Today's edition features:
DekelOil Public Limited (LON:DKL)
Horizon Discovery (LON:HZD)
"In his first speech of 2017, Mark Carney was clear. "Households appear to be looking through Brexit-related uncertainties" he declared at the LSE yesterday, detailing his concerns that growth which is led by private consumption remains vulnerable to an inflationary spike fuels by Sterling weakness. While it is believed that the Bank of England will be prepared to let the economy 'run hot' for a brief period, should price-growth stay stubbornly above its 2% target, then it will be prepared to raise interest rates as sharply as necessary. Given that the Prime Minister is today also expected to lay out her 12 main negotiating objectives for the UK in pending divorce negotiations from the EU, with the expectation that business investment will remain relatively subdued as management await the final outcome of Article 50 discussions, this all suggests the UK could now be facing 2 years or more of below par growth. The Pound's weakness of the past few days is expected to intensify as markets recognise the increasing likelihood of a 'Hard Brexit', with Theresa May seemingly prepared to rule out membership of the Single Market in the hope she will instead be able to secure a unique, special relationship with the EU. This all sets a nervous scene for London's opening this morning, given that yesterday's Martin Luther King holiday means traders cannot rely on the US to set opening sentiment while Asian markets closed broadly weaker. The FTSE-100 is seen down around 15 points in early trade, although this will stay relatively light until the implications of the Prime Minister's speech have been fully digested. The UK also is scheduled to release a batch of December macro data this morning, including Retail, Consumer and Producer Prices, which may build upon the concerns highlighted by Mark Carney, while the EU is scheduled to publish its ZEW Economic Sentiment Survey as the World Economic Forum Annual Meeting gets underway in Davos. Speeches from Fed members, William Dudley and Lael Brainard are also anticipated this afternoon. UK corporates due to release earnings or trading updates this morning include Cairn Energy (CNE.L), Greggs (GRG.L), Hotel Chocolat (HOTC.L), Miton Group (MGR.L) and Provident Financial (PFG.L). Traders will also remain sensitive to certain majors reporting in the US this afternoon, including Morgan Stanley and Tiffany."
- Barry Gibb, Research Analyst
The FTSE-100 finished yesterday's session 0.15% lower at 7,327.13, whilst the FTSE AIM All-Share index closed 0.21% higher at 875.81. In continental Europe, the CAC-40 finished 0.82% lower at 4,882.18 whilst the DAX was down 0.64% at 11,554.71.
In New York last night, markets were closed for the Martin Luther King Day holiday.
In Asian markets this morning, Nikkei 225 had fallen 1.35% to 18,836.92, while the Hang Seng added 0.53% to stand at 22,837.81.
In early trade today, WTI crude was down 0.11% to $52.31/bbl and Brent was down 0.5% to $55.58/bbl.
May rejects 'partial' EU membership in Brexit speech
The UK will not retain "partial" membership of the EU once it leaves, Theresa May will say in her much-anticipated Brexit speech. The PM will tell other European countries the UK wants to trade with them "as freely as possible" but will not be "half-in, half-out" of the EU. Her speech is expected to include further hints Britain could leave the EU single market. Downing Street said she would set out 12 negotiating objectives. The government has so far revealed few details about what it wants to secure from the Brexit talks.
Source: BBC News
DekelOil Public Limited (LON:DKL, 12.50p) – Speculative Buy
The operator and 100% owner of the vertically integrated Ayenouan palm oil project in Côte d'Ivoire yesterday announced the conversion of all its outstanding capital notes into 12,578,616 new ordinary shares of €0.0003367 each at 13.25p per share, a 10.4% premium to the closing share price of the Group on 13 January 2016. The Capital Notes, disclosed in the Group's admission document, were put in place in 2010 and have a total face value of €2,000,000. Under the terms of the Capital Notes, repayment of the principal was ranked above the distribution of dividends to DekelOil ordinary shareholders. The cancellation of the Capital Notes will therefore allow the Group to adopt a dividend distribution policy. The New Ordinary Shares are being issued to the two remaining holders of the Capital Notes in equal parts and will represent, in total, approximately 4.25 per cent. of the issued share capital of the Group following the issue of these shares. The holders of these notes have agreed to a firm lock-in of 12 months and a further Orderly Market period of an additional 6 months.
Our view: Over the past 12 months, DekelOil has overhauled its balance sheet by significantly reducing its overall debt outstanding and materially decreasing the interest rate on its remaining obligations. This has all been achieved due to the ramp up in its operations while buying out remaining minorities in the Group's core asset, in order to increase the Group's overall profitability. As has been previously noted, DekelOil is also a Brexit winner with the appreciation of the Euro against the Pound of well over 10% post Brexit, which in turn translates into higher Sterling earnings. Having positioned itself so, Beaufort believes the Group will be able to support its long-term operational ambitions and paydown remaining debt while also producing a sustainable surplus. Realistically, shareholders can now expect to be rewarded by management implementing a formal dividend policy which in itself remains key to investor confidence in what is otherwise an obviously undervalued investment. Beaufort retains its Buy recommendation on the shares and repeats its price target of 23p for the shares.
Beaufort Securities acts as corporate broker to DekelOil Public Limited
MySQUAR (LON:MYSQ, 1.88p) – Speculative Buy
MySQUAR, the Myanmar-language social media, entertainment and payments platform whose principal activity is to design, develop and commercialise Myanmar-focused internet-based mobile applications, yesterday announced that as of 12 January 2017, the total number of registered users across all apps and games had exceeded 7.5 million. This represents an increase of more than 25 per cent of total registered users as compared to 14 October 2016, when the Group had approximately 6 million registered users. One particular success in this respect has been the full release and soft launch of various apps and games, including CallHome, Fastsell and ChakraNinja. A diversified user base across the different sectors of gaming, social networking, increasingly VoIP and also mobile marketplace means MySQUAR is ideally position as the mobile-based value added service provider in Myanmar.
Our view: Quite breath-taking progress! The count and pace of expansion of any online social media operator has traditionally been the key driver to its valuation. In this respect, MySQUAR's unique, branded local language offering clearly has a fundamental value considerably in excess of its current £5m market capitalisation. While this statistic remains a valuable metric, however, going forward MySQUAR's management expects to focus more on monetisation and revenue updates that it considers now might represent better indicators of its progress. This is understandable, given that its numerous calls for additional capital (to fund its impressive expansion) since it came to market in 2015 have contrived to undermine confidence in the investment. It has already formally noted its expectation of achieving monthly cash flow break-even or better before the end of the current financial year (ended-June 2017). By becoming a cash generator, rather than a cash consumer, the opportunity to wash out remaining CLN obligations along with the equity overhang they are perceived to create, should allow valuation fundamentals to reassert. A more realistic equity valuation might also provide management with the opportunity to secure various acquisitions opportunities that regularly become available with the potential to provide an additional step improvement in both user numbers and profitability. This is something that is unlikely to have been missed by its numerous and very cash-rich global peer group, who remain determined to continue ensnaring players in virgin territories that have successfully participated in an online user 'landgrab'. In this respect, MySQUAR now appears quite dramatically undervalued; Beaufort retains a price target of 21.0p/share and repeats its Speculative Buy recommendation.
Beaufort Securities acts as corporate broker to MySQUAR plc
Horizon Discovery (LON:HZD, 177.50p) – Speculative Buy
Horizon Discovery Group PLC said on Monday that its gene-editing technology capability has been widened via the amendment of its license with ERS Genomics. Horizon said it now has full commercial rights for the use of ERS's CRISPR edited cell lines, including "virtually all non-therapeutic applications". The license also includes consents from all the patent co-owners although financial terms of the amendment were not disclosed. The Group also noted it has entered into a two-year collaboration with Solentim Ltd for the development of an automated manufacturing platform for the genome editing of mammalian cells. The joint project is being funded by the UK government's Innovate agency, providing GBP764,200, of which Horizon will receive GBP523,000. The project aims to establish new approaches for the manufacture of genome edited cell lines at greater throughput and reduced cost.
Our view: Becoming an increasingly important part of the pharmaceutical industry's diagnostic process! Gene editing underpins Horizon's operations, enabling it to be the go-to industry 'cell builders'. Through the extension of its CRISPR license with ERS Genomics, it now has a deeper toolbox of gene editing options. Bioproduction was only a small part of Horizon's portfolio at the time of its IPO, but the business area has outperformed expectations to become a significant source of growth and is now an important part of the Group's business plan going forward. Beaufort sees the value of this to an international base ranging from big pharma to small biotech discovery companies being reflected by a sharp rise in projected 2017E sales of £35m, some 50% higher than the current period. It also sees the opportunity to deliver net profits for the first time in 2018. Beaufort retains it Speculative Buy recommendation on Horizon Discovery and awards the shares a price target of 200p/share.
Ibstock (LON:IBST, 180.30p) – Buy
Ibstock, a leading manufacturer of clay bricks and concrete products operating in the UK and the US, yesterday provided a trading update for the year ended 31 December 2016 ('FY2016'). The Group said its revenue for the year has advanced by +5%, comprised of +2% increase in the UK and +18% growth in the US, against the comparable period (FY2015). In the UK, the revenue growth was driven by low single digit volume growth for clay brick and both volume and price growth for concrete. In the US, the growth in revenue was supported by higher average prices and the benefits from a more favourable product and end use sector mix. The Group said adjusted EBITDA is in line with expectations, while saw decline in net debt. On the operational front, the Group said installation of a new concrete roof tile line at the Leighton Buzzard facility was completed within budget and commissioning commenced during August 2016. The Group also noted that it made progress with the construction of an additional clay brick factory in Leicestershire. The Group also noted that it has reached an agreement to close defined benefit pension scheme from 31 January 2017 and switch this to company's defined contribution scheme with effect from 1 February 2017. The Group will announce its preliminary results for the year ended 31 December 2016 on 7 March 2017.
Our view: Ibstock delivered a good FY2016 performance with revenue increasing by +5%, aided by a solid UK performance during H2. Notably this reflected improved housebuilding activity and a large annual decline in imports. The adjusted EBITDA for the full year is expected to be c.£109m, in line with consensus, while the Group successfully reduced its net debt despite having significant spend on major projects (the Leicestershire brick plant and the Leighton Buzzard facility). In the UK, brick sales volume increased, despite the destocking of brick by UK distributors (mainly flow into the RMI market) as noted previously. In the US, higher average prices and favourable product mix has boosted its revenue by +4% at constant exchange rate basis (+18% reported basis). On the operational front, installation of a new concrete roof tile line at the Leighton Buzzard facility has added c.5% to UK concrete roof tile market capacity. The Group also said it progressed with the construction of an additional clay brick factory in Leicestershire, which is expected to add approximately 100 million bricks (c.13%) to its brick production capacity per year (commissioning H2 2017). Ibstock completed all brick price negotiations for 2017 with its major UK customers at levels within management's expectation. Price increases for the current year of around +4% have been implemented, offsetting increased energy costs, while the ending of destocking amongst merchant chains suggest easier comparatives. The Group generated 80% of its revenue in the UK during FY2016 and, considering the strong visibility currently provided by UK house builders together with a continuing fall in the share of national brick imports, we believe Ibstock remains comfortably placed to achieve further growth. Based on EBITDA of £109m in FY2016E moving up to some £116m in the current year, earnings multiples looks set to fall from 11.0x to around 10.3x respectively, while the dividend yield moves from an estimated 3.8% and 4.3%. In view of the continuing, high visibility fundamentals both in the UK and US, Beaufort reiterates its Buy rating on the share.