Legendary Investments (LON:LEG)
Balfour Beatty (LON:BBY)
Fox Marble (LON:FOX)
"The waiting is finally over. Today the markets will receive the FOMC interest rate decision, which is due to be announced around 14:00hrs ET. The fact is, however, that market pundits are so convinced that this hike, of 25bp and just the second in ten long years, will be delivered the question now has actually become more about when will the next one be, and the one after that - which is altogether is much more tricky to answer. Most US economists appear to believe Trump’s reflationary policies, not least his aggressive tax cutting proposals, will be quite dramatically simulative for consumer prices, suggesting this afternoon’s move will be followed in 2017 by, perhaps, two or three more. But unless Trump can also sustain strong employment while supporting higher wages, such benefits will be largely reserved for the asset rich classes, rather that the middle-aged workers who were the force behind his surprise election and could also limit the period of his tenure. Not that this was on the minds of traders last night, as US equities powered to another record high, with the Dow Jones creeping even closer to the 20,000 level on demand for energy shares, while yesterday’s caution on technology issues appeared forgotten by the NASDAQ which put in the strongest gain amongst the main indices. While the US$ was little changed against the international basket, yields on 2-year Treasuries rose to a six-year high in anticipation of today’s move. Asian shares gave up most of their early gains to end with just fractional movements, despite Japanese corporate sentiment rising for the first time in 18 months according to the central bank’s tankan survey. The Shanghai Composite fell modestly into the red, as international investors again worried over China’s rising war of words with the President-elect along with its authorities desperate efforts to curb capital outflows through a crack-down on unofficial banks who help people and enterprises illegally move money offshore. The UK today will release unemployment data, while later on this afternoon the US provides Retail Sales and Industrial Production data ahead of Janet Yellen’s press briefing. UK corporates due to provide earnings or trading updates include Boohoo.com (BOO.L), Dixons Carphone (DC..L), Mixcrofocus International (MCRO.L), SysGroup (SYS.L) and Wood Group (WG..L). Investors will also be hoping for more detail regarding, Sanofi, the giant French pharmaceutical group’s apparent talks regarding a possible counter-bid for biotech Actelion, countering an earlier approach from Johnson & Johnson which appears to have failed to reach agreement. Such an outcome could possibly herald the start of another phase of consolidation amongst international sector majors. This morning, the FTSE-100 is expected to be 25 points down in opening trade. "
- Barry Gibb, Research Analyst
The FTSE-100 finished yesterday's session 1.13% higher at 6,968.57, whilst the FTSE AIM All-Share index closed 0.03% higher at 821.36. In continental Europe, the CAC-40 finished 0.91% higher at 4,803.87 whilst the DAX was 0.84% up at 11,284.65.
In New York last night, the Dow Jones rose 0.58% to 19,911.21, the S&P-500 firmed 0.65% to stand at 2,271.12 and the Nasdaq gained 0.95% to 5,463.83.
In Asian markets this morning, the Nikkei 225 added 0.02% to 19,253.61, while the Hang Seng firmed 0.42% to stand at 22,540.41.
In early trade today, WTI crude was down 1.09% to $52.40/bbl and Brent was down 1.02% to $55.15/bbl.
Abandon net migration target, says CBI
The employers group, the CBI, is calling on the government to abandon an immigration target which was set by David Cameron and which then proved part of his undoing. Net migration measures the number of people coming to Britain, minus the number of people leaving. Given that it's pretty hard to control the number of people leaving, it's arguably a dangerous thing on which to pin your political career. But that's what the former prime minister did when he pledged to get the number down to the "tens of thousands" from over 300,000 a year. David Cameron failed, and unease about the number of people arriving from the EU was the defining issue of the referendum. The message was clear: without control of our borders we have no chance of ever controlling net migration. The rest is now history.
Legendary Investments (LON:LEG, 0.23p) – Speculative Buy
Legendary Investments provided an update on its Kyrgyzstan gold investment Sultan Sary. Legendary has 5% and an option to increase its share to c.10% in Manas Resources which has both exploration and mining rights over Sultan Sary. The update concerns results from geophysics shot during the summer. It shows resistivity and chargeability anomalies which look to be on the same trend as neighbouring gold mines. The main Sultan Sary anomaly extends for 1.4km in a WNW direction and is a prime drill target. Mamas/Sultan Sary is not Legendary's most valuable investment and is early stage. However, its location in a historical gold producing region and the WNW trending structures picked out by geophysics means it has the potential to be a significant gold deposit. We look forward to further work programme updates and a drilling decision.
Our view: This positive news together with Beaufort’s detailed review of the group's investment in Virtualstock, considers its exceptional progress against which it was awarded a significant upward revision to £176m last month. Beaufort sees scope for this figure to rise yet further and will confirm this outcome following further extensive interaction with Virtualstock Board and in the meantime reaffirms its Speculative Buy recommendation on Legendary investments with a target price of 0.5p/share.
Balfour Beatty (LON:BBY, 279.69p) – Hold
Balfour Beatty (‘Balfour’), a leading global infrastructure group, yesterday provided trading update for the period ended 12 December 2016 (year-to-date). The Group said it is almost completing the first Phase of the ‘Build to Last’ transformation programme and said it has delivered “fundamental change” to the Group. Balfour has simplified its business and strengthened its senior leadership team with governance and processes in place to drive greater transparency and control. The Group expects to deliver its Phase One ‘self-help’ targets of “£200m cash in: £100m cost out” while maintaining a positive net cash balance (H1 FY2016: £115m, FY2015: £163m). The Group also noted that management of legacy issues across the portfolio is in line with timetable and remains on track with overall expectations. Balfour said its order book has remained stable during the H2 FY2016 and it continues to win major contracts across its target markets on terms which reflect the Group's improved governance and controls.
Our view: Balfour progressed well in implementing its 24 months 'self-help' Phase One ‘Build to Last’ transformation programme, and said it is on course to achieve initial targets of “£200m cash in: £100m cost out”. Launched in early 2015, the ‘Build to Last’ transformation programme was created by Balfour to focus on four key areas; 1) lean, 2) expert, 3) trusted and 4) safe, as measured by cash/EBIT, employee engagement, customer satisfaction and Zero Harm, to bring each business unit up to industry standards. The transformation means that management will have greater visibility and control over the business and better positioned to adjust and respond to changes in market conditions. Looking ahead, in the next 24 months (Phase Two), the Group is targeting to reach industry-standard margins, and for the long-term, look to build Balfour Beatty’s market-leading strengths and performance. In light of this continuous progress, Beaufort reiterates its Hold rating on the shares.
Bellway (LON:BWY, 2,425.78p) – Buy
Bellway yesterday issued a Trading Update relating to the 18-week period from 1 August 2016 to 4 December 2016. Highlights of the period included (i) a strong sales performance including a 7% increase in the reservation rate to 176 per week (2015 – 165); (ii) housing completions for the full year to 31 July 2017 expected to increase by around 5% and; (iii) continued investment in high quality sites to secure further growth, with £263 million expended on land and land creditors (2015 – £235 million). As previously announced, the Board confirmed it is recommending a final dividend of 74.0p per share (2015 – 52.0p per share), which will result in a record full year dividend for the year ended 31 July 2016 of 108.0p per share (2015 – 77.0p per share). Whilst remaining mindful of the longer-term uncertainty as a result of the vote to leave the EU, the positive autumn trading performance has given the Board reassurance to cautiously recommence the Group’s programme of land acquisition, following a brief planned hiatus in the weeks after the referendum. As a result, the Group has contracted to acquire 40 new sites (2015 – 37 sites). The average forecast gross margin on land contracted is ahead of historical industry norms, based on expected costs and selling prices at the time of entering into the land contracts.
Our view: Good progress, much in line with its peers, no real surprises. With the much-repeated sector dynamics, including a structural UK housing shortages, high mortgage financing availability, ultra-low interest rates, government incentives (help to buy) for new property purchases and exceptional levels of forward reservations in place for 2017, Beaufort retains its overweight position for the entire UK housebuilding sector. Indeed, based on declared/enhanced dividend distribution and specials, a sector average yield of 6.8%, a P/NAV of 1.40 and average 2017E P/E of around 8.9x, we recommend it both for income and value investors. So where does that leave Bellway? The shares have fallen slightly less than the sector year to date at 15% against 21%, are priced at 1.24x book value while offering a 5.2% prospective yield. For a well-managed business that comes with a good strategic land bank positioned at the ‘affordable’ end of the market, with a lowly 8% net debt/equity gearing this represents good value. Beaufort keeps its Buy recommendation on Bellway shares, although it’s choice of the sector still remains Taylor Wimpey.
Fox Marble (LON:FOX, 7.15p) – Speculative Buy
Fox Marble, the AIM listed company focused on the extraction, finishing and global distribution of marble, yesterday released an operational update ahead of its results for the year ended 31 December 2016. It confirmed it anticipates revenues from its quarried block marble and finished marble sales for the 12 months to 31 December 2016 to be in the region of €0.7m, (2015 full year revenues €0.2m), of which £0.6m is derived from converted sales. The Company's order book for 2017 currently stands at €2.9m. This reflects the continued global appetite for high quality marble from wholesalers, producers and architects, including Pisani, Eboracum and Antolini Luigi & C. Spa and notably significant orders during the course of the year from leading property developments such as St George's Homes plc, and Capital and Counties plc's Lillie Square development, the largest residential development in Europe. It noted, however, that its order book also reflects longer lead times in converting orders to realised sales during the course of 2016, which the Company expects will now be completed in 2017. Not included in the current order book are a number of potential new off-take, distribution and sales agreements, that are currently under discussion with customers across the UK, Europe, USA and Asia, which the Company believes will positively impact Fox Marble's revenues in 2017. Management also confirmed that its marble finishing factory in Kosovo has now entered the final stages of delivery, commissioning and testing overseen by Fox Marble's technicians and its Carrara-trained manager.
Our view: Fox Marble now appears to be drinking in the ‘Last Chance Saloon’. A run of bad luck, operational mishaps, bad weather conditions, unexpected delays in factory commissioning, together with an apparent failure to perceive just how long it takes new market entrants to capture a slice of the global dimensional stone market that is dominated by regional distributors, means that Fox Marble has failed to deliver on its promises for three consecutive years now and patience is wearing very thin. Which is all a great shame, given that the Company undoubtedly has an exceptional, high-grade, effectively infinite world-class resource across a broad range of popular and rare colours. Considering also the differing qualities plus numerous stages of ‘value-added’ that go into servicing this global US$10bn market, it necessarily remains a cottage industry whose stable product pricing is not subject to the cyclical swings of more commoditised mineral resources, like oil or iron. But unless Fox Marble can now quickly monetise its opportunity and start to provide good visibility going forward, shareholder patience will be seen to run out. With a cash balance of €1.1m at 30 November 2016, including €0.3m of cash advances related to outstanding orders included in the Company's order book, there is enough to get complete the factory commissioning and convert existing orders into sales. But to fulfil its original promise of becoming a wholesale supplier of significant scale, the challenge must now be to gain trust and credibility from a wide range global partners – whereby it becomes one of the default suppliers-of-choice should, for example, a San Francesco contractor receives an order for half an acre of pure while Sivec destined for a new Middle Eastern hotel. Having risen to this point, however, the rewards should become quite exceptional as low, largely fixed operating costs will see additional revenues trickle almost straight down to the bottom line. Management has already suggested this will be quickly returned to patient shareholders in the form of dividends. In the hope and expectation of the Board delivering a more confident message with release of its finals in Q2’2017, Beaufort gives it the benefit of the doubt by retaining a Speculative Buy recommendation on Fox Marble’s shares.
UBM (LON:UBM, 714.94p) – Buy
UBM, a leading global organiser of B2B events, yesterday announced that it has agreed to acquire Allworld Exhibitions (‘Allworld’), the leading privately-owned Asian exhibitions business, for a cash consideration of US$485m, financed through existing revolving credit facilities and a new US$365m bridge facility, with latter expected to be refinanced with longer-term debt following completion. Allworld is a pure-play events business operating 51 tradeshows in 11 countries and across 9 industry sectors including Food & Hospitality, Packaging, Manufacturing, TMT and Oil & Gas. For the year ended 30 June 2016, Allworld generated revenues of US$97.2m and EBITDA of US$37.6m (38.7% margin) with operating profit of US$37.1m and gross assets of US$62.9m. An investment into systems and process for Allworld is required to support the accelerated revenue growth and therefore net zero cost synergies is expected. The integration process and realisation of anticipated revenue synergies is expected to last approximately 2 years, with total integration costs of approximately US$20m. UBM’s CEO, Tim Cobbold commented “The acquisition of Allworld is wholly in line with our Events First strategy and represents an exceptional opportunity to accelerate growth by investing in a high-quality events business. In so doing we cement our position as the leading events business in Asia and achieve the number one position in the fast-growing ASEAN region. We see excellent opportunities to accelerate organic growth in the business.”
Our view: An acquisition of Allworld is an encouraging move for UBM. Allworld has been growing organically over the past decade with an exceptional +7.3% revenue CAGR. During last financial year, over half of the Allworld’s revenue was generated from annual events, which have grown at a +6.6% revenue CAGR over the past 2 years. This growth is expected to accelerate into “double digits” during both calendar 2017 and 2018, before reverting to the historic level of 7-8% thereafter. Allworld’s EBITDA margins for the year to December 2017 are expected to be c.35%, weaker than year ended 30 June 2016, reflecting biennial event revenues which were impacted by headwinds from the Oil & Gas sectors. The Group anticipates “significant” margin expansion post 2017, primarily driven by revenue growth. The acquisition will strengthen UBM's market-leading position in Asia, creating the leading events business in the ASEAN region, while also providing UBM with access to the Middle Eastern opportunities. In terms of operating sectors, the acquisition will also allow UBM to entre into Oil & Gas sector, while the rest of sectors are highly complementarity within its existing portfolio. UBM said the acquisition should be immediately earnings enhancing from 2017, with return on investment (ROI) expected to exceed cost of capital from 2019, while the enlarged Group’s revenue growth is expected to accelerate over the next 24 months. UBM will maintain target leverage of 1.5-2.0x over the next 12-18 months, in line with its financial policy, while maintaining flexibility to continue to make regular bolt-on acquisitions. UBM was one of Beaufort’s Tips for 2016 and has performed exceptionally strongly during the period, being up almost +40%, since 12 January 2016. Shorter-term investors may wish to take advantage of this year-to date outperformance by locking-in profits, although Beaufort’s long-term stance on the shares still remains ‘Buy’.