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Beaufort Securities Breakfast Alert: BP, Fuller Smith & Turner, Tesco

Published: 08:11 13 Jun 2016 BST

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Markets
Europe
The FTSE-100 finished Friday's session 1.86% lower at 6,115.76, whilst the FTSE AIM All-Share index closed 0.61% lower at 739.62. In continental Europe, markets ended lower due to a decline in oil and commodity prices. Investors remained concerned over the impending Brexit vote and global economic growth. Germany's DAX and France's CAC 40 shed 2.5% and 2.2%, respectively.
Wall Street
Wall Street ended in the red as energy stocks registered losses due to a sharp fall in oil prices. Investor sentiment was dampened by a decline in government bond yields, amid growing uncertainty over the UK's continuance in the European Union. The S&P 500 slipped 0.9%, with the financial sector losing the most. For the week, the markets closed 0.1% lower.
Asia
Equities are trading lower, as weak Chinese data and concerns ahead of a Brexit vote fuelled bearish sentiment. Investors await the outcome of central bank meetings in the US and Japan later this week. The Nikkei 225 fell 3.5%, as a stronger yen exerted pressure on export-driven stocks. The Hang Seng was trading 2.7% down at 7:00 am.
Oil
On Friday, WTI and Brent oil prices decreased 2.9% and 2.7%, respectively. The spread between the two varieties stood at US$1.5 per barrel.

Headlines
UK's construction output improves in April
According to the Office for National Statistics, the UK's construction output, which accounts for 6% of the economy, grew 2.5% m-o-m in April after a 3.6% fall in March. This was the highest monthly increase since January 2014. On a y-o-y basis, output fell 3.7% in April after a 4.5% drop in the previous month.

Company news

BP (LON:BP., 370.75p) - Buy
On Friday, BP and Det Norske agreed to merge their Norwegian businesses to create the largest Norway-based independent oil and gas producer. Det Norske is a Norway-based oil firm, which 49.9% owned by Aker, an oil services provider. The new company, Aker BP, would be owned 40:30 by Aker and BP, with the remaining stake held by other Det Norske shareholders. Aker BP would be listed on the Oslo Stock Exchange. As part of the transaction, BP would receive US$140m in cash and positive working capital adjustments. The deal is expected to be completed by the end of 2016, subject to customary closing conditions, regulatory reviews, and approval by Det Norske shareholders. It is anticipated that 850 BP Norge employees would be transferred to the new company after the completion of the deal.

Our view: The merger between BP's Norwegian business and Det Norske is a positive step. The combined industrial experience and strength of both companies would help Aker BP in growing into a huge exploration and production unit. Furthermore, Aker BP would benefit from Det Norske's efficient, streamlined operating model and BP's extensive experience in Norwegian offshore operations, asset knowledge, technical skills, and international experience. Both companies expect Aker BP to attain a production level of 250,000 barrels of oil equivalent per day by early 2020s. Recently BP reported good Q1 2016 results despite challenging market conditions, primarily attributable to the company's strong operational refining and positive trading performance. BP's restructuring and cost reduction plans have progressed well, with the company reporting significant savings for the quarter. Moreover, the upbeat performance of the downstream segment has helped the company in beating estimates for the quarter. BP remains on track with regard to the development of its next wave of material upstream projects. We maintain a Buy rating on the stock, considering the overall developments surrounding BP.

Fuller, Smith & Turner (LON:FSTA, 1,038p) - Buy
Fuller, Smith & Turner ('Fuller'), an independent family brewer and operator of pubs & hotels, on Friday announced its final results for the 52 weeks ended 26 March 2016 (FY2016). During the period, like-for-like ('LFL') sales for Managed Pubs and Hotels and Tenanted Inns improved by +4.8% and +2%, respectively, while The Fuller's Beer Company's total beer and cider volumes fell by -1%. Financial wise, revenue advanced +9% to £350.5m and EBITDA increased by +11% to £65m against comparable period (FY2015). Adjusted pre-tax profit expanded by +12% to £40.9m, consequently, adjusted earnings per share jumped to 58.35p from 51.51p a year ago. Net debt increased to £198.5m as a result of investment and acquisitions. Cash and cash equivalent at the period end stood at £6.2m. On the operational front, the Group acquired 5 new pubs for £11.1m, 3 freeholds for £29.9m, and 51% stake in Nectar Imports, a wholesale drinks business for £2.7m. It opened one newly built pub in Greenwich Reach, 6 new sites for The Stable (craft cider and pizza business) and increased its craft beer range with new keg and canned products. The total pub estate at the year-end was 191 Managed Pubs and Hotels and 200 Tenanted Inns. Fuller's CEO, Simon Emeny commented "It has been another outstanding year for the Company. As we look forward to the year ahead, we know that our long-term strategy, combined with the vision to address the needs of our customers and consumers of the future, will keep Fuller's on the path of growth. By continuing to invest in our assets, our brands and, most importantly, our employees, we will continue to build a Fuller's that delivers outstanding service to our customers, excellent careers for our people and good returns for our shareholders". The Group proposed a final dividend of 11p per share, bringing full year dividend to 17.90p per share, up +8%.

Our view: Fuller delivered solid performance for the FY2016 with excellent financial results along with increased dividend. The Group's ongoing in existing estate (refurbishing) and its employees (training & development) turned fruitfully as Fuller's largest division, Managed Pubs and Hotels (60% of the FY2016 revenue) reported LFL sales growth of +4.8% and improved its operating profit margin to 13%, up +0.7%. Fuller has won the Employer of the Year from the Publican Awards and currently has 14 employee development programmes, include 14,000 days of training (2012: 3,000 days), and already partially applied National Living Wages since November 2015. In terms of its estate investments and acquisition, Fuller spent total of £80.7m in FY2016 and successfully extended £130m of its existing bank loan facilities and the £20m one year fixed term loan. It also secured new £30m bank loan facility with a four year term (£160m of our bank loan facilities expire in 2020, £50m in 2019 and £20m in August 2016). Looking ahead, the Group expect the additional cost impact from National Living Wage for FY2017 to be around £2m which we think, in long-term, can be indirectly offset by high retention, reduces induction costs and improved efficiency of the employees. For the first 10 weeks of FY2017, the Group saw LFL sales for Managed Pubs and Hotels up +2.7%, Tenanted Inns down -2% and total beer and cider volumes down -5%. Almost all positive, but it is worth highlighting that the declining volume of beer and cider from The Fuller's Beer Company is worrying and we estimate this to continue as its largest customer being taken over by another brewer, meaning Fuller now have to desperately find new marketing route. Having said that, we believe Fuller has a clear business model and is well-positioned for the long-term growth, supported by strong balance sheet of 3x net debt to EBITDA at the year-end and undrawn banking facilities of £32m (at 26 March 2016). The stock may suffer volatility as we get closer to the 23 June (UK's EU Referendum), but the Group remain fundamentally strong. Beaufort reiterate its Buy rating on the stock.

Tesco (LON:TSCO, 151.55p) - Hold
On Friday, Tesco agreed to sell of its 95.5% stake in the Kipa business in Turkey to Migros. The divestiture is subject to local regulatory approvals. Cash proceeds from the sale are estimated at about £30m. Separately, Tesco announced plans to sell the Giraffe restaurant chain to Boparan Restaurants Holdings Ltd. The sale includes 54 standalone restaurants, of which 12 are franchise sites, and 3 restaurants that are within the premises of Tesco stores.

Our view: Tesco's decision is in line with stated plans to dispose its non-core assets. Tesco's ambition is to focus on and stabilise its UK business. The proceeds from the sale of the Kipa business would be expected to help the company in reducing its debt. The Kipa business incurred huge losses in the previous year. Of late, Tesco's financial position has been kept under pressure by the ongoing price war in the UK and onerous lease contracts on stores and pension obligations. As of April 2016, Tesco indebtedness stood at £15.5bn. We maintain a Hold rating on the stock owing to the continuing uncertainty regarding the company's prospects.

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