The Markets
Market opening: Markets are likely to open higher today. FTSE 100 futures were trading 92.80 points up at 7:00 am.
New York: Wall Street witnessed modest gains amid prevailing tensions over Greece and uncertainty in the Chinese markets. Investors largely ignored an increase in initial jobless claims. The S&P 500 advanced 0.2%, primarily led by the financial sector.
Asia: Markets responded positively to the latest reforms made by the Chinese regulators and the new bailout proposal submitted by Greece. The Hang Seng was trading 2.2% up at 7:00am whereas the Nikkei 225 gave up initial gains to close 0.4% lower.
Continental Europe: Equities ended in the green in anticipation that Greece would present a new proposal to its creditors. France’s CAC 40 and Germany’s DAX were up 2.6% and 2.3%, respectively.
Crude Oil: Yesterday, prices of Brent and WTI crude oil increased 2.7% and 2.2%, respectively. The spread between the two varieties stood at US$5.8 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.08% higher yesterday at 744.77. To read our latest research click here.
Today’s news
IMF downgrades growth forecast for UK
The International Monetary Fund (IMF) reduced its growth forecast for the UK to 2.4% for 2015 from 2.7% due to lower oil prices and uncertainty over Greece. Moreover, the agency cut its global growth forecast for 2015 to 3.3% from 3.5%.
Greece submits new bailout plan with austerity measures
Yesterday, Greece presented a new reform proposal comprising sales tax hikes, pension cuts and privatisation to its international creditors. The country’s parliament is expected to vote on the new proposal later today.
Company News
Legendary Investments (LON:LEG) – Speculative Buy
Yesterday, Legendary Investments informed that its investee company, Virtualstock, has entered into an agreement with Maplin to supply Virtualstock Edge solutions, a cloud based platform that facilitates seamless flow of information between any set of fragmented systems. These Edge solutions may be applied to a range of applications and sectors to enable expansion of online range for the retailers without taking on additional inventory. The online orders taken by retailers are fulfilled directly from suppliers to the end consumer. Virtualstock started working with Maplin in 2014 by implementing the former’s dropship solutions and expanding the latter’s dropship supplier base and streamlining other management processes. The dropship tools enabled Maplin Electronics to add new suppliers and product ranges to their online offer and also augment the functionality to expand existing manufacturer relationships.
Our view: Maplin has significantly benefitted from the use of Virtualstock Edge Solutions as it managed to considerably reduce costs and time spent on processing product data from suppliers. The Edge solutions bring all the products in one place thereby leading to improved customer service from the retailer. The unique solutions suite is gaining international acceptance from a large number of retail players and is soon likely to become the industry benchmark for inventory, supply and logistics value chain and data management. Moreover, Virtualstock Edge is sector agnostic and is capable of combining any set of fragmented systems, without disruption to any existing IT landscape. Legendary’s other investee companies such as Bosques and Amedeo Resources also offer significant opportunity for value creation. Amedeo’s offshore vessel yard has now become fully operational, and Bosques also moved a step closer to commercialisation with pongamia seeds producing saplings, ahead of schedule. Thus in view of the progressive developments, and the company’s ability to pick value stocks across sectors including technology, energy and natural resources, we maintain a Speculative Buy.
Beaufort Securities acts as corporate broker to Legendary Investments plc
Barratt Developments (LON:BDEV) – Buy
Yesterday, Barratt Developments released a trading update for the year ended 30th June 2015. Total completions stood at 16,447, up 10.8% on yearly basis. The total Average Selling Price (ASP) on completions was £235k, up 7%. Net Private Reservations (NPR) per active site per week, however, slipped to 0.64 from 0.69 in the previous year. Total forward sales including the Joint Ventures (JVs) were £1.8bn, up 29.6% on a y-o-y basis, and the number of plots increased by 28.8% to 8,777. Barratt Developments expects the profits to rise to £46m (2014: £40.5m). A 45% increase in profit before tax to £565m is expected primarily due to higher proportion of land completion, enhanced volumes and rising house prices. Barratt Developments expects finance charges of £57m comprising of £28m and £29m cash and non-cash charges respectively. The company also expects ROCE to improve by 430 basis point to 23.8% through deferred payments to creditors. The company will announce its annual results on 9th September.
Our view: Barratt Developments expects an improved financial year as it continues to deliver on its core strategy to provide quality homes in all market segments. Riding on the surging demand for new homes, expectation of healthy mortgage lending environment, the company expects a 45% rise in its full year pre-tax profit. Going forward, the company expects to leverage on a healthy land market with better development prospects, and achieve targets of 20% gross margin and at least 25% ROCE by 2017. Given the above, and Barratt Developments’ plans to secure land pipeline mainly through acquisition of options over strategic land, we reiterate our Buy rating on the stock.
Premier Oil (LON:PMO) – Speculative Buy
Yesterday, Premier Oil provided an operational update for the half year ended 30th June 2015. During the period, the company’s average production stood at 60.3 thousand barrels of oil equivalent per day (kboepd) against 64.9 kboepd in H1 2014. The full year guidance was reaffirmed at 55 kboepd. Total revenues for the period are expected to be US$580m compared with US$885m in H1 2014, due to the lower oil price environment and the disposal of Scott area. Operating costs are likely to be 30% lower at around US$150m whereas the company’s cash and undrawn facilities stood at approximately US$350m and US$1.1bn, respectively, as on 30th June 2015. Meanwhile, Premier operated Chim Sáo field in Vietnam continued to do well while the Huntington field reported lower production owing to constraints on the gas export route during the first quarter. The company acquired Chrysaor’s 40% interest in the Solan field for nil upfront consideration while the Catcher project remains within budget and on schedule for first oil in 2017. In addition, the company continued to advance on the pre-FEED activities and contractor selection for its Sea Lion project in the Falkland Islands. Further, the exploration and appraisal campaigns continued successfully at both Zebedee and Isobel Deep. In Indonesia, the Anoa Deep appraisal well was spudded in April and reached its total depth in June. The company also farmed into Block 661 in the Ceara basin in Brazil to evaluate Mexico’s Round 1 opportunities, with bidding scheduled for 15th July 2015. Premier also plans to initiate a process for a possible disposal of its Pakistan assets. Apart, Mr Andrew Lodge retired as Exploration Director on 30th June 2015 and Mr Dean Griffin was appointed as the Head of Exploration.
Our view: Premier reported strong production numbers for the first half of the year while reiterating its production guidance for the entire year. The cost base has been minimised and the debt was well under control despite continuing the investment programme. The company seems to be using the reduced oil price environment to increase its exploration expenditure even as its industry peers cut back on these investments. Premier made significant progress on the sanctioned development and also succeeded in its exploration endeavours at the Falklands. Since January, the company has been seeking low-cost solution for the first phase of the Sea Lion project. Despite the challenging environment, the company possesses some world class assets and remains well-placed to generate long term cash flows to fund both its committed developments as well as manage its balance sheet. The recent plunge in the share prices should be seen as an opportunity for investment. In view of the above, we retain a Speculative Buy on the stock.
Balfour Beatty (LON:BBY) – Sell
Yesterday, Balfour Beatty provided a trading update for the half-year ended 26th June 2015. The company’s continued reviews to identify legacy issues in its business are likely to result in an additional pre-tax profit shortfall of £120m to £150m, where UK is expected to account for nearly two-thirds of this amount. The company’s ‘Build to Last ‘ program is likely to reduce costs permanently by £100m and remains on track with new project disciplines, financial controls and a new leadership team in place. Consequently, the net cash is expected to surpass £200m by the half year end compared to H1 2014. The company plans to announce the half yearly results on 12th August 2015.
Our view: With the above trading update, Balfour Beatty issued another profit warning signalling that the company may slip into losses for the year 2015. The company’s; management is working towards bringing major changes to the company and the process is likely to continue for the foreseeable future. The company’s bottom line has been under pressure as the company has accepted several low margin projects during the financial crisis. Balfour not only scrapped the final dividend payment but also cancelled a share buyback. On the other hand, stocks price has risen almost 67% in the past nine months, thereby providing limited scope for upside potential to the stock. Thus in view of the above, we downgrade our rating to a Sell for now.
Venture Life (LON:VLG) – Speculative Buy
Yesterday, Venture Life released a pre-close trading update for the first half of the year ending 31st December 2015. Half yearly revenues were in line with the market guidance and the management expects the trend to continue. During the period, Venture signed three long-term distribution agreements also completed product registrations in three countries. Four of the company’s brands were launched by its partner. In addition, the company received its first purchase order for skin care products and also received an upfront payment of €0.52m for this order. Venture developed four new products in the women’s health range with one of them to be launched in the beginning of 2016. The customer segment witnessed an addition of two new medical devices. Further, a new skin care product was developed for an Italian customer, Paglieri, apart from the other new products for Giuliani, another Italian client. Biokosmes, the company’s subsidiary, entered into a 10-year deal with a Swiss client to develop a product to cure onychomycosis and is expecting the first order to be ready by the year end. The company also signed a Letter of Intent with OptiBiotix Health to develop products on micro biome modulators, and expects the production in 2016. On the other hand, Venture also appointed two Business development directors to the management team. Separately, the company also made an investment in the Italy plant by installing new cooling and cleaning systems with an aim to improve utility.
Our view: Venture Life’s trading statement reflects that the integrated company has been performing in line with expectations. The company’s strategy to invest in every aspect of the business seems to be working in its favour. Going forward, we expect an improvement in growth owing to the development of new products, enhanced investments in people and infrastructure and planned improvements in manufacturing plants. We believe that the company is likely to benefit from increased business with its new and existing clients and deliver strong results for the complete year. Thus in view of the above and the expected launch of new products in China, we reiterate a Speculative Buy on the stock.
Economic News
UK Bank of England rate
The Monetary Policy Committee of the Bank of England (BoE) retained its benchmark interest rate at 0.5%, matching market expectations. The central bank decided to keep the pace of its current monetary stimulus program unchanged at £375bn.
US initial jobless claims
The number of Americans that filed their first initial claims for unemployment benefits increased by 15,000 to a seasonally adjusted 297,000 in the week ended 4th July, the Labor Department stated yesterday. Economists had forecasted a reading of 275,000. Last week’s reading was upwardly revised to 282,000 from 281,000. The four-week moving average of jobless claims rose 4,500 to 279,500 last week.