The Markets
Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 22.10 points down at 7:00 am.
New York: Wall Street pared initial gains, as the ongoing Greek crisis weighed down the investor morale. Upbeat jobless claims and rising personal spending appeared to have little impact on their morale. The S&P 500 shed 0.3%, energy being the biggest laggard.
Asia: Equities are trading lower, extending the overnight losses from the global indices. The Nikkei 225 lost 0.3% at close, despite better-than-expected unemployment and inflation days in Japan. The Hang Seng was trading 1.7% down in view of the tighter margin financing in China.
Continental Europe: Markets ended largely unchanged, as the likelihood of a deal between Greece and its creditors diminished following the inconclusive meeting of Eurogroup finance ministers yesterday. Germany’s DAX closed flat whereas France’s CAC 40 declined 0.1%.
Crude Oil: Yesterday, the prices of WTI and Brent Crude Oil decreased 0.9% and 0.5%, respectively. The spread between the two varieties stood at US$3.5 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.19% higher yesterday at 772.41.
Today’s news
Cameron kicks off renegotiations for UK’s EU membership
Yesterday, British Prime Minister James Cameron pitched a new deal to the European Union leaders to continue the country’s membership in the single currency bloc. However, the proposal was overshadowed by discussion over the impending Greece issue and the migration crisis.
UK retail sales growth decelerates in June
The Confederation of British Industry’s retail sales balance fell to +29 in June from a five-month high of +51 in May, due to weakening in the grocery sector. However, the reading remained above average for this time of the year.
Company News
Stratex International (LON:STI) – Speculative Buy
Yesterday, Stratex International provided a progress update on mine construction at its 45%-owned Altintepe Gold Project, located in Turkey. The company expects to complete the construction by August 2015 when the pre-operational testing will commence ahead of hot commissioning, thereby leading to full-scale production. The latest key developments at the site included the completions of the Phase 1 excavation and engineering fill at leach pad. Other advancements comprised the installation of low permeability soil liner fill and 40% completion of the geomembrane with the fitting of pipework and diversion channels in progress. In addition, all mechanical installation including crusher and screening sections is complete and the electrical reticulation is underway. The installation of grasshopper system, agglomerator is finished and the construction of gold room building also concluded. The company expects to achieve its first production by the end of Q3 2015, subject to the ongoing legal challenges relating to the project’s original Environmental Impact Assessment.
Our view: The above update suggests that the company is well on track to commence production in late Q3 2015 and attain a production of 30,000 ounces (oz) and 40,000 oz of gold over the subsequent few months. At Altintepe, the company’s joint-venture partner Bahar Madencilik has provided funds worth US$39m towards the construction and would bear all the pre-production costs. In addition, we expect Stratex to benefit from Goldstone Resources’ decision to take almost full control of the Homase gold licence in Ghana as it may turn out to be a major growth driver for the company. Moreover, the company’s gold project revaluation in Ghana also highlighted significant potential for further oxide resources at the site that may enhance the existing oxide resource. Separately, the company is engaged in exploration of gold assets and other high-value base metals across Turkey, East Africa and West Africa that offer scope for important upside potential. Thus in view of the above, we maintain a Speculative Buy on the stock.
London Stock Exchange (LON:LSE) – Buy
Yesterday, London Stock Exchange provided a pre-close trading update for the five months ended 31st May 2015. The company continues to do well following the combination of FTSE and Russell. Both the businesses have been combined as FTSE Russell where FTSE total ETF AUM benchmark increased 14% to US$236bn and Russell ETF AUM was up 22% to US$157bn. The company witnessed higher demand for the Information Services products, including UnaVista and SEDOL while the professional users of both UK and Italian market real time information declined slightly against Q1 2015. LCH.Clearnet has delivered good performance in all over-the-counter areas with a 28% rise in the clearing of credit default swaps, 29% increase in forex notional clearing and an enhancement of 20% in cash equities. Total equities raised for the period stood at £16.5bn. In fixed income trading, MTS money markets (repo) value traded increased 26% while cash markets value traded declined 4%. The average daily UK equity value traded was up 8% to £5.3bn and the Italian average daily volumes rose 6%. In addition, the Italian clearing volumes were up 7% overall. The initial margin held increased 9% to €11.9bn for the period. The company continues to make steady progress on the Russell Investment Management divestment process. The Interim results for the six months ending 30th June 2015 are likely to be announced on 5th August 2015.
Our view: The acquisition of Frank Russell has proved to be a crucial milestone towards the company’s geographical expansion as the former’s business is located in the largest global financial services market of North America. The businesses were combined as FTSE Russell, following the company’s US$2.7bn acquisition of the US’s Frank Russell last year. The combination has flourished at a good pace as evident from the company’s overall financial and operational performance for the period. The company is progressing well with the divestment of the Russell’s investment management business, following a comprehensive review. LSE saw a rise in the activities on the capital markets and the clearing business and remains well-positioned to leverage its international open access market infrastructure to steer innovation and bring market efficiencies. We expect LSE to benefit from the continued positive market trends and deliver lucrative shareholder returns. Thus we retain our Buy rating on the stock.
Costain Group (LON:COST) – Buy
Yesterday, Costain issued a trading update ahead of its interim results for the six months ended 30th June 2015. The company expects to perform in line with the guidance and added further new contracts and extensions to its kitty. Some of the recent contract awards include the development of the M4 corridor around Newport for the Welsh Government, the underground link between the Crossrail and Bakerloo Line platforms at Paddington station, and two sections of the A14 improvement scheme for Highways England. During the period, the company’s order book increased to £3.7bn, against £3.5bn on 31st December 2014, with over 90% repeated orders. In addition, Costain maintains a strong preferred bidder position of over £500m while the tendering activity remains on the higher side. The company plans to announce its half yearly results on 20th August 2015.
Our view: Costain Group reported record orders for the six months, led by strong support from repeat orders that underpin the company’s long-term strategic relationships and the customer trust that it enjoys. The company that provides a variety of innovative and integrated services to customers from different business sectors recently reported strong revenue growth for the last fiscal despite a poor show of its Natural Resources division. The company’s strong preferred bidder position and the robust forward order book are likely to facilitate the achievement of the Board’s annual guidance. We believe that the company’s standing in the domain of innovative multi-disciplined services would help it in winning more substantial long-term contracts in the coming period. We remain Buyers of the stock.
Wood Group (John) (LON:WG.) – Hold
John Wood Group issued a pre-close trading update for the six months to 30th June 2015. The company expects the financial performance for the first half of 2015 to be below the comparable period in 2014, in view of the challenging conditions in the oil and gas markets. The company has been putting additional efforts in cost reduction initiatives to offset the pricing pressure and lower activity. In the engineering division, the Upstream activity levels remained weak. During the second quarter, FEED work was started on the Offshore Maintain Potential contract with Saudi Aramco, awarded in March 2015. Subsea business remained active on larger projects and the company recently won new contracts including FEED for Woodside in Australia and for Talisman in Vietnam and a five year maintenance contract for subsea well control. Meanwhile the onshore and the downstream business continue to do well. On the other hand, the PSN business was also impacted by the pricing pressures. The company’s joint venture in Trinidad was awarded a new five year US$250m contract to provide engineering, procurement and construction services to BP’s offshore facilities. The company expects the overall guidance and EBITDA to remain in line with the market expectations and aims to increase the dividend per share by a double digit percentage from 2015 for the medium term. Results for the first half are likely to be released on 18th August 2015. Separately, the company also entered a US$250m agreement for operating services on Central Area Transmission System in the North Sea for up to 10 years.
Our view: Though Wood Group’s guidance remains unchanged, the company has warned against the challenging market conditions that have forced it to implement cost control measures to offset pricing pressure and lower activity in the oil and gas sector. The company did manage to win some major contracts but the subdued performance from its key divisions paint a mixed picture, thereby adding to the future business uncertainty. Though the oil prices have shown some steady improvement in the past few months, we would like to wait for more strong signals of growth from the company and therefore downgrade the stock to Hold for now.
BlueRock Diamonds (LON:BRD) – Speculative Buy
Yesterday, BlueRock Diamonds announced that it sold a 116 carats parcel, produced during May 2015 and the first week of June 2015, at an average price of US$440 per carat. The average per carat price for the diamonds produced by the trail mining plant stood at US$248 for the 575 carats at the Kareevlei project in South Africa. The original competent person’s report had suggested that the company’s Kareevlei project may attain only around US$183 per carat. Also, the most recent parcel included a 4.7 carat stone that was sold for US$3,885 per carat. The above announcement follows the commission of a new plant that has not yet attained its full capacity. The company continues to work towards achieving maximum its efficiency from the plant.
Our view: BlueRock Diamonds sold a parcel of 116 carats for almost double the average selling price of its previous sales even when the newly commissioned plant is not performing to its full capacity. Also, the company’s latest prices have also far exceeded the rates suggested by the original competent persons report. Since its admission to AIM in September 2013, the company’s trial mining operations at the Kareevlei tenements have resulted in strong diamond recoveries. Thus, riding on the back of the continuing diamond recovery at Kareevlei and the substantial operational improvements, we believe that BlueRock would continue its growth story further and therefore, reiterate a Speculative Buy.
Economic News
US personal income and spending
US personal income advanced 0.5% m-o-m in May, after rising 0.4% in April, according to the US Commerce Department. The reading came in line with the market expectations. Personal spending increased 0.9% m-o-m in May, better than the market forecasts of a 0.7% rise and an upwardly revised 0.1% growth in April.
US initial jobless claims
The number of Americans that filed their first initial claims for unemployment benefits increased by 3,000 to a seasonally adjusted 271,000 in the week ended 20th June, the Labor Department stated yesterday. Economists had forecasted a reading of 273,000. Last week’s reading was upwardly revised to 268,000 from 267,000. The four-week moving average of jobless claims fell 3,250 to 273,750 last week.