Daily market update: Sainsbury’s, HSBC, Thames Water, Prada & Versace

Miners did their best to prop up the FTSE 100, but opposing forces from the banking, pharma and utility sectors were too great to keep the index in positive territory.

Hong Kong’s Hang Seng index was a notable mover, falling 1.3% as nearly all sectors apart from basic materials and industrials were in the red. China’s CSI 300 index was also weak, with both indices hit by disappointing services data.

Sainsbury’s

Sainsbury’s shares took a hit after major shareholder QIA made steps to sell part of its 10.5% stake in the grocer.

The stock has enjoyed a good run since April, thanks to business progress. A food-first strategy has reaped significant rewards and Sainsbury’s has managed to breathe new life into the business.

QIA might take the view that now is a good time to cut its exposure as Sainsbury’s regaining its mojo is one thing, taking it to another level is more challenging.

Competition in the grocery sector is fierce. Aldi and Lidl are showing no signs of taking their foot off the pedal, rival Asda is working hard to play catch-up after a lacklustre few years, and Tesco continues to dominate. Sainsbury’s might find it hard to further increase its market share unless one of its rivals makes a serious mistake.

HSBC

The market might be feeling a little underwhelmed by the appointment of HSBC’s new chair.

Brendan Nelson had been filling in on an interim basis since the start of October. Some may read between the lines that this is effectively still a short-term hire until HSBC can secure a higher profile candidate or someone with more direct banking experience.

Former chancellor George Osborne and Goldman Sachs’ Asia chief Kevin Sneader were among the names floated as potential candidates before today’s announcement.

Nelson has principally worked in accounting as well as serving as a non-executive director at NatWest and BP. At 76, matching the eight-year tenure of his predecessor Mark Tucker may be a big ask.

The role arguably has more significance than ever as HSBC pursues growth in Asia in a difficult geopolitical environment and as current boss Georges Elhedery undertakes a major restructuring of the business.

Thames Water

Debt levels at Thames Water are rising fast enough that there will be genuine worries about the levees breaking on its balance sheet before it can secure a rescue deal.

To howls of protest from many households, the company has been able to push up profit as it raises bills. Yet its cash is still due to dry up early next year and an agreement with its creditors needs to be forged by then if it is to avoid government-supervised administration.

A big sticking point may be agreeing to dilute performance targets with the regulator which may be a hard sell with other stakeholders.

To be a black sheep in a water utility sector which has alienated politicians, regulators and the public in recent years thanks to pollution, financial issues and higher bills is quite something, but there is no sign of Thames Water shaking that tag.

Prada / Versace

Versace is finally off to its new home, having been snapped up in a Black Friday style deal. Prada has snagged a bargain, picking up the business for a song compared to what former parent Capri Holdings paid for it in 2018.

The luxury goods sector has been through a challenging period post-Covid as even wealthier people scaled back spending as inflation and interest rates shot up.

Sweeping tariffs also didn’t help and Versace had problems of its own. Capri got over-excited with licencing deals and diluted the brand’s appeal. Now comes the hard part of making Versace more exclusive and desirable.

Smiths Group

Smiths Group has made the next step in its transition away from a conglomerate structure. It has struck a deal to sell the Detection business to private equity group CVC. Smiths has got a good price for the unit which should please shareholders, particularly as they are in line for a cash payout.

Selling the Detection business will dramatically change the revenue split in the rest of the group. Detection accounted for 29% of revenue in the past financial year, the second biggest contributor to the group. Post-separation, the seals-to-filtration unit John Crane will become even more dominant within Smiths, as will the temperature management arm Flex-Tek.

One might expect a tighter focus on specialist engineering to entice investors to pay a higher multiple of earnings for the shares. This event has already happened, with the shares having already jumped from 13 times forward earnings a year ago to 19.2-times. The market has clearly bought into the story that Smiths was in break-up mode, and investors have tried to stay one step ahead of the curve.

Gear4Music

Sometimes the big post-Thanksgiving sales events are seen as being overblown but Gear4Music is sounding the trumpets on its Black Friday and Cyber Monday performance.

The sales momentum which saw the company dispatch a record 14,000 orders in a single day underpins a significant uplift to guidance for the current financial year. This is the latest in a series of upgrades.

Gear4Music has benefited from the collapse of two rival musical instrument and equipment sellers who had been engaged in heavy discounting.

While this created a significant opportunity, it is still one Gear4Music had to execute on and, like a virtuoso soloist for a world-class orchestra, it has done so flawlessly so far.

This has struck a chord with investors and helped the shares advance more than 80% year-to-date. However, they are still a long way short of the heights attained during the pandemic when housebound consumers had time on their hands and cash to spend on hobbies, including music.