukraine, the management can bring a dedicated second drilling rig into the Rudenkovskoye field to recommence and accelerate work on the development of this field. JKX also plans to construct a LPG plant to add extra value to its Ukrainian gas production. Meanwhile in Russia, the workover programme in the Koshekhabiskoye field is continuing, with first gas sales expected by the year-end. All added up, in 2010, capital expenditure is expected to be something like $230m, as existing reserves are brought into production and significant contingent reserves are converted into proven plus probable reserves (2P); whilst at the same time, the directors are keeping their eyes open for acquisition opportunities. 

Merger deal progressing

In October, AIM-quoted San Leon Energy announced a plan to merge with Island Oil & Gas to create a strong Irish-based oil and gas exploration business. Around that time San Leon reported that it had gained an irrevocable undertaking totalling 29.62% of Island’s issued share capital from Platinum Petroleum and Gartmore Investment Management. Both Platinum and Gartmore have now extended the existing terms of this arrangement to accept an offer, if made, until 14 April 2010. Discussions between San Leon and Island are continuing and apparently both companies are working towards an offer for Island that the directors currently intend to recommend to shareholders. There's little doubt that, independent Irish oil and gas exploration company, Island has a successful track record. Through its exploration work in the Celtic Sea, Island has become the only operator in offshore Ireland to have announced three successfully tested exploration and appraisal wells in the last decade. Island is now looking to repeat that success in  little explored regions like Morocco.  Interim results announced in the week, drew attention to the two offshore petroleum agreements for the contiguous areas of Sidi Moussa and Foum Draa in Morocco. Also in that country, there was encouraging news about the Zag reconnaissance licence, which has been advanced to a full exploration licence by the operator.

Strong recurring revenue

Accountancy software house Sage Group has grown by sticking to its guns and continuing to look after the needs of small and medium-sized enterprise in more than twenty four countries around the world. A quarterly trading statement didn't rock the boat much, but did point out that subscription revenue growth is continuing to offset what seems to be subdued markets for software and software related services. At the time, Paul Walker, Chief Executive, commented that “We continue to navigate successfully the challenging market conditions through our focus on high quality customer service. We have seen no change in the environment over the period and our first quarter results were in-line with our expectations. Our proven business model and the loyalty of our large, geographically diverse, customer base gives us confidence that we are well positioned for these conditions and the eventual market recovery.” Certainly with the current belt tightening mentality, Sage seems to be protected by its recurring subscription revenues, which last year accounted for 65% of total revenue and sported overall organic growth of 2%. Final results were announced in early December and the board’s guidance to analysts has remained unchanged since that time. The consensus forecast for the current year is that the Group will see revenue largely unchanged at £1.4bn with pre-tax profits rising by 20% to £320.7m, which is worth 17.77p per share in earnings and puts the stock on a prospective price earnings ratio of 13.5. The consensus forecast suggests a 7% and 8% increase in earnings per share in 2010 and 2011 respectively and so it’s little surprise that overall brokers are positive on the stock.

Growing in special risks

Last year, security risk management services provider Red24 came of age in declaring a maiden dividend at the interim stage. Such a payment demonstrated the board's real confidence for the future. The Company provides its Red24 services through large financial services businesses like HSBC and AIG Travel Assist which act as key distribution channels. HSBC is continuing to provide Red24 services as part of its Premier, Plus and First Directory bank accounts. In search of further growth, the board is pursuing a strategy of offering a more comprehensive range of special risk advice services. To this end, Red24 has recently signed an agreement with another North American based assurance company to provide kidnap and ransom consulting services. It's a three year deal to offer not only advice, but where necessary the appropriate response services. Simon Richards, Chairman, explained that “Towards the end of last year we identified special risk services as a potential area of growth which complements our core operations and which has significant cross selling opportunities with our existing business. We therefore invested in a highly skilled team which is based in the USA and can leverage our outstanding Crisis Response Management Centre in Cape Town. The initial response has been very encouraging and this latest agreement is the third special risk contract that we have achieved in a short space of time. This is further evidence of the progress being made by the business as a whole and underpins our confidence in the future.”

Conservative lender

Car and equipment finance provider Private & Commercial Finance Group (PCFG) has been trading on AIM since 1998 and the share price over the years has tracked the ups and downs of the business cycle. The stock currently sits not far off it's all time low and seems to beg attention. The Group's subsidiaries provide equipment finance products, which cover the financing of cars for consumers and the leasing of a wide range of equipment for businesses. A national network of brokers brings in the business using PCFG's own specifically-developed, internet-based, proposal system. The Company takes a conservative approach to lending and sensibly exited the sub-prime business way back in 2004. Tough industry-wide conditions have lead to reduced competition. At the interim results stage in mid-December, Scott Maybury, Chief Executive, drew attention to this matter remarking that “...There is currently a significant opportunity for PCFG due to many of our competitors reducing their lending activities and I believe with our strengthened financial position, a first rate team of people and the high quality business we are writing at good margins, we can look forward to 2010 with confidence.”  In the first half of their financial year, the Company reduced total borrowings by £8.2m helped by strong cash generation. The trend seems to have continued in the second half, asin the past ten days, the board has announced the repurchase of 149,600 8% Convertible Unsecured Loan Notes 2013 of £1 each in PCFG at a price of 77p per loan note which looks to be a bullish move. These loan notes are being purchased to cancel. Not such good news is that director Robert Murray sold 250,000 shares at 6.75p, although it has to be pointed out that he is still sitting on close to a million shares which represent a 1.9% stake in the Company.

Diamond deal terms out

Trading resumed in the shares of West African Diamonds (WAD) as the terms of the reverse takeover of Stellar Diamonds Limited have now been announced. Stellar is being acquired at three times the valuation of WAD, so it will be a 75:25 deal and at the current price, the enlarged entity will have a market capitalisation of £10.7m when it’s listed in late February. Already, their brokers have completed a £5m placing at 20p, as there is a 1-for-5 consolidation to come before the new shares start trading. John Teeling, Chairman, urges shareholders to approve the deal, saying that “...The enlarged group will be on a stronger financial footing due to the placing and the cashflow from two producing mines. The West African diamond industry is underdeveloped and fragmented. Stellar Diamonds will be well positioned to exploit opportunities in the area.”

Trading might resume at Core

On 25 September 2009, trading in the shares of The Core Business (Core), the distributor of beauty and skincare products, was suspended pending the clarification of the Company's financial position. A recently released announcement told the market that an outline agreement had been reached with a major creditor and a new external investor under which a Company Voluntary Arrangement will be proposed. If such a move is approved by both shareholders and creditors, it is intended that trading in the shares of Core would recommence on AIM. Amirose International Limited, the Company's trading subsidiary, has been placed in liquidation and so Core will no longer have any trading activities. This would mean that Core would return as an Investing Company under AIM rules. Refinancing is likely to lead to current shareholders being diluted, but at least there’s a chance of there still being a quote on the screen.   

In's and Out's from the Bridge Hall CFD Desk

So, the bears were lurking in the woods.

Last week finished with a bang as Barack Obama started his battle with Wall Street, this obviously had major reverberations in our market and the markets fell accordingly on the back of his Bank breakup plan. The UK Banks and any Inter Dealer Brokers (e.g. ICAP) share prices took a drastic slide to lower levels on the back of the uncertainty that Obama left the markets in.
At the start of the week we took a very cautious stance after the Thursday/Friday news emanating from the US, but we were keenly awaiting the key GDP figure due on Tuesday in the hope that the UK economy was looking to have had pulled itself out of a recession. The figure was less than convincing and showed that the much hyped figure of 0.4% was a far reach. 0.1% was the announced GDP figure and this shows that the UK crawled out of recession, we can only hope for a better revised number, otherwise concerns over a double dip will become very real. 
We started the week by closing out some trades on BAE Systems (BA.L) and Vodafone (VOD.L). A defensive stance is more suitable for trading during this volatile window, so we took a cautious view with some Pairs trades around our more speculative trading options, several traders and dealers were eagerly awaiting trading statements from Tullow Oil (TLW.L), Astrazeneca (AZN.L) and Interims from BSKYB (BSY.L). Also, we gave our clients the option to hedge any positions by placing the relevant Long or Short position on the Indices (FTSE 100) itself, to cover the opposite to their original holding. Should anymore shocks come out of the woodwork then we are well placed to try and weather the storm. 
Now the retail reporting season is at an end, we feel this may be an area where clear trading signals may be given.  Opportunities may be more easily read and during these volatile times, holdings in the retail sector, may give a bit more of a defensive stance alongside any speculative trades within the market.
During the coming week we will be considering various trades around companies that are reporting. On Tuesday we will pay attention to Interims from ARM Holdings (ARM.L) and Interims from BP (BP.L), on Wednesday a Trading Statement from Standard Life (SL..L), Thursday -  Interims from Glaxosmithkline (GSK.L), Unilever (ULVR.L) and Trading statements from Easyjet (EZJ.L),Vodafone (VOD.L) and to finish the week off, we have British Airways reporting Interim Results to complete the week’s events. A key economic event during the week will be the meeting of the Bank of England Monetary Policy committee, with Quantative Easing now slowly running to an end, and inflation nudging higher, there are some key decisions to be made and it will be interesting to hear their thoughts.   
Financials have obviously dragged the FTSE 100 down this week, with Man Group (EMG.L) and ICAP (IAP.L) leading the way. Economic data that has flowed through the week has all been of the negative aspect, so in terms of positive news to turn this market it all seems a bit thin on the ground for now.
The Bears are out of the woods for now, that is for sure, and it may take a while to get them off the scent.

Happy trading for the coming week and we’ll be in touch again next week for another update. 

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Featured stocks

The Core Business (CORE)
AIM
Share price: 0.3p suspended
12 months high-low: 0.7p – 0.15p
Market value: £0.76m
www.thecorebusiness.co.uk

Island Oil & Gas (IOG)
AIM
Share price: 6.25p
12 months high-low: 13.5p – 5.13p
Market value: £8.50m
www.islandoilandgas.com

JKX Oil & Gas (JKX)
FTSE 250
Share price: 271.2p
12 months high-low: 309.3p – 173p
Market value: £426m
www.jkx.co.uk

Private & Commercial Finance Group (PCF)
AIM
Share price: 8p
12 months high-low: 13.5p – 6.25 p
Market value: £4.22m
www.pcfg.co.uk

Red24 (REDT)
AIM
Share price: 7.88p
12 months high-low: 7.88p – 2.13p
Market value: £3.50m
www.red24plc.com

Sage Group (SGE)
FTSE 100
Share price: 239.5p
12 months high-low: 242.7p – 158.9p
Market value: £3.1bn
www.sage.com

West African Diamonds (WAD)
AIM
Share price: 4p
12 months high-low: 5.13p – 2.75p
Market value: £3.60m
www.westafdiamonds.com

Directors dealings

Directors dealings can provide a useful insight
       
Director buys
Acal (ACL) 20,000 @ 140p
Bellway (BWY) 1,500 @ 757p
Blacks Leisure (BSLA) 98,926 @ 47p
BowLeven (BLVN) 50,000 @ 106.5p
Castings (CGS) 10,000 @ 174p
Gooch and Housego (GHH) 10.000 @ 167.5p
Ingenious Media Active Capital (IMAC) 100,000 @ 43.5p
Innovise (INNO) 200,000 @ 31.5p
Ludgate Environmental Fund (LEF) 3 directors 62,445 @ 90.2p
Managed Supports Services (MSS) 77,000 @ 9.74p
NCI Vehicle Rescue (NCI) 100,000 @ 28.57p
Severn Trent (SVT) 1,000 @ 1,141p

Director sells
Carphone Warehouse Group (CPW) 251,011 @ 192p
Chemring Group (CHG) 2 directors 16,377 @ 3,125p
City of London Investment Group (CLIG) 100,000 @ 310p
Euromoney Institutional Investor (ERM) 25,000 @ 460p
Premier Oil (PMO) 4 directors 67,279 @ 1,083p
Sound Oil (SOU) 3 directors 5,155,172 @ 2.45p - 2.35p

The above list of transactions represents a selection of the directors' buys and sells reported last week

Written by Dr Michael Green - Independent analyst – DOC Investments Limited – doc@docinvest.co.uk




 

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