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Beaufort Securities Breakfast Today including IMI and China Rerun Chemical Group

Last updated: 10:30 17 Oct 2013 BST, First published: 09:30 17 Oct 2013 BST

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The Markets

Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 12 points down at 7:00 am.

New York: Wall Street witnessed sharp gains as the Senate agreed to raise the debt ceiling and end the government shutdown by the 17th of October. Positive earnings data from multiple companies further boosted the sentiment. Financials led gains on the S&P 500, which climbed 1.4%.

Asia: Markets rebounded sharply as positive cues from the US provided relief to investors. Large export stocks such as Honda Motors benefitted from the news. The Nikkei 225 closed 0.8% higher. The Hang Seng was trading 0.1% lower at 7:00 am.

Continental Europe: Equities rallied over easing inflation concerns in the region and positive US sentiment. However, negative revenue results from food company Danone and luxury retailer LVMH dragged France’s CAC 40 down 0.3%, whereas Germany’s DAX moved up 0.5% for the day.

UK small caps: Yesterday the FTSE AIM All-Share index closed 0.29 points (-0.04%) lower at 790.59. 

Today’s news

China reports 4.9% growth in FDI

Data from the Ministry of Commerce indicated China’s foreign direct investment (FDI) increased 4.9% y-o-y to US$8.8bn in September. In August, FDI had risen merely 0.6%. However, economists were expecting a higher reading for the month. From the beginning of the year till September, China’s FDI stood at US$88.6bn, recording a 6.2% gain during the period. Additionally, the ministry warned of a tough trading environment in the country in coming months due to sluggish demand from emerging markets.

Company News

China Rerun Chemical Group (LON:CHRR)

Yesterday was the Group’s first day of Dealings on AIM. China Rerun Chemical Group Ltd is an established and profitable producer of lubricant products for the Chinese domestic automotive, industrial and agricultural markets, operating in the People’s Republic of China. Its shares were admitted to trading on the London Stock Exchange’s AIM, with a market capitalisation based on an Admission price of 10p/share of approximately £25.6m. Cairn Financial Advisers LLP is the nominated adviser and Beaufort Securities LIMIted is the broker to the Company. Information on the Group’s activities and operations can be found by accessing www.chinarerun.com

Our view: China Rerun’s stated ambition is to become China’s leading lube oil brand and auto services provider. As a sizeable small and medium enterprises (‘SME’) player in a booming but extremely fragmented domestic market place, the company has reported exceptional growth in both revenue and operating profits over the past three years. A further inter-connected, albeit nascent, business opportunity has also been identified in the form of a countrywide mobile lube oil replacement and basic automotive maintenance service.

State-imposed structural and market changes are now afoot. Importantly, the next few years are expected to open significant new opportunities for established and well-positioned domestic lube producers to use their strong balance sheets to gain significant economies of scale and market share. Forces driving this will be continued exceptional demand growth, along with the anticipated imposition of a much tougher and strictly enforced regulatory and environmental regime on all participants. The net outcome is likely to force a major sector consolidation over the coming decade, potentially concentrating the number of active players down to one-tenth or less of its current number.

This dramatic consolidation is expected to be seized by stronger players (like China Rerun) as an opportunity to significantly increase existing market share. During this same period, pure organic growth is also expected to power a doubling of the country’s total lube requirement. While peer group competition is expected to restrain potential for ‘run away’ operating margins, China Rerun’s margins are nevertheless expected to rise sharply out to 2019, stabilising thereafter. The Group is expected to throw off significant free cashflow from the outset; having achieved its quotation on AIM, China Rerun will be able to fund its expansion and other business initiatives internally. Management has provided revenue and profit forecasts for three years (2013 – 2015), while also declaring its intention to adopt a generous dividend policy going forward. Beaufort recommends China Rerun Chemical Group Ltd as a Speculative Buy.

IMI (LON:IMI)

IMI released its interim management statement for the period from 1st July to 15th October, yesterday. Trading was in line with the management expectations. After adjustments for acquisitions and exchange rate movements, revenues for the three months ended September were up 3% y-o-y, but edged down 1% year to date (YTD) on an organic basis. On a reported basis, revenues gained 4% y-o-y and remained flat YTD. In the Severe Service division, revenues were up 6% y-o-y (organic basis) as a result of an improvement in shipments, but stayed flat YTD. Bookings in this division climbed 11% y-o-y and 16% YTD. Petrochemicals delivered strong performance by winning some good projects in China, Singapore and Russia. Productivity improvement is expected to improve margins in H2 2013 for Severe Service. In Fluid Power division, organic revenues rose 2% y-o-y, declining 3% YTD. The group expects improved margins from this division in Q4 2013 owing to increased volumes and certain other initiatives. The Indoor Climate division showed organic revenue growth of 1% y-o-y and a flat reading YTD. European countries especially Germany, Poland and France exhibited strong performance during the period, while the emerging market’s performance was mixed. Going forward, the division is expected to derive benefits from its recent launches and an improved order intake, to record normal seasonal margin improvements in H2 2013. Merchandising division witnessed robust revenue growth of 22% y-o-y (+18% YTD) on an organic basis, with a strong performance in both the North American automotive business and European cosmetics business. The Beverage Dispense division faced some challenging conditions as major customers continued to defer capital expenditure. As of 15th October, the group had completed £85m of its share buyback programme of up to £175m and expected to deliver its full year results in line with the market expectations. In a separate announcement, the group announced an agreement to sell its Beverage Dispense and Merchandising divisions for £690m to the Marmon Group, a Berkshire Hathaway company. Subject to the completion of the disposal, expected in early 2014, IMI would return cash of £620m to its shareholders and contribute £70m to the IMI UK Pension Fund. The stock rose 1.9% to feature amongst the top gainers for the day on FTSE 100.

Our view: IMI took a prudent step by deciding to sell off its Beverage Dispense and Merchandising businesses, which fall into the non-core activities of the company. This would help the company in focusing towards the improvement of its core activities, which lie in industrial-end markets of Fluid Power and Severe Service. The beverage division has been facing headwinds for some time due to tough market conditions. However, all the other divisions have generated good revenue growth during Q3 2013 and present a broadly strong margin outlook for the near future. Besides lifting the overall margins of the company, this deal would also bring in cash return of more than £600m for the shareholders. From a shareholder’s point of view, this deal seems positive in all aspects. Additionally, the ongoing share buyback programme would further enhance the company’s value for its shareholders. We see a huge opportunity for a meaningful addition to the company’s stock price in the near term and thus, remain Buyers of this stock.

Economic News

UK jobless claims change

UK jobless claims in September dropped 41,700 to 1.35 million and recorded biggest decline since 1997, the Office for National Statistics said yesterday. Markets had expected claims to fall by a much lesser margin of 25,000. The decline for August was revised to 41,600 from an earlier reported 32,600.

UK ILO unemployment rate

UK unemployment rate for the three months ended August stood at 7.7%, matching the reading for the preceding three months, the International Labour Organisation stated yesterday. Economists had also expected an unchanged reading for the period. The number of unemployed people fell by 18,000 to 2.49 million, while the number of employed people rose 155,000 to 29.9 million.

Eurozone CPI

Eurozone consumer price inflation (CPI) stood at 0.5% m-o-m in September, in line with the market expectations, up from a reading of 0.1% in August, final data from the Eurostat revealed yesterday. On y-o-y basis, inflation rate was 1.1% in September, matching the market expectations, following a 1.3% increase in the preceding month. Core inflation that excludes energy, food and alcohol dipped to 1% in September from 1.1% in August, as expected by the economists.

US MBA mortgage applications

US mortgage applications edged up 0.3% in the week ended 11th October, after advancing 1.3% in the prior week, the Mortgage Bankers’ Association said yesterday. Refinance index moved up 3.3%, while the measure of loan requests dropped 4.8%. The refinance share of mortgage activity rose to 66% from 64% in the prior week.

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