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Beaufort Securities Breakfast Alert: ValiRx,, Legal & General, United Utilities, Wolseley

Beaufort Securities Breakfast Alert: ValiRx,, Legal & General, United Utilities, Wolseley


The FTSE-100 finished yesterday's session 0.15% lower at 6,807.67, whilst the FTSE AIM All-Share index closed 0.18% lower at 815.25. In continental Europe, markets ended in the red, as oil prices dropped after Iran said that it would not freeze production. The decline was led by banking and energy stocks. Germany’s DAX and France’s CAC 40 fell 0.3% and 0.2%, respectively.
Wall Street
Wall Street ended in the green, ignoring a fall in oil prices and boosted by positive consumer confidence data in the US. The S&P 500 advanced 0.6%, with the consumer discretionary sector gaining the most.
Equities are trading lower amid a sharp drop in oil and commodity prices. The Nikkei 225 declined 1.3%, as a stronger yen resulted in losses for export-driven stocks. The Hang Seng was trading 0.5% down at 7:00 am.
Yesterday, Brent oil prices decreased 2.9% to US$45.97 per barrel, while WTI prices dropped 2.7% to US$44.67 per barrel.

WTO downgrades global trade growth outlook

The World Trade Organization (WTO) cut global trade growth forecast to 1.7% for 2016 from 2.8% projected in April 2016; this would be the slowest pace of trade and output growth since the 2009 financial crisis. Global trade is set to grow at a slower rate than global GDP for the first time in 15 years. Moreover, the WTO lowered trade growth forecast to 1.8–3.1% for 2017 from 3.6%.

Company news

ValiRx (LON:VAL, 7.0p) - Speculative Buy
ValiRx, the life science company, which focuses on clinical stage cancer therapeutic development, taking proprietary & novel technology for precision medicines towards commercialisation and partnering, yesterday announced its Half Yearly Report for the period ended 30 June 2016. During the period, the Group made substantial advances in clinical trials for both of its advanced therapeutic compounds. The Phase l/ll Clinical Trial of VAL201 confirmed at the end of the period that the compound was well tolerated and safe, with no significant adverse events being reported. Post period studies continue to show preliminary indications of VAL201 efficacy. VAL401 completed its submission to commence Phase llb clinical trial in patients with lung cancer. Ethics and regulatory approval to commence patient recruitment was received just after the period-end and now ready to start recruiting; it also received two patent grants in the period - a US patent grant in April followed by a post period allowance in July of a New Zealand patent grant. Management successfully engaged with its UK and international life-sciences audiences by exhibiting at both the UK Investor Show in London and at the prestigious AACR conference in New Orleans. Funding was secured through a placing to raise £0.5m in February 2016 with existing and new investors, while the following month a Convertible Loan Facility was agreed with Bracknor to facilitate the expansion of the VAL201 trial into a multi-centre study, although the Board concluded in July that it would not make further use of this facility. The same month, it instead concluded the sale of TRAC Technology Rights for EUR 0.8 million. Much as expected, the reported loss after taxation for the half year increased 55% to £2.12m (H1 2015: £1.37m) due to increase in clinical R&D expenditure on VAL201 and 401, leaving a Total comprehensive loss of £2.074m (H1 2015: £1.34m). Cash and cash equivalents as at 30 June 2016 of £568,805 (H1 2015: £391,884).

Our view: Review of the pre-clinical data obtained with VAL201 has revealed a major gynaecological indication for the compound, namely endometriosis; this condition is one that is not adequately served with current medications which frequently are seen to be poorly tolerated and/or impair fertility during treatment. VAL301 should show that it is completely devoid of these complications and that it also demonstrates positive signs of maintaining bone density while treating this chronic debilitating condition. Indeed, ValiRx is now moving towards a number of important clinical developmental milestones and potential value inflection points as far its VAL201, 301 and 401 pipeline is concerned. For all such cash-consuming pharmaceutical development projects source of, and continued access to, funding remains management’s most significant, ongoing headache. The placing that was completed in September with existing and new investors, however, successfully raised £1.2 million which, in addition to the Convertible Loan Facility set up with Yorkville to provide up to US$3.75 million in potential 3 tranches, is expected to provide the resource necessary to reach identified goals and deliver tangible value-added for shareholders. One such point is likely to appear in the form of VAL401’s early safety and tolerability indications that are expected to be available before the end of 2016. In anticipation of this and further progress elsewhere, Beaufort retains its Speculative Buy recommendation on ValiRx.

Beaufort Securities acts as corporate broker to ValiRx (LON:BOO, 98.50p) - Buy (‘boohoo’), one of the UK’s largest online own-brand fashion retailers, yesterday announced interim results for the 6 months ended 31 August 2016 (H1 FY2017). During the period, revenue advanced +40% to £127.3m, where revenue for the UK, rest of Europe (‘ROE’), USA and rest of world (‘ROW’) increased by +38%, +41%, +93% and +17%, respectively, against the comparable period (H1 FY2016). Gross margin declined by -4.8% to 55.3%, due to planned investments in price and customer proposition. Due to efficiency improvements (lower distribution costs and administrative expenses), pre-tax profit expanded by +129% to £14.4m, resulting earnings per share improved to 1.01p from 0.45p. Cash balance at the period end stood at £67.1m (H1 FY2016: £60.4m). On the operational front, number of active customers (who shopped during the last year) has grown to 4.5 million, up +28% year-on-year with international sales now stands at 36% of total revenue. The Group has now expanded its capacity to 525,000 square feet and now operating, with capacity sufficient for medium-term future growth. A second warehouse extension is now at the planning stage. boohoo’s joint CEOs, Mahmud Kamani and Carol Kane commented “Following the success in the first half of the year we will continue to look for opportunities to invest in marketing campaigns and our customer proposition to drive future sales growth and improve customer lifetime value.”

Our view: As was reported in the trading update of 9 August, boohoo a delivered strong H1 FY2017 results while further expanding revenues across all regions. Having already twice revised full year revenue growth upward during the period, the Board one further time raised the upper and lower ends of its target range to 30%-35% (previously 28%-33). The Group also provided expectation for EBITDA margin growth for the full year to c.11%, up from 9.6% last year. US sales were particularly encouraging with +81% increase during the period to now at similar level to the ROW and ROE regions. In UK, on the other hand, the sales growth slowed by tiny percentages, despite the ongoing investment in pricing (higher promotion), the increased proportion of third party sales which resulted further gross margin reductions. Operationally, a highly engaging marketing strategy has improved efficiency of its customer acquisition. Looking down the key performance indicators, the number of orders count has grown faster than the number of active customers, which indicates a customer base that is both sticky and purchasing more frequently. Together with improved average order value, the sales increase appears to have strong foundations. Going forward, the Group is scheduled to introduce a new range of children's clothing along with a small maternity range, while also confirming that it has an option to acquire the business of ‘PrettyLittleThing’ before March 2017 for which the management is currently evaluating all aspects. The Group confirmed that the currency movement following Brexit has not caused significant impact so far, as it has foreign exchange hedges in place covering several months of forward trading. It said, however, with many product prices being dollar-based, longer term effect of continued Sterling weakness is uncertain. Having noted that, however, management remained confident enough to provide improved guidance for both its EBITDA margin and sales growth despite the higher H2 comparative. Beaufort believes that the worldwide market for internet fashion sales will continue to expand as shopping preferences shift towards the convenience and competitive pricing affordable by online retailers, such as boohoo. Considering the Group’s successful marketing strategy, its ability to meet the customer demand and new children and maternity range introducing in coming months, we think there remains upside potential even after almost tripling the share price year-to-date. Beaufort reiterate its Buy rating on the shares.

Legal & General (LON:LGEN, 216.20p) - Buy
Legal & General Group said its Retirement Division was on track to double its new business sales in 2016, with sales now at £5.4 billion (£2.9 billion, FY 2015). L&G’s Retirement business continues to experience strong growth in pension de-risking and lifetime mortgages. Customer demand has not been impacted by the introduction of Solvency II in 2016, the uncertainty around Brexit, and 'lower for longer' interest rates. In the UK and US L&G has written over £400 million in bulk annuity business during the month of September alone. Lifetime Mortgages delivered record sales this quarter, and are on track to exceed £500 million of sales in 2016. Since June 30th L&G Retirement has written over £1.4 billion in sales, and the Group has started to invest in US infrastructure assets, to support its growing US pensions de-risking business. Infrastructure investment forms a key part of L&G’s annuity portfolio investment strategy. £6.2 billion of the annuity portfolio is currently invested in infrastructure assets, of which almost £1 billion has been invested this year. Examples include £250 million investments into Transport for London's new headquarters and the London Gateway port, deliver materially enhanced higher risk adjusted returns to L&G shareholders.

Our view: Legal & General Retirement is on track to double new business sales in 2016. Companies still need to manage their defined benefit pension plans, and people still want to achieve financial security in retirement, regardless of the uncertain political, regulatory or economic backdrop. L&G's aim is to both create and invest in new real productive assets. This allows the Company to fulfil pension promises to its customers in an efficient way, and deliver attractive risk adjusted returns for the shareholders. L&G entered the lifetime mortgage market last year, and the business has grown rapidly. Customers want more choice in how they fund their retirement, and accessing wealth that is tied up in their home is an attractive solution for asset rich retirees. The Company expect lifetime mortgages to be even more popular with customers in 2017. Legal & General Retirement sales since June 30th are £1.4bn, comprising of £1.2 billion for pension de-risking, £130 million of lifetime mortgages, and £90 million of individual annuities. In July Legal & General signed 5-year distribution agreements with Santander for lifetime mortgages, and Aegon for individual annuities. We believe legal & General is unappreciated by the market and with a yield in excess of 6.5%, a forecast p/e for 2016 of just over 10x, we believe they are undervalued and maintain our BUY recommendation.

United Utilities (LON:UU., 995.50p) - Buy
United Utilities released a trading update for the six months ended 30th September 2016 (H1 FY 2017). United Utilities continued to deliver better operational performance and customer service. In July, the company attained the 'industry-leading company' status as measured through the Environment Agency's annual assessment. Earlier this month, United Utilities retained its Dow Jones Sustainability Index 'World Class' rating for the ninth successive year. Total regulatory capital investment for 2016–17, including infrastructure renewals expenditure (IRE), is expected to be around £800m, similar to last year. Group revenue is expected to be slightly lower than the first half of last year, mainly due to the impact of the Water Plus business’s retail joint venture, which was completed on 1st June 2016. Underlying operating profit for H1 FY 2017 is expected to be slightly higher than that in the same period last year. IRE in H1 FY 2017 would be slightly lower than that in the first half of last year. Underlying net finance expense for H1 FY 2017 is anticipated to be around £20m higher than that in H1 FY 2016, mainly reflecting the impact of higher RPI inflation on index-linked debt and slightly higher net debt. Net debt as at 30th September 2016 is expected to be slightly higher than the position as at 31st March 2016.

Our view: United Utilities expects to deliver strong operational and financial performance in H1 FY 2017. The company received awards from industry-wide recognised bodies. United Utilities’ Ofwat's 2016/17 first wave service incentive mechanism (SIM) qualitative score remained solid, indicating improvement in customer satisfaction from last year. The company delivered a small net reward for 2015–16 on its outcome delivery incentives (ODIs), which represent a tough set of performance targets. The investment programme progressed well, focusing on improving customer service and achieving operational efficiencies. The company’s modernisation programme at its largest wastewater treatment works, Davyhulme, progressed well. Additionally, United Utilities continued to invest in systems thinking approach, which integrates the use of assets, leverages data intelligence, and employs new work processes and technology to support operational performance enhancement. Gearing is comfortably within its target range of 55–65% net debt to regulatory capital value, supporting the solid A3 credit rating for United Utilities. In light of the above argument, we maintain a Buy rating on the stock.

Wolseley (LON:WOS, 4,244.0p) - Hold
Wolseley declared results for the year ended 31st July 2016 (FY 2016). Revenue increased 8.5% y-o-y to £14.4bn, with like-for-like revenue increase of 2.4%. Trading profit increased 7.0% y-o-y to £917m. Pre-tax profit increased to £727m (FY 2015: £508m). Headline EPS rose 7.6% to 247.7p. Net debt as at 31st July 2016 stood at £936m (31st July 2015: £805m). On the operational front, the company invested £113m in 16 bolt-on acquisitions with annualised revenue of £197m. Since the year end a further £300m has been either invested or approved. Wolseley plans to close around 80 branches, one distribution centre and up to 800 job losses. The company expects restructuring charges of about £100m, the cash element funded by working capital efficiencies and disposal proceeds. Wolseley incurred impairment charge of £94m incurred in the year. Wolseley proposed a final dividend of 66.72p, bringing the total for the year to 100p, 10.2% higher than last year.

Our view: Wolseley delivered good performance in FY 2016. The company’s growth was driven by its US division, which generated over 80% of its trading profit and recorded good growth in residential and commercial markets. Wolseley increased investments in e-commerce and reported revenues of £2.1bn (14% of Group revenue). Wolseley initiated a review of operating strategy across the Nordics to ensure a successful strategy to deliver great service, gain market share and improve financial performance. The company announced UK turnaround and repositioning strategy, which includes closure of branches and distribution centre. Wolseley would also cut 800 jobs in the UK, which is mainly due to weak demand for materials to maintain and upgrade buildings. Understanding the cyclical element of the industry and strong share price performance since June, we feel it is a good opportunity to lock-in some profit made. Beaufort downgrades its rating from Buy to Hold.

Economic news
Eurozone M3 money supply

Eurozone’s M3 money supply expanded at an annual pace of 5.1% in August after growing at 4.9% in the previous month, the European Central Bank said yesterday. The markets expected an increase of 4.9%.
US consumer confidence index
As per the US Conference Board, US consumer confidence index improved to 104.1 in September from 101.8 in August, better than the expected reading of 99.0.

Important Risk Warnings and Disclaimers 

This report is published by Beaufort Securities Ltd ("Beaufort Securities"). Beaufort Securities Ltd is Authorised and Regulated by the Financial Conduct Authority and is a Member of the London Stock Exchange. 


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This research is non-independent and is classified as a Marketing Communication under FCA rules. As such it has not been prepared in accordance with legal requirements designed to promote independence of investment research and it is not subject to the prohibition on dealing ahead of the dissemination of investment research in COBS 12.2.5. However Beaufort Securities has adopted internal procedures which prohibit analysts from dealing ahead of non-independent research, except for legitimate market making and fulfilling clients' unsolicited orders. 

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Beaufort Securities may effect transactions in shares mentioned herein and may take proprietary trading positions in those shares, and may receive remuneration for the publication of its research and for other services. Beaufort Securities may be a shareholder in any of the companies mentioned in this report. Accordingly, this document may not be considered as objective or impartial. Additionally, information may be available to Beaufort Securities or the Group, which is not reflected in this material. The remuneration of the author of this report is not tied to the recommendations on any shares mentioned nor to the any transactions undertaken by Beaufort Securities or any affiliate company. Further information on Beaufort Securities' policy regarding potential conflicts of interest in the context of investment research and Beaufort Securities' policy on disclosure and conflicts in general are available on request. Please refer to 

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