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Beaufort Securities Breakfast Today including Magnolia Petroleum, Noricum Gold, Whitbread, Spirit Pub Company and others

Last updated: 09:14 23 Oct 2013 BST, First published: 08:14 23 Oct 2013 BST

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The Markets

Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 17.50 points down at 7:00 am.

New York: Wall Street rallied after the highly sought after payroll data fell short of market expectations, raising hopes of continuance of the Fed’s monetary stimulus at the current pace for an extended period of time. The S&P 500 moved up 0.6% for the day.

Asia: Nikkei fell 2% on investor sell-off after strong gains last week. Softbank’s shares were trading higher on Alibaba Group’s progress toward an IPO. Hang Seng was trading 0.3% down at 7:00 am.

Continental Europe: Encouraging cues from the US triggered a rally in markets. Broadly positive earnings reports from regional companies further supported the momentum. Germany’s DAX and France’s CAC 40 advanced 0.9% and 0.4%, respectively.

UK small caps: Yesterday the FTSE AIM All-Share index closed 0.49 points (+0.06%) higher at 802.99.

Today’s news

UK economy back on growth path

Yesterday, at a conference in London, the Deputy Governor of the Bank of England (BOE) expressed confidence in an economic rebound. He stated the economy was finally on the path of sustainable growth, albeit at a slower pace vis-à-vis historical readings. This could be ascribed to easing of ongoing concerns over lack of credit from the region’s troubled banks and the Eurozone crisis, he said.

BOE may give forward policy guidance

Yesterday, authorities from Bank of England indicated the forward guidance on policy rates might be updated. This would serve to provide better clarity to investors regarding the future course of the bank’s benchmark interest rate in case of a speedy recovery in the UK economy.

Company News

Magnolia Petroleum (LON:MAGP)

Yesterday, Magnolia Petroleum provided an operations update across its portfolio of interests in proven US onshore formations including the Bakken, North Dakota and Mississippi Lime, Oklahoma. The company said the JoAnn1H-18 well and Murl#1 well are holding gross initial production rates of 1,170 barrels of oil equivalent per day (boepd) and 87 boepd. Furthermore, Magnolia is participating in four wells (Parmley 1-1WH, Parmley 1-1WH, 1-27HW and Northcut WildWest 1-1H), all in Oklahoma, at an aggregate net cost of up to US$952,702. Devon Energy is the operator of three of these wells. Magnolia’s total acreage in the Mississippi Lime, Hunton, Woodford and Wilcox formations in Oklahoma now stands at 5,800 net mineral acres. Separately, Magnolia also announced it secured a US$5m credit facility. The stock climbed 8% yesterday.

Our view: Magnolia has come a long way from the time its 2P reserves were valued at US$2.2m. As on 1st August 2013, Magnolia’s 2P reserves were valued at US$47m, based on a net attributable oil and condensate 2P reserves of 1,437 million barrels (mbbl) and net attributable gas 2P reserves of 5,124 million cubic feet (mmcf). Magnolia continues to pursue the strategy of taking participatory interest in proven US onshore plays with well known partners like Devon Energy. The recently acquired US$5m credit facility is likely to enable Magnolia to undertake future drilling activity alongside established operators, as well as to buy additional leases in proven US onshore formations. With over 600 potential drilling locations on over 13,500 net mineral acres of proven US onshore plays, the growth prospects for Magnolia look quite strong. We retain our Speculative Buy rating on the stock.

Noricum Gold (LON:NMG)

Yesterday, Noricum Gold announced further positive drilling results from its flagship Rotgulden Gold and Precious Metals Project in Austria. Results from RZ01A were 16.7 metres (m) at 2.71 grams per tonne (g/t) gold and 13.4 g/t silver from six metres. Other holes returned 0.75 to 4.58 g/t gold and 4.85 to 20.39g/t silver. To sum up, the latest drill holes show continuing high grade mineralisation within the target area at Rotgulden and, due to the positive nature of these results, there could be scope for further drilling from this location which may extend mineralisation both across and up strike.

Our view: Noricum Gold released encouraging drill results, which confirm high grade mineralisation within the target area at flagship Rotgulden Gold and Precious Metals Project. Given the attractive asset base of the company and financial backing through the recent equity issue, we retain a Speculative Buy for the stock.

Reckitt Benckiser (LON:RB.)

Reckitt Benckiser released its interim results for the third quarter yesterday. Net revenues rose 5% to £2,548m, and were up 3% on a like-for-like (LFL) basis. Excluding Reckitt Benckiser Pharmaceuticals (RBP), revenues grew 5% on LFL basis. The Health segment saw revenues grow 27% to £707m while the Hygiene segment revenues rose 5% to £948m. The home segment revenues declined 1% to £500m. Food revenues increased 3% to £74m. RBP revenues stood at £191m, down 14% y-o-y. Geographically, the ENA region (Europe and North America) witnessed revenue growth of 9% to £1,308m while LAPAC (Latin America, North Asia, South Asia and ANZ) saw revenues increase 7% to £623m. In the RUMEA region (Russia / CIS, Africa, North Africa, Middle East and Turkey), revenues were up 2% to £352m. Chief Executive Rakesh Kapoor said the company’s focus on Health and Hygiene segment, along with innovation-led growth in ENA were the factors that seem to be working well for Reckitt Benckiser. Despite a challenging environment, he reiterated, the company was on track to meet its full year revenue growth target of at least 6% at net revenue growth (excluding RBP). The company is commencing a strategic review of RBP, its pharmaceuticals unit. The stock led the gainers on FTSE 100, registering a 5.2% increase.

Our view: Reckitt Benckiser seems to be doing well. Scholl in particular delivered an excellent performance after the launch of Scholl Pedi product in a number of markets across Europe. Mucinex outperformed in the US. The hygiene sector also witnessed solid LFL growth, driven by sales of Lysol disinfectant. However, sales of Airwick were hurt by highly intensive competitive environment, particularly in the US. Durex and Gaviscon, Dettol and Harpic, Woolite and Vanish delivered strong performances in LAPAC. Other power brands, especially Mucinex also performed well. While the long term outlook for Reckitt remains robust, we are wary of the challenging market conditions in Southern Europe and poor performance of the pharmaceuticals unit. We maintain our Hold rating on the stock.

Spirit Pub Company (LON:SPRT)

Spirit Pub Company announced annual results for the 52 weeks to 17th August 2013, yesterday. Revenue stood at £758.2m versus £760m last year. However, operating profit rose to £85.7m versus an operating loss of £500.7m last year. Pre-tax profit was £71.7m versus £588.9m loss last year. Spirit Pub Company had incurred heavy losses relating to the revaluation of the property portfolio last year. Sales at Managed estate (90% of total revenue) were up 1.6% on a like-for-like (LFL) basis. Despite ongoing cost challenges of rising minimum wage, raw material costs and energy costs, Managed estate was able to expand EBITDAR margin by 130 basis points, due to enhanced food margins, improved labour productivity and reduced support costs. Sales at Leased estate (10% of total revenue) was down 0.4% on a like-for-like (LFL) basis as the company looked to stabilise the performance of high quality Leased estate and begin work on alternative operating models to reposition the business for future growth. However, average annual net income per pub rose to £96k from £94k at the previous year end. The Board recommended a final dividend of 1.37p per share. Spirit Pub Company also announced a re-profiling of its debt amortisation. Bondholders are being asked to tender their existing A1 and A3 bonds which will be settled by the issue of new A6 and A7 bonds respectively. The new bonds would offer a slightly higher coupon and com with a longer amortisation profile.

Our view: Spirit Pub Company, which has 1,229 Leased and Managed pubs in the UK, witnessed a major turnaround. The company reported a pre-tax profit of £71.7m versus £588.9m loss last year. Managed estate reported a significant increase in profit margins due to higher productivity and efficiency gains. The performance of Leased estate also stabilised. The company entered new financial year with good momentum. Managed estate segment has made a solid start to the new financial year with LFL sales up by 4% in the first eight weeks. Similarly, net turnover at Leased estate has witnessed a LFL growth of 1.2%. In light of the above and a strong brand portfolio, we issue a Buy rating on the stock.

Whitbread (LON:WTB)

Yesterday, Whitbread announced results for the six months ended 29th August 2013. Total sales increased 12.4% while like-for-like (LFL) sales grew 2.8% over the previous year. Underlying profit before tax was higher 12.6% to £216.1m, resulting in an underlying EPS of 90.9p. Sales at the coffee chain, Costa, soared 20.9%, while LFL sales grew 5.5%. Costa’s total system sales were up 19.5% to £569.2m. Costa added 153 net new coffee shops taking the total to 2,680 worldwide. Revenue from the Restaurants business was up 2.9% to £269.9m. The hotel chain, Premier Inn, saw total sales grow 12.2% to £497.4m; with LFL sales up 3.3%. Total revenue per available room (revpar) rose 2.1% with occupancy of 80.3%. Premier Inn opened 1,368 net UK rooms taking the total number of rooms to 53,039. Whitbread increased the interim dividend by 11.8% to 21.80p.

Our view: Whitbread delivered another good performance with double digit growth. Strong organic expansion, coupled with good LFL sales growth drove total sales up 12.4% to £1,144.7m. Costa Coffee continues to gain popularity in the new Asian and Middle-east markets, driving organic growth for the company. Premier Inn also delivered a strong performance with revenue growth of 12.2%. Whitbread plans to open around 12,000 rooms by 2016. The company has expanded rapidly over the last few years on increasing demand for more affordable hotels and a rising popularity for takeaway coffee. Given the continued strong trading performance of the company across all its divisions, we remain Buyers of this stock.

Economic News

US change in nonfarm payrolls and unemployment rate

US non-farm payrolls rose by a seasonally adjusted 148,000 in September thanks to higher employment in construction, wholesale trade, and transportation and warehousing, the US Labor Department said yesterday. Markets had expected payrolls to increase by 180,000. The August payrolls were revised upwards to a 193,000 increase versus 169,000 reported initially. The unemployment rate for September fell to 7.2%, the lowest since November 2008, from 7.3% in August. The reading came below the market expectations of an unchanged reading of 7.3%.

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