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Beaufort Securities Breakfast Today including TXO Plc, Travis Perkins and Cairn Energy

Last updated: 09:45 18 Oct 2013 BST, First published: 08:45 18 Oct 2013 BST

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The Markets

Market opening: Markets are likely to open higher today. FTSE 100 futures were trading 38.5 points up at 7:00 am.

New York: Wall Street traded bullish after the signing of US debt deal erased concerns of an imminent government shutdown. However, mixed earnings reports from various companies, including technology firm IBM, capped gains. The S&P 500 advanced 0.7%.

Asia: Encouraging growth data from China boosted the overall sentiment in the region. Nikkei shed 0.2% due to an unfavourable currency and as investors awaited earnings results from multiple companies. The Hang Seng was trading 1% up at 7:00 am.

Continental Europe: Equities closed marginally lower after the recent gains. Investors turned their focus towards corporate news after the start of the earnings season, which presented mixed results. Germany’s DAX and France’s CAC 40 fell 0.4% and 0.1%, respectively.

UK small caps: Yesterday the FTSE AIM All-Share index closed 2.64 points (+0.33%) higher at 793.23. 

Today’s news

China’s economic growth accelerates in third quarter

The National Bureau of Statistics today reported upbeat economic data for China. During Q3 2013, the country’s GDP growth accelerated to 7.8% y-o-y from 7.5% y-o-y in the previous quarter. On q-o-q- basis, the GDP rose 2.2% following an upwardly revised 1.9% in Q2 2013.

Chinese industrial production up 10.2% in September

As per data published by the National Bureau of Statistics, China’s industrial output climbed 10.2% y-o-y in September, after increasing 10.4% y-o-y in August. Retail sales jumped 13.3% y-o-y during the month. On year-to-date basis, the output rose 9.6% in September compared with 9.5% in August. On the same basis, retail sales were up 12.9%.

Company News

Cairn Energy (LON:CNE)

Cairn Energy released its interim management statement yesterday. In frontier exploration drilling programme, operations on FD II – A (1) prospect on the Foum Draa block, the first well offshore Morocco, are expected to start soon. For the remaining four wells, preparations for exploration continued using the Cajun Express and Blackford Dolphin rigs under the 12-month multi-well frontier exploration programme. For the Pitu prospect located offshore Greenland, the decision regarding a joint venture drilling would be taken in Q4 2013. At the Mature basin exploration and development programme, second Skarfjell appraisal well was started. In August, the company engaged into multiple asset transfers and exchanges as part of its continuing growth and asset rationalisation programme. The Kraken Field Development Plan (FDP) awaited final approval from the authorities after having received approval for the Environment Impact Assessment (EIA). In Catcher area, the Bonneville exploration well (28/9a-6) and its side track (28/9a-6z) discovered oil in Eocene reservoirs. Premier Oil, the operator of Catcher area, is likely to submit the FDP in H2 2013. Cairn’s share repurchase programme for up to US$300m worth of ordinary shares is to be reviewed by the board. The stock rose 4.9% yesterday.

Our view: Cairn Energy looks all set to record strong progress in its drilling operations at multiple assets. The company has already planned work on two drilling wells in Morocco and two exploration wells at Senegal. In order to create value from its North Sea portfolio, Cairn engaged into a number of asset transfer and exchange deals and recorded good progress on this front. Besides, the share buyback programme is also positive for the investors. However, considering the recent run-up in Cairn’s stock price vis-a-vis peers like Ophir Energy and Tullow Oil, we feel that there is little scope for further upside. We downgrade the stock to a Hold.

Travis Perkins (LON:TPK)

Travis Perkins issued its interim management statement for Q3 2013 yesterday. Total sales grew 8.6% y-o-y and 7.1% on a comparable days’ basis. Like-for-like (LFL) sales were up 6.3% y-o-y as three of the four segments – General Merchanting (10.7%), Specialist Merchanting (10.6%) and Plumbing & Heating (5%) recorded strong growth. However, the consumer segment showed a flat reading due to challenging conditions in the retail market. In the nine-months ended 30th September, total sales advanced 4% y-o-y while LFL sales were up 2.8%. The group reported that it was on track to achieve a full year earnings per share (EPS) of 100p.

Our view: Travis Perkins registered good growth in revenue across most of segments and kept its full year EPS target of 100p. However, the weak performance of consumer segment is a cause for concern. Besides, a £5m lower gain, which is expected to be realised in the coming year, could hamper profitability for that period. Considering the mixed signals about the future prospects and revenue upside for the company amidst still tough trading conditions, we revise our stock rating to a Hold.

TXO (LON:TXO)

Yesterday, TXO provided an update on the announcement from the Grand Bahama Group Limited (GBG). For its subsidiary, Morgan Oil Marine (Bahamas) Limited (MOM), GBG announced further progress at its Hydrocarbon Recovery Plant (HRP) in Freeport, Grand Bahama. GBG plans to take an active part in the Billy Cay Project for the planned redevelopment work. In this regard, GBG has decided to lease additional land on the asset, increasing its total acreage and the quayside frontage. Borco’s Oil Terminal is growing fast, higher than its current 21.6 million barrels (mmbls) of storage. Currently, the Grand Bahama Shipyard is constructing a fully serviced berth with a 40 and 80 ton crane capacity. The company plans to complete the US$250m Phase V Development at the Freeport Container Port soon. The Environmental Impact Assessment (EIA) is now expected in Q4 2013 and development plans on the site would begin soon thereafter. TXO and GBG are in final negotiation with a Bahamian Consortium for the development work, in return for cash and/or equity in MOM. The first phase of HRP, to be completed by the year-end and become operational by Q1 2014, would enable production of up to 800 gallons per minute. This phase would be funded from GBG’s accumulated profits and other three phases partly from profits and partly from debt financing. The currently operational Barge Martha and the HRP together would enhance the emergency response function of the company. GBG’s second subsidiary, Morgan Oil USA, continues to operate at a small profit. Production for this division is likely to be maintained at the current level of 17 barrels of oil per day (bopd). Upon the completion of HRP, the company plans to undertake further investment to tap the proven reserves and increase production. GBG and its subsidiaries have entered into a number of contracts maintain substantial and sustainable profits both prior to and post completion of the HRP. TXO has a 30.2% equity holding in GBG with an option to increase its stake to 43.2% by year end.

Our view: The leasing of addition land on the Billy Clay project would significantly increase GBG’s acreage on the asset. However, it would also result in a delayed HRP development. Overall, this news seems to be beneficial for GBG in the long term. The continuing progress with development work on the Grand Bahama Shipyard and the Freeport Container Port enhance the market opportunities for GBG. Given the massive potential of TXO’s existing assets, steady HRP development at MOM and an improved cash position of GBG, we retain a Speculative Buy for this stock.

Economic News

UK retail sales

UK retail sales advanced 0.6% m-o-m in September, following a 0.8% drop in the previous month, the Office for National Statistics reported yesterday. The data came higher than the market expectations of a 0.4% rise. On y-o-y basis, sales rose 2.2%, ahead of the market forecast of a 2% gain. Retail sales, excluding fuel, rose 0.7% m-o-m in September and were 2.8% higher on y-o-y basis. Economists’ had forecasted a 0.3% monthly gain and a 2.2% annual increase.

US initial jobless claims

Initial jobless claims in the US declined 15,000 to a seasonally adjusted 358,000 in the week ended 11th October, the Labour Department said yesterday. Economists had expected claims to decline to 335,000. The previous week’s claims were slightly revised downwards to 373,000 from a prior reading of 374,000. The four-week moving average rose to 336,500 from the previous week’s revised 324,750.

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