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HB Markets Breakfast Today including Spectris plc, TXO, Bovis Homes and Sula Iron & Gold

HB Markets Breakfast Today including Spectris plc, TXO, Bovis Homes and Sula Iron & Gold

The Markets

Market opening: Markets could open higher today. FTSE 100 futures were 20.5 points up at 7:00 am.

New York: Wall Street closed mostly higher on earnings momentum as a string of Q4 results beat expectations. Consumer sentiment dropping to its lowest level since December 2011 capped gains. General Electric and Morgan Stanley stocks rallied as earnings surpassed estimates. The S&P 500 rose 0.3%.

Asia: Equities eased as investors turned cautious ahead of corporate earnings results and Bank of Japan’s policy meet amid expectations of an aggressive monetary stimulus. The Nikkei closed 1.5% lower, while the Hang Seng was trading 0.1% down at 7:00 am.

Continental Europe: Markets closed lower on an unprecedented decline in UK retail sales and the US consumer sentiment unexpectedly deteriorating for the second successive month to its lowest in over a year. France’s CAC 40 and Germany’s DAX fell 0.1% and 0.4%, respectively.

UK small caps: The FTSE AIM All-Share index rose 0.1% on Friday.

Today’s news

Bank of Italy cuts GDP forecast for 2013

Italy’s central bank expects the economy to contract 1% in 2013, sharply higher than the 0.2% contraction forecasted in July. As per the bank’s estimates, GDP shrank 2.1% in 2012; it forecasts the economy to grow a mere 0.7% in 2014. Given the growing economic challenges, the bank expects unemployment to reach 12% by 2014 from 8.4% in 2011. The central bank’s report also estimated public deficit declined to around 3% of GDP in 2012 from 3.9% in 2011.

IMF estimates Greece could need up to €10bn

As per the IMF, Greece would face a financing deficit of €5.5-€9.5bn for 2015 and 2016. However, the IMF announced it had received assurances from European members that they would continue to aid Greece until the end of the bailout programme in 2016.

Compamny News

Bovis Homes Group (LON:BVS)

On Friday, Bovis Homes Group issued a trading update for the year ended 31st December 2012. Profit before tax for 2012 is set to beat market expectations, driven by a 15% growth in legal completions to 2,355, of which 1,854 were private and 501 were social. Average sales price also rose 5% to £170,700. Operating profit margin improved to around 13.5% from 10% in the previous year, largely due to higher contribution from legal completions on sites acquired since the housing market downturn, positive contributions from land sales and better overhead efficiency. As of 1st January 2013, forward sales for 2013 delivery was 778 homes, 37% higher than the prior year, reflecting the stronger private reservations position and an improved level of social housing reservations. The company began 2013 with 90 active sales outlets, 13% above 2012 levels. During 2012, the company invested in around 3,500 plots of consented land on 24 sites. It also legally completed three land sales, generating an income of £18m and £5m of profit. The management said it expects to deliver a return on capital employed of around 7.5% for the full year. The stock was down 2% at close.

Our view: Bovis Homes reported a strong trading update with operating margin improvements, higher average selling price and full year profit on track to beat market expectations. Bovis, along with its rivals, has so far enjoyed robust demand for its homes despite the UK’s murky economic outlook. This was aided by government sch emes to boost the market and the company’s strategy of buying land cheaply during the recession and building in south England where house prices have remained strong. The company’s forward sales for 2013 look strong, thanks to higher demand for private reservations. However, we believe there would be downward pressure on house prices in the current year as recession fears could mean buyers could shying away from making big ticket purchases. Furthermore we believe the stock which has already seen a significant appreciation of around 47% since June 2012, factoring in these positives, leaving little room for a meaningful upside. We have a Hold rating on the stock.

Spectris (LON:SXS)

On Friday, Spectris released a trading update for the full year ended 31st December 2012. Full year sales rose 11% on a reported basis, including 10% from acquisitions, offset by a 2% impact from currency movements. Like-for-like (LFL) sales were up 3% in 2012, boosted by higher LFL sales growth of 4% in the last quarter, despite a difficult trading environment. LFL sales in the Asia Pacific region rose 6% last year, with China showing continued strength. North America sales rose 5% whereas Europe reported a fall of 1%. Full year adjusted operating profit rose to £229m from £201.5m in 2011, while the adjusted operating margin improved to 18.6% from 18.2%. In December 2012, the company completed the acquisition of Analytical Spectral Devices. In the same month, Spectris announced the planned divestiture of Fusion UV to Heraeus Holding GmbH for a cash consideration of US$172m. This transaction would be closed within Q1 2013. The stock jumped 8.3% on Friday.

Our view: Spectris announced a positive set of numbers with full year sales growth of 11%, adjusted operating profit growth of 13.6% and improvement in adjusted operating margin. The Test and Measurement and Industrial Controls segments are seen as key drivers of growth going forward. The company continues to focus on its strategic priorities which include further strengthening of its R&D pipeline and realising synergies from its recent acquisitions. The company’s robust balance sheet also enables it to seek additional inorganic growth opportunities. Strong performance in the Asia Pacific region (which contributed around 33% to overall revenue in 2011) is expected to offset sluggish growth in the domestic European market, while the North American market is poised for a recovery. With greater focus on cost rationalisation by most companies in the current economic environment, the demand for the Spectris’ productivity enhancing equipment is expected to grow. We assign a Buy rating to the stock.

Sula Iron & Gold (LON:SULA)

On Friday, Sula Iron & Gold announced an exploration update for its 153 sq. km iron ore and gold licence area in Sierra Leone. The company has completed detailed mapping and reconnaissance work at the site. The presence of banded iron formation (BIF) was confirmed at the surface over a strike length of 3.1 km, located in Area 1, in the south-west of the licence area. A 2,000 metre (m) diamond drilling programme will begin before the end of Q1 2013 to test the strike continuity, thickness and iron grade of BIF, with a rig contract to be signed shortly. The exploration is targeting 500 million tonnes (Mt) at 30.4% iron for magnetite and 55% iron for haematite. Sula added that it had also identified significant greenstone-style gold mineralisation at the Dalakuru and Lagunda prospects. Diamond drilling by earlier operators had shown encouraging gold intersections and the mineralisation at Dalakuru remains open in all directions. Follow-up work is now planned, including a ground magnetic survey and follow-up geochemical sampling to determine the economic potential of both the target areas. Past drilling data at Dalakuru returned best intersections of 8.72m at 10.46 grams per tonne (g/t) of gold, 9.03m at 6.63 g/t of gold, and 1.55m at 11.68 g/t of gold.

Separately, Sula announced that it has issued 300,000 new shares of 1p each in order to maintain its cash balances for exploration activities. The stock rose 4.9% at close.

Our view: Sula reported highly positive mapping and reconnaissance work results at its flagship iron and gold project in Sierra Leone. The tests confirmed outcropping banded iron formation over a 3.1 km strike, which advances the project to a drill ready status. Sula will now implement a 2,000m drilling programme and is due to sign a drill contract shortly to commence work. It intends to delineate a JORC compliant resource at the prospect. Sula’s highly prospective licence (EL54/2011) is contiguous to the licence which contains African Minerals’ 12.8bn tonne iron ore Tonkolili operational mine. Independent consultants SRK Exploration Services had concluded that an exploration target of magnetite BIF could be in the region of 500 million tonnes. Furthermore, artisanal workings at the prospect’s northern part of the licence indicate the potential for a primary gold deposit, with earlier grab samples showing up to 4.92 g/t of gold. We believe the company, with its clear strategy, strong management track record, and proximity to other proven resources, will make rapid advancements in establishing a JORC compliant resource. We maintain a Speculative Buy on the stock.


On Friday, TXO announced an update on Grand Bahama Group Ltd (GBG), in which the TXO has a current equity stake of 23.64%. Morgan Oil Marine (Bahamas) Ltd (MOM), a wholly owned subsidiary of GBG, has struck two five-year deals with major shipping agents in the Bahamas – Freeport Ship Services and Elnet Maritime Agency Ltd. These contracts give MOM, and subsequently TXO, the exclusive rights to collect and reprocess used lubricating oils, heavy fuel oil washings, contaminated fuels, tank residues, sludges, emulsions, oil interceptors and ships effluent from the agents’ ship owning customers. With the newly-commissioned 1 million gallon barge due to become operational on 21st January, TXO said the business will be in a position to start collecting the used oils and ships slops immediately. The oil recovered will be stored securely, post completion of the Hydrocarbon Recovery Plant (HRP). Once the HRP is complete, the used oils will be reprocessed and sold as Reprocessed Fuel Oil, at a discounted rate to that defined by the American Petroleum Index. TXO also said that that given the possibility of further investment needed by MOM, it would enter into a revised Investment and Option Agreement with GBG, details of which will be announced soon.

Our view: Morgan Oil Marine signing two five-year deals with major shipping agents, Freeport Ship Services and Elnet Maritime Agency Ltd. is very promising news for TXO. The company will be in a position to start collecting the used oils and ships slops once the newly commissioned one million gallon Barge Martha becomes operational on 21st January. With the association with Freeport, GBG expects to collect significant volumes of used oil, with a minimum estimate of 17,000 tonnes in the first year, in addition to the projected 50,000 tonnes it hopes to collect from the Grand Bahama Shipyard. This will equate to approximately 20 million gallons, depending upon the water content. Subsequently, GBG expects the volume to grow significantly as the market becomes aware of the new reception and the significant cost benefits of offloading in Freeport. The Hydrocarbon Recovery facility once completed will have a 50-gallon per minute capacity and could run 24/7. Thus, TXO will now have a balanced portfolio of assets with a low risk, sustainable and cash generative business. We believe these two contracts will yield high margins earnings for TXO from the substantial revenues from the collection charges and the sale of new lubricants. This will provide TXO shareholders with an excellent return on their investment. We assign a Speculative Buy rating to the stock.

Economic News

UK retail sales

The UK retail sales including auto fuel dipped 0.1% m-o-m in December, after remaining flat in November, the Office for National Statistics said on Friday. Economists had estimated a 0.2% gain. Retail sales, excluding fuel, declined 0.3% m-o-m, following a 0.2% increase in the preceding month. Markets had forecasted a 0.1% increase. Food store sales fell 0.3%, while non-food stores declined 0.7% due to weak household goods store turnover. On a y-o-y basis, overall retail sales grew a mere 0.3%, following a 0.9% gain in November, much lower than market expectations of a 1% increase. Retail sales, excluding auto fuel, rose 1.1% y-o-y in December, down from the 2% growth seen in the prior month. Economists had estimated annual growth to be unchanged at 2%.

US University of Michigan confidence

The US University of Michigan consumer sentiment index fell to 71.3 in January, the lowest since December 2011, from 72.9 in the previous month, as per preliminary reading on Friday. Economists forecasted a reading of 75. The consumer expectations index, which closely forecasts the direction of consumer spending, dropped to 62.7 in January from 63.8 the previous month. The current economic conditions index, a gauge of Americans’ perceptions of their financial situation and whether they consider it a good time to buy items like cars, decreased to a six-month low of 84.8 from 87 in December.

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