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Beaufort Securities Breakfast Alert: Smiths Group, Tullow Oil, Vodafone

Beaufort Securities Breakfast Alert: Smiths Group, Tullow Oil, Vodafone


The FTSE-100 finished yesterday's session 0.03% lower at 6,909.43, whilst the FTSE AIM All-Share index closed 0.26% higher at 816.01. In continental Europe, markets ended in the red amid weak economic data released, which added to economic woes in the region. France’s CAC 40 and Germany’s DAX shed 0.5% and 0.4%, respectively.
Wall Street
Wall Street ended in the red as oil prices declined amid speculations that major oil producers were not likely to reach an agreement to freeze production. The S&P 500 declined 0.6%, with the energy sector losing the most. For the week, the markets closed 1.2% higher.
Equities are trading lower as investors await the outcome of the OPEC members’ meeting regarding freezing oil production. The Nikkei 225 dropped 1.3% as a strong yen led to loss in export-driven stocks. The Hang Seng was trading 0.9% down at 7:00am.
On Friday, WTI prices decreased 4.0% to US$44.48 per barrel, and Brent oil prices fell 3.7% to US$45.89 per barrel.

Eurozone’s private sector slows in September

As per Markit, the Eurozone’s services PMI contracted to 52.1 in September from 52.8 in August, marking the lowest reading in 21 months. Conversely, the flash composite output index fell to 52.6 in September from 52.9 in August.

Company news

Smiths Group (LON:SMIN, 1,420.0p) - Hold
The Smiths Group entered into an agreement to sell its Artificial Lift business, part of the John Crane division, to Endurance Lift Solutions LLC. The gross consideration payable at completion is US$39.5m in cash, subject to an adjustment based on the working capital position at completion. For the year ended 31stJuly 2015, the business and assets subject to the transaction had combined revenues of US$90.8m and an operating loss before certain non-recurring items of US$1.8m. The gross assets of the combined business as at 31st July 2015 stood at US$63.2m. For the unaudited year ended 31stJuly 2016, the business and assets subject to the transaction had combined revenues of US$53.4m and an operating loss before certain non-recurring items of US$10.1m. The gross assets of the combined business as at 31st July 2016 stood at US$32.1m. The management team will transfer with the business. The transaction is subject to customary regulatory approvals and expected to close by the end of the calendar year.

Our view: The Smiths Group’s disposal of the Artificial Lift business is in line with its commitment to increase focus on building technology differentiated leadership positions in its chosen markets. Funds from the transaction would be reinvested in attractive growth opportunities. Nonetheless, the outlook for the energy market appears less encouraging and the group’s exposure to it cannot be overlooked. Also, the recent full year trading update was in mixed colour as group confirmed that its revenue and operating profit are both expected to exceed market consensus, but said profit is below the FY2015 level caused by substantial reduction in profit from John Crane division. The group also reiterated its FY2017 expectations. We maintain our Hold rating until recovery in the surrounding environment is sensed.

Tullow Oil (LON:TLW, 225.0p) - Buy
Tullow Oil (Tullow) informed that hull & machinery insurance cover was confirmed for the floating production, storage and offloading (FPSO) vessel that serves the Jubilee field offshore Ghana, following the failure of the turret bearing earlier this year. The hull & machinery policy covers relevant operating and capital costs associated with both current operating procedures at the FPSO and long-term solutions.

Our view: The hull & machinery insurance cover confirmed for the FPSO is a positive development. Tullow would now work with the loss adjusters and reinsurers to build an efficient payment schedule even as remedial work continues. The company continued work with its business interruption reinsurers on confirming cover for the loss of production and revenue caused by the turret bearing failure. Recently, Tullow informed that first oil flowed from the Tweneboa, Enyenra, Ntomme (TEN) fields offshore Ghana. First oil was reached on time, on budget three years after the Plan of Development was approved in May 2013. The TEN start-up process is now well advanced and Tullow expects oil production to ramp up gradually towards the FPSO capacity of 80,000 bopd through the remainder of 2016. Tullow estimates that TEN’s average annualised production in 2016 will be approximately 23,000 bopd (net: 11,000 bopd). In light of these developments, we maintain a Buy rating on the stock.

Vodafone (LON:VOD, 220.70p) - Buy
Vodafone extended its partner market agreement with Afrimax in Cameroon. As per the deal, the two companies will launch long-term evolution data services under the Vodafone Cameroon brand, initially in Cameroon’s two biggest cities, Douala and Yaounde. The financial details of the deal remained undisclosed.

Our view: Vodafone continues to build on its existing relationship with Afrimax. The launch builds further on the framework agreement between Vodafone and Afrimax announced in November 2014, to co-operate and explore potential partner market opportunities in territories in sub-Saharan Africa. The roll-out of Vodafone Cameroon for consumers and businesses will include the opening of Vodafone-branded retail stores and kiosks in key locations. This would be supported by a network of distributors and re-sellers offering an attractive range of LTE handsets and devices. Vodafone recently reported a solid performance in Q1 FY2017, registering good organic service growth driven by strength in AMAP. The company recorded a sharp jump in the number of 4G customers and data volumes. It anticipates substantial growth opportunity for the 4G service in the Eurozone. We look forward to updates from the company and retain a Buy rating on the stock.

Economic news
Germany manufacturing PMI

As per the data released by Markit, the preliminary manufacturing PMI of Germany for September increased to 54.3 from 53.6 in August. The markets expected a reading of 53.1.
Eurozone manufacturing PMI
Manufacturing PMI for the Eurozone increased to 52.6 in September from 51.7 in August, preliminary data from Markit showed yesterday. The markets expected a reading of 51.5.
US manufacturing PMI
The preliminary Markit PMI for the US stood at 51.4 in September, from 52.0 in August. The markets expected a reading of 52.0.

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