FTSE 100 drifts lower with chip designer Arm hit by disappointing update

Ahead of results from Apple and Facebook later, one of the UK's technology stars disappointed investors after its latest update.

Chip designer Arm, whose customers include Apple, Samsung and Lenovo, saw its shares fall 27p to 956p as it reported a 9% rise in first quarter profits to £97.1m but warned the usual seasonal decline in the first three months of the year would affect royalty revenues in the second quarter. Liberum, which has a sell rating on the company, said:

Arm has reported a weaker than expected set of first quarter results with sales of £186.7m coming in 4% below our forecast. The miss came mainly in processor royalties which on a reported basis was 9% below our forecast. Even excluding a one-off adjustment of $5m in the quarter, royalties were 5% below our expectations.

But Espirito Santo was more positive on the outlook:

While first quarter results are relatively lacklustre, we believe Arm is likely to have a strong second half and we re-iterate our buy recommendation.

Jasper Lawler, market analyst at CMC Markets UK, said:

Lower growth in [Arm's] royalties was blamed on the slower demand for high-end mobile devices - which doesn't bode well for Apple results going forward.

Overall, the FTSE 100 ended 7.02 points lower at 6674.74 as Wall Street slipped lower in early trading following disappointing home sales. Earlier there were mixed PMI reports, with positive data from Germany but disappointment from France and China.

Among the miners, Antofagasta fell 48p to 796.5p as its shares went ex-dividend, while Rio Tinto dipped 8p to £32.49 after the weak Chinese figures.

After Tuesday's excitement in the pharmaceutical sector, AstraZeneca added another 82.5p to 4042.5p on continued hopes of a bid from Pfizer, while another potential takeover target, Shire, rose 43p to £31.89. GlaxoSmithkline, which unveiled a complex asset swap and joint venture with Novartis, ended 2.5p better at 1642.5p.

A number of other companies were quoted without the right to the latest dividends, including British Gas owner Centrica, down 14.3p at 330.6p, and Old Mutual, 8p lower at 196p.

Elsewhere Morrisons lost 7.4p to 196.7p as JP Morgan cut its price target from 175p to 150p with an underweight rating. The bank said:

Morrison published its annual report last week. We would highlight the relaxed depreciation policies (which reduces earnings quality) and the big reduction in labour intensity, in line with trends seen at Sainsbury and Tesco in recent years (which limits the scope for future cost cutting). We cut earnings per share by 18% for 2015/16 and, thus, our target price from 175p to 150p.

But Associated British Foods was the biggest riser in the FTSE 100, up 240p to £29.62 after a 1% rise in first half profits, as a strong performance from its Primark discount fashion chain outweighed a fall in its sugar business.

Wolseley added 56p to £34.17 after Credit Suisse raised its rating on the building materials group from neutral to buy with a £40 target price, based on the prospects for cash returns to shareholders.

Leading the mid-cap risers was telecoms testing equipment group Spirent Communications. Its shares jumped 7.4p to 104p after it reported a 16% rise in first quarter revenues, helped by a rush of business from China as the country rolled out its 4G networks. But Roger Phillips at Investec remained cautious, saying:

An in-line statement for a stock that has seen relentless downgrades for a year will be taken positively, albeit the results are not as good as they appear on the surface...The shares look fairly priced for some chance of a 2015 bounce-back but we think Spirent's 2013 travails are partially structural. We stay at hold with an unchanged multiple-based target price of 105p.
2014 guidance for around 10% underlying revenue growth looks supported by the first quarter performance, which is much stronger in growth terms due to an easy comparison. However, the results look better on the headline level than they really are, with networks and applications slipping into loss and wireless and service experience earnings before interest, tax and amortisation down around 60% year on year, both partly due to previously announced operating expenditure investment. A large contract in service assurance that slipped from the fourth quarter of 2013 into the first quarter of 2014 both distorts the book-to-bill and saves the operating profit line, but this is a one-off so we see little momentum behind 2014 estimates.

Finally Iofina slumped 33p to 22.75p after the iodine specialist warned production this year would be significantly below market expectations. The company extracts iodine from the waste brine produced by oil and gas companies, but some of its US suppliers are switching to fracking, leaving it short of brine. As a result it unveiled a cost cutting programme including reducing staff numbers in order to conserve cash.

Analyst Sanjeev Bahl at house broker Numis said:

Our recommendation and forecasts are under review this morning as a consequence of this...production update. The primary operator in Oklahoma who supplies Iofina with produced brine water has been aggressively fracking in the first quarter, but this now looks to continue at similar levels through to the end of 2014. This will impact the supply of brine at four of Iofina's six operational plants (with number 6 close to completion), only leaving number 1 (Texas) and number 2 unscathed. Brine availability has always been a risk to our valuation, where our base case factored in an operational uptime that included a buffer for unexpected disruptions in brine supply and plant shut-ins, however, today's announcement suggests far lower plant availability than estimated.
...This will have a significant effect on our projected iodine production for 2014 and as a consequence there is a significant risk to Iofina's profitability for 2014...We do not expect Iofina to generate a significant profit in 2014 and our discounted cash flow derived valuation is under review. We expect our valuation to come back significantly as we scale back additional plant-roll out and near term production.