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“Shanghai’s SSE Composite index jumped 3.2% on hopes that the US and China were making progress with trade talks. This optimism also gave a boost to the London-listed natural resources sector with mining shares topping the list of FTSE 100 risers. “Continued strength with oil prices also gave support to the FTSE with BP and Royal Dutch Shell up on Friday,” says Russ Mould, investment director at AJ Bell.
AstraZeneca
“AstraZeneca is in deal-making mode as it continues to gain momentum following the return of sales growth in 2018.
“A deal worth up to $6.9bn with Japan’s Daiichi Sankyo to develop and sell a new cancer drug is a bold move given that it won’t improve earnings in the near term. However, AstraZeneca will be taking a very long term view with such an agreement, particularly if the drug becomes a blockbuster.
“Large pharmaceutical companies have been racing to replace declining sales from previous blockbuster drugs which have suffered from the loss of patent protection. Cheaper generic drugs offered by rivals have caused companies like AstraZeneca and GlaxoSmithKline to trip up.
“These big companies now appear to be coming out of this difficult phase and are finding ways to fill their growth pipeline. However, there is still a risk that they acquire new drugs at any price.
“AstraZeneca is already under pressure to make up for reduced revenue from products which have lost patent protection in order to keep paying generous dividends. Splashing out on big acquisitions could put the dividend at risk unless they immediately produce strong cash flows.
“A cash call alongside the Daiichi Sankyo deal is understandable as it will help to fund the transaction, repay some bonds and strengthen the balance sheet.
“The company also reassures that the transaction won’t affect its progressive dividend policy. While that will be a relief to shareholders, one should still be aware of the risk to future dividends if AstraZeneca has regained its appetite for mega deals.”
TUI
“As if travel operator TUI needed another headache. The company has been forced to downgrade expectations again just weeks after warning on profit and ditching long-term financial targets in the face of pressured consumer spending and heavy competition.
“The latest setback relates to the grounding of Boeing’s troubled 737 MAX aircraft of which it owns 15.
“Securing replacement flight capacity results in a material financial impact as it means a 17% decline year-on-year is now expected in 2019 versus previous guidance for flat profit. That’s assuming the planes return to the air in July; if they don’t then TUI faces some real summer heartache as it says earnings could fall by 26% in a worst case scenario.
“There will be sympathy for the company as this situation genuinely falls into the category of being out of the hands of management, but it couldn’t have come at a worse time.
“Doubts about the economy and disruption from Brexit bubble away in the background and after 2018 saw business apparently hit by the wrong kind of weather – Europeans sunning themselves at home amid heatwave conditions – the company’s executives could be forgiven for brushing up on a rain dance to force sun seekers off on beach holidays.”
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