Most popular equity research this week | 28 Aug - 1 Sept

"Dixons Carphone reported good like-for-like growth (6% vs our estimate: +4.5%) in the Q1 trading update. The UK & Ireland business increased 4.0% (vs our estimate: +5.0%; contributes c.62% to group sales), driven by strong momentum in the electrical business and a +5.0% benefit due to sales transferred from closed stores. The Nordics and Greek businesses were up 8.0% and 6.0%, respectively (vs our estimate: +1.0% and +5.5%), on the back of market share gains in electrical business. The reported revenue growth came in at 6.0%, as the currency benefit (+3.0% yoy; largely due to the depreciation of Sterling vs Norwegian krone and Euro) was offset by a negative scope impact. However, management also shared some disappointing news with the press release. The FY17/18 PBT is expected to plunge year-on-year and is now expected in a range of £360-440m (vs our current estimate: £483m; market consensus: £495m). This is due to the following factors: 1. UK post-pay phone business continues to witness sluggish consumer demand. Consumers are holding on to older handsets for 4-5 months longer than expected as new phones have become more expensive after the GBP depreciation. 2. A net negative impact of £10-40m in FY17/18 (vs a £71m net positive impact in the previous year; largely non-cash), largely due to changes in EU roaming legislation. 3. The decision to sell the Honeybee software product as a software-as-a-service rather than upfront sales, resulting in limited overall profits in FY17/18 from the CWS business."

"IG Design continues to deliver impressive growth. Its Q1 trading update shows momentum carrying into the new financial year and the group on track to meet (and possibly exceed) our FY18 target. Initiatives to stimulate organic growth and further benefits of last year’s US acquisition are driving progress, with the stronger balance sheet also giving potential for further acquisitions. The share price has performed well over the last year and the valuation is underpinned by the strong cash generation."

"We started off with an unambiguously good interim performance by H&T, up by 62% and ahead of my expectations, let alone brokers’ forecasts. 

The leak of the potential merger between Rathbones and Smith & Williamson provoked a rise in Rathbones’ share price – contrary to the general trend that bidder’s share price falls while the target’s price rises.

Harvey is the first hurricane to hit the US mainland for a nearly five years and has already caused several $billions in damage. The destruction will result in a short-term hit to companies insuring or reinsuring properties in Texas but the weakening of the winds and their destructive power (indicated by its official downgrading to a “Tropical Storm”) means that it is unlikely to trigger a change in the downward trend in reinsurance and insurance rates."

"Following today’s trading update we have revised our assumptions. This results in a 22% upgrade to Adj. PBT & EPS in FY18 and a 19% uplift in FY19. We leave the DPS forecast unchanged for now. The upgrade is driven by an improvement in underlying trading and an absence of new store openings in H1'18. We are encouraged by the update and see the group as being very well positioned in a market whose competitive dynamics are improving."

"Increased tensions on the Korean peninsula saw the Gold price move to its highest level since September 2016 and now trades above our 2017 target price. As we highlighted in most recent Quarterly Nugget, “strike risk” remains elevated across a number of geographies and provides a supportive backdrop for physical gold and gold mining equity exposure.

UK house prices grew by 2.1% in the year to August 2017 according to the Nationwide but declined 0.1% MoM. This is in line with soft new buyer interest seen during the last six months.

We have a week of cyclical indicators across the UK economy with consumer credit, mortgage approvals, confidence, and the manufacturing PMI all being released. Over the summer the UK economy has reported sub-trend growth but important indicators remain supportive for this representing a slowdown rather precipitating a technical recession."

"OptiBiotix (OPTI) has this morning published FY17 interims (Nov16-May17) that highlight the continuing commercial development being made by management for both SweetBiotix and LP-LDL. Reported income was broadly flat at £0.1m (1H16 +£0.1m) with adj. loss of £0.9m (+£3.1m profit when including a £4.1m non-cash profit on revaluation of its investment in Skin Biotherapeutics – SBTX revaluation). Adj. LPS was 1.3p compared with 0.8p (1H16 LfL) and is due to increased marketing costs and preparations for SBTX’s listing. Strong commercial development has been, made with agreements signed by Sacco, Tata Chemicals, and Nutrilinea. We remain positive on OPTI’s long-term prospects, expecting further agreements going forward. Forecasts and target price remain under review."

"Findel has reported a good start to FY18. Double digit customer and revenue growth has been sustained in Express Gifts (EGL), providing a strong platform ahead of the peak trading period. Performance has improved in Education in its busy period compared to the soft start to the year it reported previously. A number of self-help initiatives are gaining traction, which is encouraging. Findel is, therefore, trading in line with expectations so far in FY18. With the shares having fallen 17% over 3 months and trading on 7x P/E falling to 6x next year, this update ought to trigger a positive response."

"Interim results ahead, with an unexpected profit at Natural Resources (NR). FY 17 FD EPS unchanged and the mix maintained despite the H1 beat at NR. Net cash fell less than expected from the FY and FY 17 average cash estimate unchanged. Order book nudged down from the FY

figure of £3.9bn to £3.7bn due to timing. Infrastructure EBIT down 10% as expected due to lower margins. Manchester waste now all but behind Costain. BUY, TP 510p to 545p."

"Cairn Energy remains our top pick, given a compelling valuation, and multiple potential avenues for value creation. Whilst we acknowledge that excitement might ebb slightly in the short term, given the end of the 2017 Senegal E&A programme and Senegal resource update at H1 results, we would remain long into 2018 given the potential $1.1bn upside in the event of successful international arbitration, on which we should get greater clarity in Q1 2018. We also think the recent share price weakness since results is overdone, as we upgraded RENAV on the back of the higher 2C number for SNE and the Kraken slower than expected ramp up only reduced our RENAV by 1%. In the shorter term, we could see surprise upside if Drombeg (Ireland) is successful, plus we have two lower risk wells in Norway in H2 2017. We continue to believe the market is mispricing Senegal, and whilst Cairn does not need to sell down, a farm-out could help frank value. 

We recently upgraded Faroe Petroleum to BUY on the back of a compelling valuation. We believe it’s a solid, low-risk story, with gradual incremental upside through cheap exploration in Norway, and de-risking on the back of progressing development assets. Near term, we have a few small exploration wells (Goanna, Aerosmith) off Norway, plus appraisal around the Fogelberg discovery. We could also see some interesting trades/M&A given a more stable oil price. Less exciting than Cairn and Tullow perhaps, but for those with a low-risk appetite, we think Faroe offers a decent risk reward profile.  

We remain with our BUY recommendation on Tullow as we believe we are heading into a period where some overhangs which have dogged the share price for the past few years might finally be resolved. We should get an update around RBL refinancing in Q4 and the ITLOS decision is expected at the end of September. We have a high impact well off Suriname in Q4. Once the TEN and Jubilee issues are sorted, we believe the long awaited M&A off Ghana is more likely to occur, and we also expect farm-out of Kenya ahead of FID towards end 2018. Whilst we are relatively cautious on short term oil prices and acknowledge that Tullow’s share price tracks the oil price quite closely, we would flag that near term oil price gearing is minimal given its hedging and insurance programmes."

"SDX Energy reported its 2017 interim earnings on 25 August. The company has reported a comprehensive income of US$26.5 million for the half year which was predominantly due to a gain on the acquisition of the Egyptian and Moroccan operations of Circle Oil in January 2017. The company also had an underlying netback (revenues less operating costs) of US$13.0 million and a strengthened balance sheet with net cash increasing to US$27.6 million from US$21.1 million in Q1 17, demonstrating the continued benefits from the Circle Oil acquisition."