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Beaufort Securities Breakfast Today Richland Resources, Sports Direct, Plus 500 and Altona Energy

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The Markets

Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 45 points down at 7:00 am.

New York: Wall Street posted losses after minutes from the FOMC meeting signalled further bond tapering and the International Monetary Fund warned of downside risks to global growth. The S&P 500 decreased 0.7%.

Asia: Weak manufacturing data from China and higher-than-expected trade deficit in Japan caused equities to decline. An extended profit-taking trade in Japan led to a further drop for the Nikkei, which fell 2.2%. The Hang Seng was trading 1.3% down at 7:00 am.

Continental Europe: Markets closed broadly flat after a set of positive corporate updates erased losses arising from disappointing job numbers in the UK and concerns over the ongoing civil unrest in Ukraine. Investors awaited the release of Fed minutes later in the day. Germany’s DAX remained flat, whereas France’s CAC 40 edged up 0.2%.

Crude Oil: On Wednesday, Brent Crude Oil prices remained flat, while WTI crude oil prices increased 0.9%. The spread between the two varieties stood at US$7.2 per barrel.

UK small caps: Yesterday the FTSE AIM All-Share index closed 1.81 points (+0.21%) higher at 881.96.

Today’s news

Fed likely to revise its rate guidance

Minutes from the January FOMC meeting indicated the Federal Reserve would probably change its guidance on the interest rates. Earlier, Fed planned to consider a hike in the benchmark rates after the jobless rate reached below 6.5%. However, ongoing weakness across the labour market, despite an improvement in the unemployment rate, led the central bank to reconsider its rate guidance.

China’s manufacturing PMI drops to seven-month low

Data from HSBC and Markit Economics showed the preliminary reading of China’s manufacturing PMI reduced to 48.3 in February from 49.5 in January.

Company News

Altona Energy (LON:ANR)

Yesterday, Altona Energy released its results for the six months ended 31st December 2013. Loss before taxation contracted to £710,000 from £885,000 and the basic loss per share improved to 0.12p from 0.19p. Altona completed placing of 230 million shares for gross proceeds of £3.22m under a placing agreement with Wintask Group. Mr. Qinfu Zhang was admitted to the Board as Wintask’s represention. Owing to some legal issues, Altona decided to end its Memorandum of Understanding (MoU) with Xinjiang Hetian Duwa Industry for the purchase of a Duwa coal mine in China. A technical feasibility study (TFS) at the Arckaringa Coal to Methanol (CTM) project revealed that the investment costs for Coal to Liquid (CTL)/CTM plant were similar to the planned two train CTL plant; the quantity of gasified coal producing 15,000 barrels per day (bpd) of Fischer-Tropsch (FT) liquids could instead generate 6,200 tonnes per day of methanol. Post the period, Altona ended its joint venture with CNOOC and is under the process to receiving CNOOC’s 51% interest into the Arckaringa project. Meanwhile, a MoU was signed with Sino-Aus Energy Group and Wintask for a potential investment of £30m into the Arckaringa project.

Our view: With full control of the flagship Arckaringa project and potential entry of an efficient partner, Altona is likely to pace up the operations over this prospect now. The addition of Mr. Qinfu Zhang, with a wide industry experience, to the Board, enhances the success probability of Altona’s upcoming development activities. The bankable feasibility study (BFS) for the CTL joint venture holds lucrative potential and targets production of 30,000 barrel per day (bpd) in the first phase. Besides providing liquidity, the equity placing of £2.38m to Wintask also facilitates expertise and leverage for the China business. We see an opportunity for further meaningful upside for the company and thus, maintain a Speculative Buy.

Plus500 (LON:PLUS)

Yesterday, Plus500 reported unaudited preliminary results for the year ended 31st December 2013. Revenue surged 105% to US$115.1m with average revenue per user (ARPU) up 38% to US$1,325 and the number of active customers up 47% to 85,795. Meanwhile, the number of new customers jumped 53% to 56,819 from last year. EBITDA climbed 191% to US$67.3m and EBITDA margin improved to 58% vis-à-vis 41% in 2012. Earnings per share shot up 176% to US$0.47. The overall performance was buoyed by an effective marketing strategy, improved mobile offering and addition of more than 600 financial instruments in various markets. Plus500 declared a final dividend of US$0.1504 per share and a special dividend of US$0.1369 per share. Over the period, Plus500 consolidated its position in Europe, with particularly strong growth in the UK. The company successfully launched its new subsidiary in Australia in January 2013 and attained 5% market share of the online contracts for difference (CFD) trading market in the UK. Management is optimistic of continuing the ongoing growth momentum well into 2014 and beyond. More recently, the company delivered a robust trading performance for the 7 weeks ended 19th February. The stock climbed 28% in yesterday’s trade.

Our view: Plus500 has got a big boost for its operations after it got listed on the AIM in July 2013. The funds from the IPO have helped the company in expanding its footprint across multiple geographies, including the successful launch of a subsidiary in Australia. Besides, this listing has also helped the company is establishing a stronger presence and brand name in the market. The company posted a dividend pay-out ratio of 81% in the year ended 31st December 2013, thus providing notable cash returns to the shareholders. Growth in the use of online trading platforms and its widespread availability across various geographies and multiple operating systems enhances flexibility of use and thus, strengthens revenue visibility for the company. In light of these positives and the easy use of CFDs – one of the major offerings of Plus500, we see huge upside potential for the company and assign a Speculative Buy.

Richland Resources (LON:RLD)

Richland Resources shared its unaudited trading and operational update for Q4 2013. Tanzanite production from Richland’s wholly owned subsidiary, TanzaniteOne Mining Limited (TML) totalled 1,095,753 carats, 38% higher from Q4 2012. Processing of 6,599 tonnes of material resulted in an average recovery rate of 166 carats (2012: 102 carats) per tonne. With sales of US$1.8m from TML & the State Mining Corporation (STAMICO) and another US$0.9m from other operations like TTE and online, translated into total sales of US$2.7m. As per the agreement signed between TML and STAMICO on 12th December 2013, net profit would be shared equally between the two parties. Separately, STAMICO would pay US$4m to TML from its share of profits from the combined future operations. During the period, Richland sold its Dubai office for net sale proceeds of ~US$640,000. On 16th January 2014, the company announced the completion of the raising of £2.8m through issue of 81.1 million shares. Besides, Richland and Kibaran Resources signed a MoU for mining their graphite deposits in the Merelani region.

Our view: Richland is likely to exhibit a substantial improvement in performance after a prolonged period of illegal mining at northern part of Block C prospect in Tanzania. The company is aggressively working on bringing the regions with lucrative tanzanite potential, within the mine, back into production. Earlier, a large section of the mine was shut as high degree of safety risks had emerged owing to illegal mining. Initial deal with Kibaran for the Merelani graphite mine in Tanzania has opened up additional revenue prospects for the company. This mine is estimated to possess high grade flake graphite with purity level of 97-98%, sufficient for 40 years of operations at a rate of 15,000 tonnes per annum. Given these positives and a favourable demand scenario for commercial graphite, we are optimistic about the company’s growth prospects and reiterate our Speculative Buy rating.

Sports Direct International (LON:SPD)

Yesterday, Sports Direct International issued its interim management statement for the period from 28th October 2013 to 18th February 2013. During the thirteen week period ending 26th January 2013, group sales climbed 11.2% y-o-y to £655.4m and gross profit increased 14.6% to £280.7m. Revenue for Sports Retail division grew 6.9% to £529.9m with gross profit rising 12.9% to £230m. UK Sports Retail square footage increased to 4.2 million sq. ft. from 4 million sq. ft. For the Premium Lifestyle division, sales climbed 52.5% to £71.2m with gross profit rising 39.2% to £28.4m. The Brands division saw revenues growing 15.5% to £54.3m with an increase of 6.7% to £20.7m in the gross profit. Management was optimistic about achieving the full year internal underlying EBITDA target of £310m. Stock price advanced 7.1% yesterday.

Our view: With the addition of Republic into the portfolio of Premium Lifestyle division, Sports Direct, the largest sports goods retailer in the UK, registered an impressive financial performance. Sales and profits climbed 11% and 14.6%, respectively over the period. The company’s ongoing efforts to bid for Elverys Sports chain, if successful, would be a welcome addition to its portfolio. Given the chain of over 600 stores across Europe; strong portfolio of brands like USC, Cruise, Slazenger and Dunlop; and an effective marketing & acquisition strategy, we remain Buyers of the stock.

Economic News

UK jobless claims change

UK jobless claims in January declined 27,600 to 1.22 million, reaching the lowest level since December 2008, following a revised decline of 27,700 in December, the Office for National Statistics said yesterday. Markets had expected claims to drop by lesser margin of 20,000.

UK ILO unemployment rate

UK unemployment rate for the quarter ended December edged up to 7.2% from 7.1% in the three months ended November, the International Labour Organisation stated yesterday. Economists were expecting the rate to remain unchanged at 7.1%. The number of unemployed people fell 125,000 from the three months ended September to 2.34 million and the number of employed people rose 193,000 to 30.15 million.

US MBA mortgage applications

US mortgage applications declined 4.1% in the week ended 14th February after lowering 2% in the prior week, the Mortgage Bankers’ Association said yesterday. Over the week, the refinance index dropped 2.7% and the seasonally-adjusted purchase index decreased 6.3%.

PPI

US producer price index (PPI) increased 0.2% m-o-m in January, gathering pace after an uptick of 0.1% in December, as stated by the Bureau of Labor Statistics yesterday. Markets had expected growth in PPI to continue at the previous month’s pace. Core producer prices, excluding food and energy, were up 0.2% after a flat reading in December. PPI grew 1.2% y-o-y in January, matching market expectations, after December’s hike of 1.1%. Core prices advanced 1.3% y-o-y in January 2014 vis-à-vis 1.2% growth witnessed in the previous month.

US housing starts

US housing starts declined 16% m-o-m to a seasonally adjusted annual rate of 880,000 units in January, registering its biggest decline in about three years on account of an extremely cold winter, the Commerce department said yesterday. The reading was below the market estimate of a much milder drop to 950,000 housing units from the revised 1.05 million units in December. Housing starts for single-families fell 15.9% to an annual rate of 573,000, while the starts for multi-families decreased 16.3% to an annual rate of 307,000.

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