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Beaufort Securities Breakfast Alert: N4 Pharma Plc, Pennon Group plc, Xtract Resources PLC

Beaufort Securities Breakfast Alert: N4 Pharma Plc, Pennon Group plc, Xtract Resources PLC

Today's edition features:

• Xtract Resources (LON:XTR)

• N4 Pharma (LON:N4P)

• Pennon Group (LON:PNN)

 

Markets

Europe

The FTSE-100 finished yesterday's session 0.13% lower at 7,301.29 whilst the FTSE AIM All-Share index was up 0.20% at 996.64. In continental Europe, the CAC-40 finished 0.27% lower at 5,267.13 whilst the DAX was up 0.02% at 12,594.81.

Wall Street

In New York last night, the Dow Jones closed 0.24% lower at 22,296.06, the S&P-500 was down 0.22% at 2,496.66 and the Nasdaq fell 0.88% to 6,370.59.

Asia

In Asian markets this morning, the Nikkei 225 was 0.39% lower at 20,317.6 and the Hang Seng was down 0.03% at 27,491.87.

Oil

In early trade today, WTI crude oil was 0.09% higher at $52.31 per barrel and Brent was up 0.54% at $59.34 per barrel.

 

Headlines

Oil prices jump over 3% on rising demand and production cuts

Oil prices jumped on Monday with the Brent benchmark hitting its highest in more than two years. Rising demand and geopolitical worries fuelled the increase, along with indications that production cuts by Opec members are starting to bite. Brent rose 3.8% to $59.02 a barrel, its highest since July 2015, while the US West Texas benchmark rose 3% to $52.22. "The production cut is starting to work and the rebalance is underway," said Gene McGillian, at Tradition Energy. The oil market has been in a downturn for almost three years. But the head of BP's oil trading division in Asia, Janet Kong, told a Financial Times conference the market was now "at a juncture". As well as increased demand, especially from China, Turkey's threat to disrupt oil flows from Iraq's Kurdistan region, helped push up prices on Monday. Turkey has said it could cut off a pipeline that carries oil from northern Iraq to the global market, putting more pressure on the Kurdish autonomous region over its independence referendum. "If this boycott call proves successful, a good 500,000 fewer barrels of crude oil per day would reach the market," analysts at Commerzbank said in a research note. Meanwhile, Opec, Russia and several other producers have cut production by about 1.8 million barrels per day (bpd) since the start of 2017, helping lift oil prices by about 15% in the past three months. At an Opec meeting on Friday, several countries said output curbs were having the desired impact on the market and price. Kuwaiti Oil Minister Essam al-Marzouq said the cuts had reduced global crude stocks to their five-year average, Opec's target.

Source: BBC News

 

Company news

Xtract Resources (LON:XTR, 2.38p) – Speculative Buy

Xtract Resources announced an update on the alluvial mining contractors' progress on the Manica concession in Mozambique. Omnia, the contractors operating on the western portion of the licence, have stockpiled 25,000t of alluvial material ready for processing and have pre-stripped a considerable amount of overburden. The process plant is in position and all items have been run and tested with a single water pipeline remaining to be installed. On the eastern half of the alluvial deposit contractors, Sino Minerals, have exposed a considerable amount of alluvials prior to their extraction and have three small plants on site which are currently being repaired for production. Initial production is expected to take place shortly by Omnia with Sino Minerals commencing production in October.

Our View: The above announcement is good news for Xtract where production could potentially start imminently. Alluvial operations are much less complex than hard rock mining and have a quicker timeline towards production. Taken together and considering the recent strengthening of gold prices the expected monthly revenues from the Mancia alluvials could be significant. We look forward to further updates on the hard rock project as well as commencement of production from the alluvial operations. In the meantime, we maintain our Speculative Buy rating on the stock.

Beaufort Securities acts as corporate broker to Xtract Resources PLC

 

N4 Pharma (LON:N4P, 5.38p) – Speculative Buy

The specialist pharmaceutical company which reformulates existing drugs and vaccines to improve their performance, yesterday announced its unaudited interim results for the six months ended 30 June 2017. These were the Group's maiden results since completion of its acquisition of N4 Pharma Limited and re-admission to AIM with a new management team and business model. As anticipated during the period, no revenue was generated, although other operating income included £22,910 of government grants. The operating loss of £390,377 (2016: £73,701) was impacted by the costs associated with the RTO. Operational activity in the first half of the year was initially focused on the divestment of the legacy investment portfolio. Since then, it has moved quickly to progress the development of its lead product, the reformulation of sildenafil (commonly known as Viagra), for which it will shortly be commencing initial human pilot clinical trials based on its protected formulation. The Board has also been adding to the Group's product pipeline through the filing of additional generic product patent opportunities with potential for reformulation and improvement. More recently, Bio-Images Drug Delivery Limited ('BDD') has been appointed to undertake a small scale human pilot clinical trial; it is expected that this will commence in Q1 2018 with results due in Q2 2018. It remains the Board's intention to then either to partner with a large pharmaceutical company to complete the pivotal trial (thereby earning a licence fee and generating milestone payments), or to explore the possibility of conducting the pivotal trial independently and, in doing so, assess the balance of increased capital risk versus the available rewards for its shareholders. Meanwhile, the focus for the Group's vaccine division continues to be on generating data for a delivery system which will enable it to engage commercially with pharmaceutical and biotech companies looking for novel solutions, such as Nuvec, to improve opportunity for their own DNA and RNA development vaccines. As such, N4 will focus its efforts here, having temporarily put research on its potential hepatitis B vaccine on hold.

Our View: N4 is approaching a key milestone as it moves towards the pilot human trial for its sildenafil reformulation. Assuming the results are positive, this will greatly advance the value of the data already obtained and provide a clearer path towards commercialisation. In Q1 2018, BDD will undertake a small scale human pilot clinical trial with a limited number of healthy male volunteers to determine human pharmacokinetic data. Results expected for release in Q2'2018 will, in turn, establish the amount of drug the reformulation is capable of delivering while making comparison against existing erectile dysfunction products. Once management has this data, it will be able to make any final adjustments to the reformulation and then present the pharmacokinetic data together with relevant manufacturing/quality information to the Food and Drug Administration ('FDA') and the relevant European regulatory authorities along with a proposed approach to conducting a pivotal clinical study which will be required for marketing authorisation. At this point, the Board will consider its options; whether to engage with an industrial partner (in exchange for royalties) or whether sufficient financial backing can be attracted in order to permit N4 to undertake the pivotal trial itself. Given that N4's available cash resource (£1.5m at end-June) should be sufficient to carry it right through to the end of 2018, it will have ample time to fully furnish a data room and ensure all interested parties put their 'best cards on the table'. This opportunity should not be underestimated. A faster acting, longer lasting version of Sildenafil (which presently has global annual sales of some US$4.6bn) has the ability to fill an important market gap, which Beaufort estimates a potential opportunity in the range of US$400m to US$600m per annum. This alone provides an ideal reminder that having adopted a relatively low-risk business model that offers a rapid route to first revenues, N4 Pharma's present valuation appears to ignore the opportunities its lead candidate presents. Even after awarding an absurdly low 20% probability of success and assuming a call for an additional £2m raise to complete clinical studies before attracting a suitable partner, a net-present value of £10m is still more than twice yesterday's closing price. Investors tend to forget, however, that there is much more to N4 than just its sildenafil reformulation; an effort by management to highlight its pipeline of other generic products which also seek to address potential multi-billion dollar markets, whilst also setting out a programme for its vaccine work, possibly later this year, could raise this valuation further still. Beaufort reconfirms its Speculative Buy rating on N4 Pharma, awarding it a 12p/share price target.

Beaufort Securities acts as corporate broker to N4 Pharma Plc

 

Pennon Group (LON:PNN, 793.00p) – Buy

Pennon Group, one of the largest environmental infrastructure groups in the UK for water and waste water services, yesterday provided its trading update for the 6 months ended 30 September 2017 ('H1 FY2018'). The Group said it is on track to achieve results for both its water and waste businesses in line with management's expectations. Pennon reiterated that its Viridor business, the waste recycling and Energy Recovery company (FY2017: 59% revenue), is on track for final commissioning of Glasgow's Recycling and Renewable Energy Centre (GRREC) Energy Recovery Facilities ('ERFs') by the end of 2017. The Group also noted that progress has been made on the final agreements relating to the Viridor's Greater Manchester Private Finance Initiative ('PFI') Contract. Pennon Group commented "Pennon continues to deliver a robust underlying financial performance for 2017/18. With our clear strategy and strong balance sheet, Pennon is well-placed to continue to deliver for customers, communities and shareholders". The Group is scheduled to announce interim results on 29 November 2017.

Our View: A reassuring trading update. Continued good performance by both the South West Water business (41% of revenue) and Viridor looks set to be sustained for FY2018. The result of May's sell-off of UK water companies has been reflected in a -10% drop in Pennon's share price year-to-date, despite the Group delivering results in line with expectations with almost 60% of total revenue (c.28% of EBITDA) being generated by its Energy division. For its water business, Pennon has been maintaining its sector-leading RORE (Return on Regulatory Equity), which is a key indicator of underlying performance for such regulated activities, being derived from outperformance in ODIs (Outcome Delivery Incentives), a regulatory condition under which companies are incentivised to outperform the permitted regulatory return, along with Totex savings and lowest financing costs in the sector. We believe the Group is well-positioned for its South West Water business to maintain its sector-leading RORE, while Viridor continues to enjoy growth driven by its strong ERFs portfolio. Given also that Pennon offers a sector-leading dividend policy of at least +4% per annum above RPI inflation right out to 2020 its shares, the shares are valued on a FY2018E P/E multiple of 16.5x, with a dividend yield of 4.9%. In light of continued positive progress, Beaufort retains its Buy rating on Pennon Shares.

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