Today's edition features:
• Jubilee Platinum (LON:JLP)
• Legendary Investments (LON:LEG)
• Hastings Group Holdings (LON:HSTG)
• Morses Club (LON:MCL)
"Equities are taking a pause for breath. Nevertheless, Donald Trump probably cannot believe his luck. The coincidence of his election, which was based on a highly ambitious reflationary campaign, along with early evidence of economic recovery, which had been conveniently engineered by Obama over the previous couple of years, makes it seem he can walk on water. Indeed, the confidence he is generating suggests that right now at least his people, the financial markets and, probably, global confidence will follow him almost anywhere he goes. Importantly, this momentum gives the White House time to piece together the detail of its economic plan and push it on through Congress. Impressive stuff! Driving the point, Initial Weekly US Jobless Claims yesterday fell to their lowest level in 44 years, which effectively means the US now has ‘full employment’. Two-year Treasury yields also continued to climb through their seven-year high and the US$ moves ever upward, as expectations of a Fed hike at this month’s FOMC meeting rise to 77.5% ahead of Janet Yellen’s speech later today. In tandem with this, confidence in future US equity earnings is now said to have reached a five-year high. Meanwhile, some of the wall of money still being liberated from the bond markets, found its way into heavily oversubscribed Snap Inc., the parent of popular disappearing-message app Snapchat, which started trading on the NYSE at a good premium having already priced its initial public offering above expectations in the biggest US technology IPO since 2014. Weighed down by profit taking in financials and weakness in real estate issues, however, all three principal US equities indices fell similarly on reasonable volumes yesterday evening. Asia followed suit, led by South Korea amid rising tensions with China. A potential tourist ban and other measures hit the country’s retail and travel-related quotes, while an overnight decline in commodity prices and the continuing sell-off of Treasuries added broad downward pressure to the regional’s other bourses. Positive economic signals emerged from Europe, but the Euro was little changed following data on Thursday confirming February’s annualised rate of inflation rising above the ECB's target rate for the first time in four years. Most considered this had been generally expected, although it raises new speculation that a reduction in its giant bond-purchase programme might now start during the second quarter. Sterling was also steady despite Brexit friction being played out between Parliament’s Commoners and Lords. Macro data due from the UK, EU and US today includes February Markit Services PMI. Numerous speeches from Fed and FOMC Members are due to commence from 15:00hrs GMT, although these will be overshadowed by the Chair who is due to make her statement some three hours later. UK corporates scheduled to release earnings or trading updates include IAG (IAG.L), London Stock Exchange Group (LSE.L) and WPP (WPP.L). With another Scottish Referendum possibly emerging on the horizon, traders will also be listening for any more warning shots being fired by Theresa May, who yesterday warned on the impact separation from the Union could have on the country’s living standards. London is expected to open weaker, with the FTSE-100 seen down 20 points in early trade."
- Barry Gibb, Research Analyst
The FTSE-100 finished yesterday's session 0.01% lower at 7,382.35, whilst the FTSE AIM All-Share index added 0.32% to stand at 913.26. In continental Europe, the CAC-40 finished up 0.06% at 4,963.80 whilst the DAX was 0.06% lower at 12,059.57.
In New York last night, the Dow Jones fell 0.53% to 21,002.97, the S&P-500 shed 0.59% to 2381.92 and the Nasdaq ebbed 0.73% to 5861.22.
In Asian markets this morning, the Nikkei 225 had fallen 0.6% to 19,447.1, while the Hang Seng slipped 0.57% to 23,592.51.
In early trade today, WTI crude was up 0.13% to $52.68/bbl and and Brent was up 0.13% to $55.15/bbl.
Zero hours contracts reach record levels
The number of people on controversial zero hours contracts has reached a record high of 910,000. New figures based on an analysis of Office for National Statistics data reveal that 110,000 more people were on contracts that do not guarantee work in 2016 compared with the same period in 2015. That's an increase of nearly 14%, and 30% higher than 2014. In 2005, there were just 100,000 people on zero hours contracts (ZHCs). But although the new figures are a record, they also reveal a sharp slowing in the rate of increase in the last six months of 2016. "It's notable that the increase of 0.8% in the second half of 2016 compares to a 7.6% rise over the same period in 2015," said Conor D'Arcy, policy analyst at the Resolution Foundation, which undertook the analysis of the ONS's Labour Force Survey. "Ever since ZHCs hit the headlines the numbers have increased sharply every six months. The latest figures bring this run to an end." That decline in the rate of increase for such contracts - which have been criticised for being forced on lower paid workers - could be down to three reasons.
Source: BBC News
Jubilee Platinum (LON:JLP, 6.22p) – Speculative Buy
Yesterday Jubilee announced receipt of its Tjate Mining License. This has been a long time coming and is a major milestone in the development of Tjate, one of the largest and highest grade undeveloped platinum projects on the Bushveld or globally. The mining license has an initial 30 year term and can be renewed as many times as necessary.
Our view: The Tjate mining license has taken many years to be issued, and there was a time (when PGM prices were higher) when this event would have triggered intense Jubilee acquisition speculation. Although the South African PGM industry is a different place, with large yet low margin operations and labour challenges, Tjate's strategic importance remains intact and yesterday’s news will not be missed by the South African platinum industry. We retain our speculative Buy recommendation.
Beaufort Securities acts as Corproate Broker to Jubilee Platinum
Legendary Investments (LON:LEG, 0.18p) – Speculative Buy
Legendary this morning has announced that its 7.1%-owned investee company, Virtualstock Holdings (‘VS’), has been appointed by the John Lewis Partnership, which includes 48 John Lewis shops across the UK, johnlewis.com and 349 Waitrose shops, to implement its Supply Chain Management System, The Edge. John Lewis will be utilising The Edge Platform’s capabilities including its availability and order management functionality to develop the retailers’ Supplier Direct Channel. VS will connect suppliers with John Lewis’ systems and processes, enabling improved real-time inventory updates through a centralised system. The Edge provides a collaborative workspace enabling John Lewis and their suppliers to work together. VS has a history of deploying digital solutions to leading retailers including Tesco, Maplin, Sainsbury’s Argos, Dixons Carphone and Office Depot. Selected for its ability to implement agile, scalable technologies, VS continues to provide its retail partners with the tools to optimise supply chain operations, while delivering significant cost savings.
Our view: Another massive tick in the box. Without doubt, Virtualstock’s platform offers something very special: an ideal business critical information solution without the need for costly, expensive and potentially disruptive systems integration. It can attract a customer base ‘to die for’, not just amongst the bluest of the UK’s blue-chip retailers, but also with what certainly is one of the world’s largest and most complex procurement and stock control challenges, the National Health Service. In February 2015, Virtualstock’s was described as ‘exemplary of best practice in employing digital technology to deliver significant cost reductions’ in Lord Carter’s productivity review of the NHS. VS’s client portfolio now also includes the Shelford Group, which comprises ten leading NHS multi-speciality academic healthcare organisations as clients, and it is in discussions with several additional NHS Trusts. Customer endorsements like these are worth more than multi-million-dollar marketing budgets any day! Indeed, the likes of SAP, Oracle, Microsoft Dynamics, Sage etc. must be peering enviously at The Edge’s highly protected functionality. Quite clearly the global opportunity for such an urgently needed system, which is largely ‘off-the-shelf’ but comes with a bespoke front end, is extremely large. The business model, which is both transactional and value-based, suggests not only will it enjoy excellent gross margins but the customer-base will also remain very sticky. An almost ideal scenario for any SAAS company! The news builds considerably further on Virtualstock’s reputation and credibility, taking its highly scalable opportunity far beyond just the UK-based blue-chip enterprises with which it has deep relationships. Its potential had already been recognised by one well-known entrepreneur, who bought-in based on a £58m valuation. Beaufort’s own subsequent detailed review of Virtualstock awarded it a much higher assessment of £176m, but yesterday’s news together with the Shelford contract, suggests this still considerably understates the opportunity and, accordingly, raises the figure to £240m. Recognising that Legendary Investments’ holding in Virtualstock represents the major value component of its portfolio, Beaufort is now also raising its price target on its shares to 0.7p (from 0.5p previously) while repeating its Speculative Buy recommendation.
Beaufort Securities acts as Corproate Broker to Legendary Investments
Hastings Group Holdings (LON:HSTG, 236.15p) – Buy
Hastings, a general insurance provider, yesterday announced its preliminary results for the year ended 31 December 2016 (‘FY2016’). During the period, gross written premiums advanced by +25% to £769.0m, net revenue climbed +23% to £590.3m and adjusted operating profit rose +21% to £152.1m (before the impact of the Ogden rate change), against comparative period (FY2015). After deducting the £20.0m impact of the Ogden rate change, adjusted operating profit grew +5% £132.1m. Profit after tax increased to £78.4m (FY2015: £2.3m), leading basic and diluted earnings per share of 11.9p (FY2015: 0.5p). Retail cash generation improved +21% to £98.1m, while net debt leverage multiple reduced to 1.9x (FY2015: 2.1x), post Ogden. On the operational front, the Group’s live customer policies increased by +15% to 2.35 million and market share of UK private car insurance rose to +6.5% (FY2015: 5.8%). In home and telematics, live customer policies increasing by +25% and +45% respectively, as the Group benefitted from continued growth in price comparison website penetration. Calendar year loss ratio was 73.7% before Ogden or 77.7% after Ogden rate change, while solvency II coverage ratio stood at 140% (FY2015: 156%), post Ogden. Hastings’ CEO, Gary Hoffman commented “We remain well positioned to deliver continued profitable growth in 2016; the increases in premiums we’ve written will continue to earn through over the life of the policies, and we’ve seen no significant changes to the premium and claim inflation trends since the period end. We are firmly on track to meet, or beat, all of our targets.” The Group declared a final dividend of 6.6p per share, bringing full year dividend to 9.9p, up +350%, to be paid on 31 May 2017.
Our view: Hastings delivered an excellent set of result for the FY2016, delivering on the promises management made at the time of IPO. Financial performances were robust, boosting profit after tax, improved retail cash generation, while hiking the dividend by +350% to now represent 65.6% (FY2015: 56.5%) of adjusted profit after tax, compares with the original target range of 50%-60% (the Group only paid final dividend of 2.2p in FY2015 due to timing of IPO). Hastings’ calendar year loss ratio remains within the target range of 75%-79% and net debt leverage multiple has reduced. Looking ahead, management said it is on track to meet or exceed all of its targets including; 1) calendar year loss ratio of 75-79%, 2) dividend payout ratio of 50-60% of adjusted profit after tax, 3) reach customer numbers of 2.5 million by end 2017 but not at the expense of profitability, and 4) net debt leverage multiple of 1.5x by end 2017. Further to this, the Group’s confidence is also demonstrated by them setting an updated target for customer numbers of 3.0 million and net debt leverage multiple of 1.0x during 2019. Hastings has agile, digital and data-driven business model, whose approach focusses on price comparison website, with satisfaction evident from its increased number of customers and market shares. Recent change to the personal injury discount rate ('Ogden rate') from 2.5% to -0.75% has resulted in a hit on profit across the industry as it will increase the cost of settling personal injury damages awards. Despite the impact of the new rate, Group’s performance remains robust and it is well capitalised and invested to derive further growth. The shares are valued at FY2017E and FY2018E P/E multiple of 12.2x and 11.0x along with dividend yield of 4.8% and 5.3%, respectively. While Beaufort recognises the limited future visibility that a virtually pure automotive insurer, like Hastings, can now have given the electric car revolution which will almost certainly come to bear over the next 15 or so years, this remains a high visibility income investment that will benefit from the fact that new competition is now unlikely to crowd out the sector while technologies and regulation will likely continue to reduce the extent of major personal claims in coming years. Hastings fits well for investors seeking both capital gains and income. Beaufort repeats its Buy recommendation on the share.
Merlin Entertainments (LON:MERL, 481.53p) – Buy
Merlin Entertainments (‘Merlin’), the European entertainments company operating the world’s second-largest visitor attractions, yesterday announced its preliminary results for the year ended 31 December 2016 (‘FY2016’). All comparatives below use 53 weeks in FY2016 against 52 weeks in FY2015 unless otherwise stated. During the period, at a reported basis, Group’s revenue advanced +14.0%, EBITDA rose +12.2% to £451m, operating profit grew +10.0% to £320m, pre-tax profit increased +10.8% to £277m, leading adjusted earnings per share improved by +16.9% to 20.8p. At a constant exchange rate basis of the same 52 weeks period, revenue increased by +3.6% but EBITDA fell -1.8% and operating profit dropped -6.2%, reflecting slight fall in margin which was impacted by the cost pressures and lower margin new attractions. Like-for-like (‘LFL’) revenue growth which compared same 52 weeks was up +1.4%, comprised of; +4.3% growth in Resort Theme Parks division, +1.6% improvement in LEGOLAND Parks division, but -0.2% decline in Midway Attractions division. On the operational front, the Group opened 5 new Midway Attractions, 210 rooms across theme parks accommodation, and LEGOLAND in Dubai. The Group said it remain on track to achieve its 2020 milestones. Merlin Entertainments’ CEO, Nick Varney commented “We continue to be excited about the long term growth opportunities for Merlin. Whilst we are planning prudently, we remain confident of a good performance in the year ahead”. The Group declared a final dividend of 4.9p per share, bringing full year dividend to 7.1p, up +9.2%, to be paid on 19 June 2017.
Our view: Merlin delivered another good set of result for FY2016 accompanied by a typically prudent outlook statement. Pre-tax profits and earnings per share both came ahead of our forecasts and consensus analysts’ estimates. Its performance was boosted by weaker Sterling, which continues into the current period as it generates over 70% of profits outside of the UK. In this respect, those seeking a reason for yesterday’s minor sell-off, other than the fact that it had outperformed the FTSE All-Share by +10% since December, might point a finger at LFL revenue growth of just +1.4% against consensus of +1.6%, along with margin squeeze and a profit decline on a constant currency basis. The devil, of course, is in the detail but it is worth noting that LFL growth at LEGOLAND Parks slowed in Q4 as its Florida tourist market suffered following Zika virus and the Orlando shootings, while the overall performance was against a particularly strong comparative (FY2015 LEGOLAND LFL: +8.2%). Midway Attractions managed to slightly ease its LFL decline in Q4 but overall, it was impacted by the shadow of international terrorism. Resort Theme Parks delivered accelerated LFL revenue growth in Q4 despite the fall in footfall at Alton Towers following the tragic accident in June 2015. Looking ahead, the Group said it has already taken actions to “maintain or improve” its margins. Merlin’s Board considers it is in a “strong position” and confident in its future, with Group recognising the recent trends of increasing European visitors to the Merlin’s London attractions due to strength of the US$ redirecting family’s holiday decisions. Weaker Sterling in theory should also attract additional foreign visitors to the UK, while at the same time persuade more British visitors to holiday at home. An inflationary spike that is expected to kick-in later this year will further reduce household disposable income, stimulating relatively cheap and affordable ‘domestic leisure’ breaks. Beaufort considers yesterday’s results to be ‘much as expected’ and believes Merlin is well-position to leverage its strong brand recognition, portfolio diversity and on-going global expansion strategy. Although external factors such as disease, terrorism and natural disasters can create short-term impacts on performance and sentiment, Merlin’s well-diversified global portfolio enabling it to mitigate such effects. The shares are valued at FY2017E and FY2018E P/E multiple of 21.4x and 18.4x along with dividend yield of 1.6% and 1.9%, respectively. Beaufort retains its Buy rating on the shares and would recommend using current weakness to build longer-term positions. Merlin Entertainment remain as one of our Tips for 2017.
Morses Club (LON:MCL, 117.75p) – Buy
The UK's second largest home collected credit lender, yesterday provided a trading update for the 52-week period to 25 February 2017. Management confirmed its trading performance for the period had continued to show strong growth and is in line with the Board's expectations. Total credit issued increased by 18% to £144m compared with the prior year, with customer numbers increasing by 9% to 216,000. This increase reflects the success of new territory builds and acquisitions in the core home collect credit (‘HCC’) market, as gross loan book rose over 4% over the past year. The proportion of loans attributable to highest tier customers also increased by 10%, demonstrating the Company's focus on higher quality lending while it expects to report impairments comfortably in line with guidance range (22% to 27%). Morses acquired Shelby Finance Ltd. a provider of online instalment loans, in January 2017, and is finalising plans for the launch of its new online instalment lending product. This marks the next step in the Company's strategy of developing digital products to expand its core offering and target a wider range of customers across the UK non-standard credit market. Morses Club will be announcing its preliminary results for the 12-month period ended 25 February 2017 on Thursday, 27 April 2017.
Our view: Continued growth and performance for the year, with progress achieved against all key metrics. Morses Club has invested in technology to support its strategic plan to offer customers a broader range of products and the ability to access credit more flexibly. On top of the successful introduction of the Morses Club Card in April 2016, it is finalising the launch of a new online instalment loan product. Having invested to streamline processes, and reduce cost, further demonstrating its commitment to develop technology to remain at the forefront of the core HCC market while broadening its offer to the wider non-standard consumer finance sector, the Company is capturing its long-term expanding opportunity while demonstrating its ability to squeeze out its smaller competitors who are either unable to compete effectively in the online world or satisfy the rigours of the regulator. This, of course, also generates a pipeline of ‘bolt-on’ acquisition opportunities which have potential for immediate enhancement while plugging regional coverage gaps. The shares have performed satisfactorily over the past 6 months, modestly outperforming the FTSE All-Share. Given the quality of management and visibility offered, a 2016/17 P/E multiple of just 11.0x along with almost a 5.1% yield (compared with Provident Financial’s 2017E of 15.5x and 4.8%) with a P/BV of 2.6x suggests it still remains something of a bargain, particularly considering this virtually ungeared lender comes with a sector leading 29.1% ROE. Beaufort retains a Buy rating on Morses Club with price target of 155p/share.