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Beaufort Securities Breakfast Alert : UK consumer confidence falls sharply in July

Beaufort Securities Breakfast Alert : UK consumer confidence falls sharply in July

A nervous opening in London is expected to see the FTSE-100 marked down around 20 points in early trade. Perhaps not too surprising, the first assessment of UK consumer confidence post-Brexit makes for sobering reading. The all-important survey, which acts as a bellwether for the overall economic outlook, registered its biggest drop since 1994, falling from -1 in June to -9 during the first week of July. The survey may also further knock Sterling, which is already severely pressured by concerns of prospective trade status with the EU, withdrawals of FDI and possible easing by the Chancellor to prop up a faltering economy. Moving into this afternoon, international markets await the all-important US Employment Report for June. Fingers are crossed that the month will have seen a recovery from weak outcome registered for May; a Wall Street Journal survey puts economist’s expectations at 162,000 new jobs being created during the month, any significant shortfall from which will likely set the markets back and kick next week off in a downbeat mood. Anticipating this, US stocks put in a lacklustre performance yesterday, closing modestly down across the board as dealers realised some profits on post-Brexit trades while cutting back energy exposure following Thursdays setback in benchmark crude prices. Asian markets were mostly lower, despite Chinese June forex reserves data emerging slightly better than expected. Australia shares remained in the positive, however, continuing to ignore S&P’s outlook downgrade for the country. Today no major corporates are due to report, although the UK is expected to release trade data this morning, while US media will remain sensitive to warning of possible rising civil unrest following the overnight shooting of police officers during yesterday’s protest in Dallas."
– Barry Gibb, Research Analyst

Markets

Europe
The FTSE-100 finished yesterday’s session 1.09% higher at 6,533.79, whilst the FTSE AIM All-Share index closed 0.34% better-off at 699.38. In continental Europe, markets ended in the green, erasing some of the losses incurred during the previous sessions. Investors largely ignored the decline in oil prices and await the US jobs data. France’s CAC 40 and Germany’s DAX advanced 0.8% and 0.5%, respectively.

Wall Street
Wall Street ended marginally lower amid sharp fall in oil prices. Investors await jobs report data, scheduled for release today. The S&P 500 dropped 0.1%, with the utilities and telecom sector leading five sectors down.

Asia
Equities are trading lower, pulled down by slump in oil prices. Investors remained cautious ahead of the monthly US jobs data to assess its impact on monetary policy. The Nikkei 225 shed 1.1%, while the Hang Seng was trading 0.9% lower at 7:00 am.

Oil
Yesterday, Brent oil prices declined 4.9% to US$46.40 per barrel, and WTI prices dropped 4.8% to US$45.14 per barrel.

Headlines

UK consumer confidence falls sharply in July
As per a survey conducted by GfK, the UK’s consumer confidence index dropped to -9 in July from -1 in June, marking the highest monthly decline since 1994. The sharp fall in the index was mainly due to the negative impact of Brexit on consumer sentiment.

Company news

DekelOil Public (LON:DKL, 11.75p) – Speculative Buy
DekelOil, operator and 85.75% owner of the profitable and vertically integrated Ayenouan palm oil project in Côte d’Ivoire, yesterday provided a production update for the half year ended 30 June 2016. The Company’s extraction mill has the capacity to produce 70,000 tonnes of crude palm oil/year, making it one of the largest in West Africa. In the half year, production of CPO was up 30.75% to 28,550 tonnes. Furthermore, production of palm kernel oil and palm kernel cake at the Company’s new crushing plant, which commenced operations in November 2015, was 1,998 tonnes and 2,360 tonnes respectively for the six-month period. As a result, management expects EBITDA for H1’2016 to be materially higher than H1’2015’s EBITDA of €2.2m. In addition, it noted, the recent strengthening of the Euro against GBP Sterling is expected to have a positive impact on DekelOil’s results. Management went on to state that its close partnerships with local palm planters that provide feedstock for the Mill are key drivers to its strategy and continue to produce mutually beneficial results. The current results support its view that the availability of fresh fruit bunches in its region is growing and that it continues to benefit from this as its approaches full utilisation of the mill. In addition, efforts to maximise production of FFB at its own 1,900-hectare plantation are also paying off as plants mature.

Our view: DekelOil is clearly confident that it can realise significant value for shareholders from the Ayenouan project and now sees its development strategy advancing swiftly. The first half was characterised by both CPO sales price and the cost of purchasing Fresh Fruit Bunches lower than in H1’2015, which unusually stayed below international spot trading prices. This movement was driven in part by the recent currency crisis in Nigeria, which significantly reduced its imports of refined CPO product, in turn feeding through to lower Cote d’Ivoire prices, which is of course the Company’s major cost component. Following the recent float of Nigeria’s currency, however, trade can be expected to gradually normalise, the first results of which are already being seen with CPO prices now above the first half average. Importantly also, DekelOil is an obvious Brexit winner. Palm Oil, of course, is traded in US$ whose demand cycle is largely independent of European activity, while Group costs are linked primarily to the Euro, its reporting currency, while also containing components in Sterling. In future, management may decide such exposure necessitates a more active hedging policy, but at this moment it is clearly a net foreign exchange winner. Having positioned itself to become highly cash generative, Beaufort believes it will be able to support its long-term operational expansion while producing sustainable surplus. As these ambitions are realised going forward, shareholders can expect to be rewarded by management implementing a formal dividend policy. On a valuation basis, the model is sufficiently transparent to model on a DCF basis, in which assuming an aggressive 9% cost of debt, arrives at a target price will well over 100% upside. Given the confidence and visibility now offered by DekelOil management and factoring in an overly cautious average CPO price, the share price still has the scope to double. Beaufort retains its Speculative Buy recommendation on this basis.
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Beaufort Securities acts as corporate broker to DekelOil Public plc

ValiRx (LON:VAL, 7.88p) – Speculative Buy
ValiRx Plc, a life science company, which focuses on clinical stage cancer therapeutic development, taking proprietary & novel technology for precision medicines towards commercialisation and partnering, has announced the sale of use of rights for its Finnish-based TRAC Technology for €800,000, according to a payment schedule, whilst retaining a license to use TRAC Technology in its therapeutic development. In February 2015, ValiRx announced that it had acquired TRAC (Transcript Analysis with the Aid of Affinity Capture) for a consideration of €75,000. ValiRx saw TRAC Technology as both a potentially powerful tool in the diagnosis of different cancers and as a technology that could support development of ValiRx’s personalised medicine targets.

Our view: This transaction represents an exciting commercialisation of a part of the ValiRx portfolio and this deal will free up resource and management time. TRAC’s sale and demonstrates ValiRx ability to grow and deliver substantial value, particularly in such a short timeframe. ValiRx are keeping those rights to the assets of the technology,, while outsourcing development to a commercial partner. Speculative Buy.
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Beaufort Securities acts as corporate broker to ValiRx plc

Associated British Foods (LON:ABF, 2,780.0p) – Hold
Associated British Foods (ABF) released a trading update for the 40 weeks to 18th June 2016. During the period, the company’s revenue increased 3% y-o-y on a constant currency basis and 1% y-o-y on actual exchange rates. ABF’s grocery business witnessed revenue growth in the third quarter. Sales volumes from Allied Bakeries were better than last year. Revenue from ABF’s sugar business was higher than the last year at constant currency. The company completed the buyout of minorities in Illovo Sugar Limited for £245m. ABF’s revenue from its agriculture business fell due to weak commodity prices and lower volumes in UK feed. ABF’s Ingredients segment continued to grow, with operating profit higher than last year’s level. Year-to-date sales from Primark increased 7% y-o-y at constant currency, mainly due to higher retail selling space. Operating margin for Primark in the third quarter stood at 11.9%, similar to that for the first half. As at 18th June 2016, Primark’s 310 stores had a Total retail selling space of 12 million sq ft.

Our view: ABF delivered a good performance for the 40 weeks to 18th June 2016, supported by solid growth in the third quarter. The company recorded revenue growth of 4% at constant currency and 7% at constant exchange rates during the third quarter. ABF reported revenue growth across its grocery, sugar, retail and ingredients businesses. The company’s sugar business benefitted from a rise in global sugar prices, which have lifted European sugar prices. However, ABF’s agriculture business continues to witness a drop in revenue due to low commodity prices. Moreover, the UK’s decision to leave the EU has created uncertainty in the business environment and financial markets. Whilst the post brexit fall in Sterling will introduces translational benefits for the current period, reduced hedging for subsequent years implies a more mixed effect, when including additional transactional costs. Despite our mid-term confidence in both Primark accelerating sales growth and anticipating likely higher EU sugar prices, a 2016E P/E of 25x along with a price/book of 3x does not look particularly cheap. We maintain a Hold rating on the shares.
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Bovis Homes (LON:BVS, 660.0p) – Buy
The Group yesterday issued a trading update for the six-month period ended 30 June 2016. Highlights included growth in legal completions to 1,601 new homes (H1 2015: 1,525), average sales price increasing by 15% to £255,000 (H1 2015: £222,000), while land investment remains carefully managed with 1,267 consented plots acquired in first half year across 11 new sites. Management retains a prudent balance sheet, with modest net debt of £8m as of 30 June, with land creditors standing at around £320m (2015: £264m). The Group has circa 19,500 permitted units which represents land supply of between four and five years. Management notes continuing operating improvement across the business, which suggests opportunities for higher profit margins in the future. Meanwhile sales prices achieved to date have been modestly ahead of target, while the level of cost inflation has moderated compared to 2015.

Our view: This update was very much in line with expectations, although Bovis management stress it is still too early to assess the impact of the EU referendum on the UK housing market. The equity market, however, has running well ahead of this, with housing builders one of Brexit’s most obvious casualties; Bovis shares, for example, now trade some 45% below their 52-week high. So the question must be, whether or not the sector is already wearing a worst case scenario? Does Bovis’s 2017E earnings multiple of just 7.6x along with a dividend yield of over 6.5%, for example, now represent good value? The fundamentals, of course, presently remain excellent with high demand from home buyers, good availability of affordable mortgages, good land supply and cross party political support to build more homes in the UK. Bovis’s geographic spread, targeted product range and agile management structure also ensures it can be proactive in the market both demonstrating the appropriate degree of restraint in the short term, while positioning itself to take further advantage of a fundamentally positive land market at the right time. Although there was some criticism of the lack of obvious progress in its sites during the first half, this can be expected to improve in the second and momentum going forward certainly has scope to be ramped up if necessary. Watching this the cautionary investor would, nevertheless be prudent to factor in some pressure on profit margins by the year end as buyers use the new uncertainties to become more selective, while also not expecting the improvement in build costs experienced so far this year may not continue. Not forgetting that the housebuilding sector has in the past been viciously cyclical, the true extent and magnitude of any possible future downturn will only likely be felt upon completion of the UK’s two years of divorce proceedings effected by Article 50. And probably only then if the interest-rate cycle swings sharply upward in tandem as well. Indeed, whether the UK separation from the EU does eventually completes or, indeed, the electorate find themselves being offered a different alternative, only time will tell. Which all suggests the housebuilder share prices may have found themselves just too deeply in the clutches of a reactive, ‘phoney’ bear market. Investors will see through this shortly and choose to buy back the shares for income while playing the waiting game. Beaufort recommends buying Bovis on this basis, although our analysis suggests slightly better value can presently be found through Persimmon, Berkeley and Taylor Wimpey.
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Marks & Spencer (LON:MKS, 298.90p) – Hold
Marks & Spencer, one of the UK’s leading food, clothing and home products retailer, provided its trading statement for 13 weeks ended 2 July 2016 (Q1 FY2017′). During the period, the Group sales advanced by +1.3% at actual exchange rate basis, comprised of; Food sales +4%, Clothing & Home sale -8.3%, M&S.com (online) sales -1.1% and International sales +0.7%, against same period last year (Q1 FY2016). On a like-for-like (‘LFL’) basis, Food sales declined by -0.9% and Clothing & Homes sales fell by -8.9%. Total UK sales was down -4.3%. Marks & Spencer’s CEO, Steve Rowe commented “A key part of our recovery plan for Clothing & Home is lowering prices and reducing promotions. We knew our actions would reduce total sales but we are seeing some encouraging early signs. Our Food business continues to strongly outperform a deflationary market, with LFL sales slightly down when adjusted for Easter timing.” An update of strategy update will be included within its Interim results in November.

Our view: Marks & Spencer is still struggling to convince investors that its recovery plan is working. Management noting “some encouraging early signs” had been seen was not enough for investors. There was positive news. Food sales, for example, were resilient against the backdrop of sector-wide food price deflation, with LFL sales only fell by -0.4% when excluding the timing impact of an early Easter. International sales also improved slightly, which was then boosted by weaker Sterling, resulting in a +6.1% improvement on a reported currency basis. Elsewhere, the story was not so bright. As a part of its recovery plan for Clothing & Home, the Group chose to focus on lowering standard prices, rather than through traditional promotions. Marks & Spencer shifted its sales event timeslot by two weeks to start in July (Q2) which partly accounts for the disappointing in-store performance and slower online activity. During the Analyst conference call, the management said it intends to cut the overall number of sales events this year to 6 (4 in H1 and 2 in H2) from 9 last year. Next year it expects to be further reduced the number to just 4. Although margin for the first half of this year are expected to be weaker, the Group reaffirmed its full year guidance. This is possibly asking too much for the second half so, for now Beaufort will monitor the Group performance awaiting confirmation. Taking comfort from a prospective 6.3% 2016E yield, we leave our Hold rating unchanged.
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Sports Direct International (LON:SPD, 279.10p) – Hold
Sports Direct International has reported its preliminary results for the year ended 24th April 2016 (FY 2016). During the period, revenues increased 2.5% y-o-y to £2.9bn, with the Sports Retail segment’s revenue rising 3.9% to £2.5bn. Underlying pre-tax profit decreased 8.4% to £275.2m, leading to an underlying EPS of 35.5p compared with 38.9p in the previous year. Net debt at the end of the period increased to £99.6m from £59.7m as of 26th April 2015. Underlying free cash flow generation for the period amounted to £309.1m. On the operational front, Sports Direct completed the acquisition of the Heatons business in Northern Ireland and the Republic of Ireland for €48.0m. The company completed the latest phase of its Shirebrook campus development, adding 700,000 sq ft of warehouse and office space to the site. Sports Direct focused on increasing its large format stores, its key location doors, and opened Leeds and Plymouth in FY 2016. Recently, the company disclosed the acquisition of freehold property at 161–167 Oxford Street, London. Sports Direct did not declare any dividends for FY 2016.

Our view: Sports Direct performed poorly in FY 2016, adversely impacted by the unfavourable trading environment in the second half of the year. The company failed to meet its EBITDA target of £420m set in the 2015 Share Scheme. Sports Direct’s margins were hurt by higher selling, distribution and administrative costs compared with the previous year. Nonetheless, the company remained focused on its organic and inorganic growth strategy as it made quality acquisitions and investments throughout the period. Sports Direct opened 60 stores across 11 countries in FY 2016. The company’s square footage at the end of the period increased to 8.25 million sq ft. However, the outlook for the retail sector appears uncertain, especially after the UK opted to leave the European Union. Brexit has also hit consumer confidence. In light of the mixed outlook, we maintain a Hold rating on the stock.
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Economic news

Germany industrial production
Industrial production in Germany fell 1.3% m-o-m on a seasonally adjusted basis in May, after a revised increase of 0.5% in the previous month, the Federal Ministry of Economics and Technology said yesterday. Economists expected the production to increase by 0.1% for the month. On y-o-y basis, industrial production declined 0.4% in May, after a 0.8% rise in the previous month.

UK industrial production
UK industrial production decreased 0.5% m-o-m in May, after a revised increase of 2.1% in April, the Office for National Statistics reported yesterday. Markets expected a 1.0% fall in production. On a y-o-y basis, industrial production surged 1.4% in May, after revised increase of 2.2% in the previous month.

UK manufacturing production
The Office for National Statistics reported that the UK manufacturing output dropped 0.5% m-o-m in May, after a revised rise of 2.4% in April. The markets expected a 1.2% fall in production. On a y-o-y basis, manufacturing output surged 1.7% in May, following a revised rise of 1.5% in the previous month, beating the market expectations of a 0.4% increase in production.

US ADP employment change
Jobs in the US private sector grew by 172,000 in June, after a revised 168,000 jobs were added in May, ADP reported yesterday. The markets expected 160,000 jobs addition for the month.

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