Investment Ideas 

Press headlines & tips: Share, Dunelm, AbbVie

Shares of Shire (SHP) failed to move higher despite AbbVie raising the aggregate amount of its bid to £51.15 from £46.26, showing that investors have little faith in the deal actually going through or in AbbVie’s ability to further increase its offer. Are they correct? Should Abbvie increase its offer again, say by another 10 per cent, that would leave the combined company burdened with a net debt/EBITDA ratio of 2.7.

Hence, the investment-grade rating on its debt, which it very much wants to maintain, would be put at risk. A UK domicile with its attendant tax savings and the cost savings which would accrue to Abbvie and Shire as a result of a merger would go some ways to compensating for the above. Even so, that increase in gearing would likely eat into the valuation premium which Abbvie is hoping to derive from becoming a more diversified company. Thus, “Abbvie may not push much further,” writes The Financial Times’ Lex column.

Rather unexpectedly Dunelm (DNLM), the country’s largest seller of soft furnishings, managed to grow its like-for-like sales by 5.5 per cent over the three months to June, despite the hot summer and the World Cup. Its national advertising campaign and expansion plans, including the roll-out of its digital channel, played a hand. Furthermore, by sourcing more of its products internally the company was able to increase its margins as well.

Such is the company’s financial performance that its store operating programme cannot hope to absorb all of the free cash-flow which it is throwing off. Hence, given its current cash balances markets are expecting a special dividend payment to be disbursed, on top of the current pay-out, giving the shares a dividend yield in excess of 5 per cent. Selling on about 17 times’ this year’s earnings the stock is already reflecting its growth prospects and that high yield but they are still a hold, says The Times’s Tempus.

BUSINESS PRESS HEADLINES:

AbbVie, the US pharmaceutical company, has had to retract comments by its Chief Executive about shareholder support for its bid for Shire after being caught out by UK takeover rules. Richard Gonzalez, Chief Executive and Chairman of AbbVie, was reported as saying that big Shire investors were "supportive" of the tie-up. However, a company in a takeover is not allowed to claim support for its bid unless it has this in writing from shareholders. – The Daily Telegraph

The price of goods in Britain’s shops is falling at its fastest rate on record as fierce competition on the high street prompts retailers to offer cut-price food, clothes, footwear and electrical items. Typical prices in the shops were down by 1.8 per cent in June year-on-year, according to the British Retail Council. While food prices experienced marginal inflation of 0.6 per cent, the cost of non-edible items dropped by 3.4 per cent. - The Times

The cost of a UK home will jump by more than third nationwide before the end of the decade, while the average price in London is expected to soar past the £500,000 mark by the end of this year, according to PwC. The “Big Four” accountancy firm believes house prices will rise by 35 per cent to £328,000 by 2020, from £242,000 at the end of 2013. This means the cost of an average UK home will remain around 10 times larger than the average salary of £27,000 over the next six years, even as income growth returns to its pre-crisis average of around 4 per cent a year. - The Daily Telegraph

The City regulator is considering taking action to improve interest rates for millions of people with money in poor-paying savings accounts, it has emerged. The Financial Conduct Authority (FCA) said it may intervene after finding that some aspects of the UK's £1trn savings account market "are not working well" for consumers. - The Guardian

The scandal-prone Vatican Bank has closed 3,000 customer accounts and blocked a further 2,000 as part of a reform process that sent its full-year profits plunging by 97 per cent. The Institute for the Works of Religion, more commonly known as the Vatican Bank, said it had completed a first phase of reorganisation and the next stage would be taken forward by a new management team. – The Times

Most British insurers consider the European Union's upcoming Solvency II capital rules a "necessary evil", but are concerned about the costs of the new requirements, according to a survey by Grant Thornton. The new rules, due to take effect on January 1st, 2016, aim to better protect consumers by forcing insurers to match their capital buffers more closely with the risks on their books. – The Daily Telegraph

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