"London equities are expected to take back a little of their recent gains, with the FTSE- 100 seen opening marginally lower. This is despite the US markets lifting further overnight, with the financials rallying to their 2016 high yesterday, powering the broader market ahead for the second straight session. The Dow industrials and S&P 500 have risen more than 2% since last Thursday, as oil prices approach $50 a barrel and fears were calmed regarding the prospect of higher Fed rates now widely anticipated. Set for June 14th and 15th June, the FOMC meeting is expected to initiate the central bank's first rise in interest rates since boosting the overnight target spread from almost zero levels to 0.25% - 0.50% last December. Asia, by comparison chose to focus on energy companies during Thursday's trading as oil prices breached a key US$50/bbl threshold; dull activity elsewhere left all principal indices across the territory to close modestly down, with China's Shanghai Composite Index being the largest casualty. Investors should watch for the UK's revised GDP estimate this morning, while later the US reports on durable goods, the Fed's Powell speaks and a G7 summit is held in Japan. Results are expected from Tate & Lyle."
- Barry Gibb, Research Analyst
The FTSE-100 finished yesterday's session 0.70% higher at 6,262.85, whilst the FTSE AIM All-Share index closed 0.03% higher at 733.50. In continental Europe, markets ended in the green, as international creditors agreed to provide more bailout funds to Greece. Furthermore, an improvement in oil and commodity prices boosted basic resource stocks. Germany's DAX and France's CAC 40 surged 1.5% and 1.1%, respectively.
Wall Street advanced for the second consecutive day, as a decline in crude inventories led to a rally in oil prices. In addition, expectations that the Fed would hike interest rates buoyed investor sentiment. The S&P 500 rose 0.7%, with the energy sector gaining the most.
Equities are trading mixed, as investors remained concerned over an interest rate hike by the Fed and sustenance of the gain in oil prices. The Nikkei 225 increased 0.1%. The Hang Seng was trading 0.1% down at 7:00 am, tracking China's markets.
Yesterday, Brent and WTI oil prices increased 2.3% and 1.9%, respectively. The spread between the two varieties stood at US$0.2 per barrel.
Brexit to cost UK billions in trade: WTO
The World Trade Organization (WTO)'s Director General Roberto Azevedo has warned the UK that an exit from the European Union would cost it billions and the country would be forced to re-negotiate its membership of the WTO. He added these negotiations would be complex and could take years to reach an agreement.
Xtract Resources (XTR.L, 0.20p) - Speculative Buy
Xtract Resources, the gold mining and development company, announced today that it has signed an agreement to dispose of its Manica Gold project in Mozambique to Happy Gold Limited, a wholly owned subsidiary of Minerals Technologies International Limited (MTI), for a cash consideration of US$17.5m. The agreement is subject to obtaining the necessary corporate and regulatory approvals and successful completion of due diligence by the purchasers before 31 August 2016. Under terms of the agreement, should Xtract not deliver a Bankable Feasibility Study before 30 June 2016, the purchase consideration will be adjusted downwards by US$1m. In the event that the transaction does not proceed for any reason, Xtract will continue to maintain its ownership of the Manica licence.
Our view: Management cited substantial dilution and additional debt has the main reasons not to proceed with the development of the Manica Gold project. The estimated initial capital expenditure was US$38m plus an additional US$14m for underground development. To this end, the required capital could have resulted in significant dilution to the current market capitalisation. The sale of Manica, at a 40% return on the initial investment, allows Xtract to focus on its producing Chepica mine in Chile while firming up its balance sheet. We understand that the company is also evaluating other potential high return projects. We look forward to more information regarding the company's strategy as well as updates on operational activity at Chepica. In the meantime, we maintain our Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Xtract Resources plc
Eurasia Mining (EUA.L, 0.65p) - Speculative Buy
Eurasia Mining yesterday announced it had "executed an agreement" with a Russian contract mining company to develop its alluvial platinum project West Kytlim. The Russian contractor (OOO SK Region-Story) will be responsible for constructing the mine and all the associated pre-production and operating costs. In return it will receive 70% of revenues with Eurasia receiving 30%. Eurasia will be responsible for the geological side, developing new reserves, and appoint the manager of the recovery plant. Eurasia will also be responsible for selling the platinum concentrate to the refinery. Development is due to start in July and we assume first production will be during 3Q16.
Our view: This is an excellent result for Eurasia. It has three projects in Russia, the Monchetundra hard rock platinum project, West Kytlim alluvial platinum and a gold tailings project called Semenovsky. It needed a development solution for West Kytlim and the agreement announced yesterday means the project is fully funded without the need for an equity fundraise. Management can now focus their attention and resources on the development of Monchetundra and Semenovsky. In the meantime, we reiterate our Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Eurasia Mining plc
Savannah Resources (SAV.L, 3.375p) - Speculative Buy
Savannah Resources, the diversified mining group focused on exploration and development of mineral sands in Mozambique and copper-gold projects in Oman, announced today that it has completed three gravity surveys on Block 4 and 5 properties in the Sultanate of Oman. Savannah owns a 65% shareholding in Al Fairuz Mining, the owner of the Block 5 licence and is earning a 65% shareholding in Al Thuraya LLC, the owner of Block 4, both are highly prospective for copper and gold. The gravity surveys were completed over airborne VTEM (Versatile Time Domain Electromagnetic) and ground electromagnetic anomalies which had previously identified 12 EM conductors. These areas were drill tested in 2015 and returned encouraging alteration systems suggesting proximity to VMS-type mineralisation. The gravity surveys are in addition to the current 2,080m of diamond drill programme focused on the Maqail South and Mahab 4 prospects in Block 5 as well as the Dog's Bone and Bayda prospects in Block 4. Savannah is targeting an increase in the overall resource potential and upgrade the current resource classification. Drilling will also assist in the completion of initial geotechnical and metallurgical test work which will ultimately feed into feasibility studies as the company continues to target production in late-2017.
Our view: We look forward to results from the gravity surveys, expected in June, to further refine potential targets from the three survey areas. Ground based gravity surveys have a successful track record in identifying VMS-type discoveries. We also look forward to results from the current drill programme with the aim to increase the overall resources and resource classification from the current Inferred and Indicated resource estimate of 1.7Mt grading 2.2% Cu. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Savannah Resources plc
Anglo Pacific (APF.L, 73.50p) - Speculative Buy
Yesterday, Anglo Pacific released its trading update for the period between 1st January 2016 and 23rd May 2016. The company's royalty income for Q1 2016 dropped to £1.9m from £2.3m in Q1 2015. Guidance from Kestrel mine remains unchanged, with 30–35% of production expected within the group's land in H1 2016 and 85–90% in H2 2016. Cash and cash equivalents as on 31st March 2016 stood at £3.7m (31st December 2015: £5.7m). Borrowings as of 31st March 2016 amounted to £9.3m as compared with £7.3m on 31st December 2015. Anglo Pacific's equity stake in Berkeley Energia Limited is valued at £10.3m as on 23rd May 2016.
Our view: Anglo Pacific's performance in Q1 2016 was in line with expectations. The company expects the majority of royalty income in H2 2016, as in the previous year. The Narrabri and Kestrel coal mines in Australia are progressing well, with production expected at Kestrel and a full year of income for the Narrabri royalty. Anglo Pacific also received first receipts from its Four Mile uranium royalty during the period. Meanwhile, the company witnessed positive developments at Berkeley, with the market value of royalty around US$10m higher than the carrying value in its balance sheet. We expect Anglo Pacific to deliver as per the expectations in the year, well supported by recovery in coking coal prices. Therefore, we maintain a Speculative Buy rating on the stock.
HSS Hire (HSS.L, 103.0p) - Hold
Yesterday, HSS Hire released a trading update for the 14 weeks to 2nd April 2016 (Q1 2016). During the period, revenue increased 16.3% y-o-y to £84.3m, gaining from the extra week's trading, which accounted for around 8% of revenue growth. Revenue in core business rose 15.8% to £71.9m, while revenue from specialist business grew 18.1% to £12.4m. Adjusted EBITDA increased 14.3% to £17.6m. Net debt at the end of the period stood at £234.0m (FY 2015: £218.1m). Meanwhile, the company started operations at National Distribution and Engineering Centre (NDEC) in March 2016. Separately, HSS appointed Paul Quested as Chief Financial Officer. He would join the group and become an executive member of the Board with effect from 22nd August 2016.
Our view: HSS recorded a good performance in Q1 2016 with growth across both its business lines. The company's margins improved due to cost reduction actions implemented in 2015. HSS witnessed utilisation improvements across the group, with core utilisation rising 2% to 49% and special utilisation increasing 4% to 76%. The company's new NDEC would aid its extensive branch network and web capabilities. However, HSS's huge debt remains a factor potentially limiting its ability to fully participate in the continuing recovery. Moreover, a Brexit vote on 23rd June 2016 would likely further dampen the company's prospects. Beaufort's 2016E EPS forecast remains toward the upper end of market expectations at 6.7p (followed by 8.5p the following year), but current uncertainties mean that Beaufort has decided to cut its own price target from 100p/share to 90p/share and maintain its recommendation to Hold until improved visibility justifies a further earnings upgrade.
Dixons Carphone (DC..L, 447.60p) - Buy
Dixons Carphone, the Europe's leading specialist electrical and telecommunications retailer and services company, yesterday released its trading update for 16 weeks ended 30 April 2016 ('Q4 2016'). During the period, the like-for-like ('LFL') revenues for the Group advanced +5%, which comprised by LFL growth of; +4% in UK & Ireland, +9% in Nordics and flat in Southern Europe. The full year LFL revenue growth for UK & Ireland was +6%, driven by encouraging growth in electricals and mobile phone, contributed to total revenue growth of +2%. Both in Nordics and Southern Europe, full year LFL revenue rose by +4%. This brings full year LFL revenue growth for the Group up +5%. The Group narrowed its full year headline pre-tax profit expectation to £445m- £450m, the top half of previous guidance, while year-end net debt now expected to be below £300m. On the operational front, the Group gained market share across electricals and mobile in the UK & Ireland, Nordics and Greece. The total number of Carphone Warehouse stores-within-a-store with 3-in-1 formats (PC World, Currys and Carphone Warehouse) in the UK & Ireland now stood at 273 and these stores continued to perform well. In Nordics, the Warehousing project at Jönköping is progressing well and the Group has completed integration of the Infocare business. Dixons Carphone will announce its full year results on 29 June 2016.
Our view: Dixons Carphone delivered better than expected result for the Q4 2016, recording strong LFL revenue growth and expanded market share across electricals and mobiles in its key division. A strong performance in the final quarter enabled the Group to narrow its headline pre-tax profit range from £440m-£450m previously announced in Christmas to £445m-£450m, against current consensus analysts' estimate of £446m. This range suggests an increase in pre-tax profit of c.+17% year-on-year. The Group continued to improve its all-important customer satisfaction and price competitiveness rating across all key markets. Recently, on 21 March 2016, the Group announced that it has entered into an agreement to acquire Simplifydigital, the UK's largest broadband, TV and home phone switching business for an undisclosed sum. This acquisition enables it to significantly improve its Services business, where Dixons Carphone provides independent advice and allowing it to become a trusted partner in customers' homes for responsive, accessible, expert and affordable technology support. In view of the Group's encouraging LFL revenue growth, increasing market share, and operational progress, Beaufort maintains its Buy rating on the stock.
Intertek (ITRK.L, 3,112.0p) - Hold
The Company issued a Trading Statement yesterday and reported revenue, for the period January – April 2016 up 12.7% at actual exchange rates and 10.6% at constant currency, compared to the same period in 2015. Organic revenue growth was 2.3% and 0.5% at actual exchange rates and constant currency respectively. The Group has started the year well with double-digit revenue growth. Other Product related businesses, which contribute over two-thirds of The Group's earnings, delivered good organic growth performance, and the Group's Trade activities reported solid organic growth while market conditions remained challenging in the Resource related businesses.
Our view: The Group are on track to deliver robust full year revenue growth at constant currency and continue to expect to deliver solid organic growth performance in 2016 with Group margins broadly stable year on year. Intertek operates a high margin and strongly cash generative earnings model with a track record of sustainable growth and shareholder value creation. Looking forward, Intertek will continue to see structural growth opportunities in the Total Quality Assurance market as corporations focus on risk management in their increasingly complex operations and supply chains. Despite Intertek's track record we move our recommendation to HOLD because there appears a slowdown in Q4 and with a rating for the full year 2016 is a full 22x earnings.
Marks & Spencer (MKS.L, 399.40p) - Hold
Yesterday Marks and Spencer reported 'sales performance unsatisfactory' although strong growth in food was reported. The Profit before Tax was marginally above consensus but M&S has taken a £200m exceptional for impairments and M&S PPI misselling. The Company is clear on the actions needed to recover and grow Clothing & Home, which is M&S's top priority, but these actions, combined with the difficult trading conditions, will have an adverse effect on profit in the short term.
Our view: Disappointing results will lead to circa 10% reduction in consensus forecasts, but we note the start of the strategic turn round has commenced, although this will take time against 'difficult trading conditions'. International has been disappointing, but Food is doing well and they do have a focus on growing the Food business. However, the core Clothing and Household will take time and we will monitor Marks and Spencer but maintain our Hold stance.
Zoopla Property (ZPLA.L, 337.80p) - Buy
Yesterday, Zoopla Property declared its results for the half year ended 31st March 2016 (H1 2016). During the period, revenue soared 130% to £96.4m, mainly due to the inclusion of the Comparison Services division. Adjusted EBITDA surged 89% to £40.5m. Consequently, pre-tax profit rose 53% to £28.1m, leading to an EPS of 6.9p as compared with 3.8p in H1 2015. Net debt at the end of period amounted to £83.9m. On the operational front, Zoopla made investments and partnered with UK's property technology start-ups. After the period, the company acquired the Property Software Group for £75m. The group launched a series of national TV adverts for both its Zoopla and uSwitch brands, with the Zoopla campaign being its biggest to date and resulting in record levels of brand awareness. The company has declared an interim dividend of 1.5p, 50% higher than that in H1 2015, to be paid on 24th June 2016.
Our view: Zoopla performed strongly in H1 2016 with record revenues and enhanced margins. The Property Services division performed as per expectations and reported 12 consecutive months of UK Agency partner growth. The number of property listings grew to 854,000, showing a rise in the number of property partners. On the other hand, the Comparison Services segment outperformed expectations, with the uSwitch brand continuing its strong market hold. The energy vertical's growth was driven by a higher volume of switching during winter. Zoopla recorded strong traffic of over 300 million visits to its websites and apps, with more than 68% via mobile. The company continued product innovation and integration with the launch of new tools for both consumers and professionals. In addition, Zoopla's acquisitions and investments would enhance its consumer experience and help build the ultimate home-related lead-generation platform. The company remains committed to shareholders as it announced higher dividends payable. We believe Zoopla is comfortably placed to continue its growth momentum in the second half of the year. Therefore, we maintain a Buy rating on the stock.
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Barry Gibb, Harry Stevenson, Sheldon Modeland & Charles Long
(t) +44 (0) 207 382 8384
The business climate index for Germany rose to 107.7 in May from 106.7 in the previous month, the survey results from IFO institute revealed yesterday. The markets expected a reading of 106.8. Executives' expectation index increased to 101.6 from 100.5 in the previous month.
US MBA mortgage applications
US home mortgage applications, including both refinancing and home purchase, rose 2.3% w-o-w in the week ended 20th May, after a 1.6% decrease in the preceding week, the Mortgage Bankers Association said yesterday.
During the three months to end-April 2016, the number of stocks on which Beaufort Securities has published recommendations was 342, and the recommendations were as follows: Buy - 107; Speculative Buy - 182; Hold - 53; Sell - 0.
Full definitions of the recommendations used by Beaufort Securities in its publications and their respective meanings can be found on our website here