The Markets
Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 1.20 points down at 7:00 am.
New York: Wall Street ended flat amid mixed corporate earnings. Lower-than-expected GDP numbers for the second quarter hurt the investor sentiment. The S&P 500 closed at 2,108.6.
Asia: Equities are trading higher, tracking global markets and shunning the losses in Chinese stocks. The Nikkei 225 added 0.2%, while the Hang Seng was trading 0.5% up at 7:00am.
Continental Europe: Markets ended marginally higher on upbeat corporate earnings. Reports that the IMF may not participate in Greece’s third bailout capped gains. France’s CAC 40 and Germany’s DAX advanced 0.6% and 0.4%, respectively.
Crude Oil: Yesterday, prices of WTI and Brent Crude Oil declined 0.6% and 0.1%, respectively. The spread between the two varieties stood at US$4.8 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.14% higher yesterday at 750.17. To read our latest research click here.
Today’s news
IMF wary of joining the third Greek bailout
The International Monetary Fund (IMF) said it may not participate in the third Greek bailout owing to the country’s increasing debt and bad record of executing economic reforms. In the absence of IMF, Greece would require additional funds from other sources to meet their short term financing needs.
Company News
Hummingbird Resources (LON:HUM) – Speculative Buy
Hummingbird Resources, the gold exploration and development company with assets in Mali and Liberia, announced yesterday that an application has been made for 11,068 shares to be admitted to trading on AIM pursuant to the exercise of warrants. The warrants have an exercise price of 33 pence per share and will rank pari passu with Hummingbird’s existing ordinary shares. Admission to trading on AIM is expected to take place on 3rd August 2015; following admission the issued share capital of Hummingbird will be 106,951,831 ordinary shares of 1 pence each.
Our view: While the exercise of 11,068 warrants represents only 0.1% of the issued share capital we are encouraged with the application and support for the company. On 10 July 2015, an application was also made for 28,207 new ordinary shares of 1 pence each through the exercise of warrants at the same exercise price of 33 pence per share. Despite the current gold market sentiment and potential headwinds in the near term, we expect Hummingbird to generate sufficient margins given its estimated all-in-sustaining cost of US$733/oz for its Yanfolila project in Mali. In the meantime, we maintain a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Hummingbird Resources plc
Frontier Resources International (LON:FRI) – Speculative Buy
Yesterday, Frontier Resources released an update on its operational activities in the Owambo Basin, Namibia. Frontier’s licenese comprises two blocks 1717 and 1817 covering an area of around 18,933 sq km, where the company is the operator having 90% working interest whereas NAMCOR, the Namibian National Oil Company, has a 10% interest. Recently, the company finished a data exchange of high resolution airborne magnetic data along with a technical analysis, in a huge area near the blocks. The process was taken up by Exploration Technology in Houston, Texas, who found the sediment thickness in the area by calculating and mapping the depth to the basement rocks, and also identified local geologic trends in the subsurface. The technology, along with gravity and seismic data helped Frontier discover drillable structures on its block in Oman. The data collected is currently being combined with the existing database over blocks 1717 and 1817 having magnetic, gravity and seismic data. The data stored along with the earlier findings from the acquired gas survey would help in defining unusual features seen on the seismic, especially in the sparsely drilled regions.
Our view: Frontier’s latest operations in the Owambo Basin have been fruitful as the new data collected would improve the understanding on existing blocks as well as help in finding regions requiring extra seismic data before drilling. Earlier, the company informed of continuing drilling activities without the need for a 3D seismic survey at Block 38 in Oman and is planning to enter into farm-out discussions with Middle East-based partners for the same. The company’s strategy looks encouraging as it is expected to attract potential investors and also limit Frontier’s risk exposure in the asset. Going ahead, Frontier’s prospects remain encouraging as it expects to start its production in Oman using its existing well and seismic data. In view of the above argument, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Frontier Resources International plc
Ferrum Crescent (LON:FCR) – Speculative Buy
Yesterday, Ferrum Crescent provided an update on its quarterly activities and cash flow report for the period ended 30th June 2015. The company completed a bankable feasibility study (BFS) on its Moonlight Iron Project that includes planned future mining and beneficiation of the Moonlight Deposit for the production of high grade concentrate. This concentrate would be transported to a pellet manufacturing centre located in Thabazimbi in Limpopo Province, South Africa, to produce direct reduction and blast grade iron pellets for sales purposes. Several potential South African buyers were identified for the same. Ferrum has planned activities with the infrastructure providers for power, water, rail and port. The company has also planned the next BFS phases starting with the development of full ore reserves in terms of JORC (Joint Ore Reserve Committee) by conducting drilling over zones A, B and C. On the corporate front, Ferrum completed private placement in May 2015 and raised £0.5m gross. The company also entered into a Memorandum of Understanding (MOU) with Principle Monarchy Investments (PMI), where the latter may acquire up to 39% of Ferrum Iron Ore (Pty) Ltd (FIO), the Group’s Project holding company for ZAR142m, with a payment of ZAR30m. Post the payment of this amount the MOU would become legal, and the parties would enter into a new shareholders’ agreement for FIO.
Our view: Ferrum made significant progress in this quarter following the successful conduction of BFS for the Moonlight project and signing of MOU to strengthen the project. The company has already located the site for its mining activities for the assignment and has commenced the work on its pit design. Ferrum plans to use the latest drilling data to enhance the model for the mine and DR pellet centre at Thabazimbi. Its collaboration with PMI would bring in local expertise with the help of its connection with major engineering groups and institutions in South Africa. Further, the company’s marketing team has identified the target market segment to help in making the products as per the local needs. Overall, Ferrum is strongly positioned to benefit from its projects and is well placed to create additional value for its shareholders. In view of the above optimism, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Ferrum Crescent plc
Royal Dutch Shell (LON:RDSA) – Buy
Yesterday, Royal Dutch Shell declared its unaudited results for Q2 2015 and H1 2015. The company’s revenues decreased to US$3.4bn in Q2 2015 compared to US$5.1bn in Q2 2014 whereas the quarterly earnings excluding identified items (upstream, downstream and corporate and non-controlling interest) declined 37% to US$3.8bn. The CCS (current cost of supplies) EPS dipped to 0.61p in Q2 2015 from 0.97p in Q2 2014. The company’s cash flow from operating activities (CFO) reduced to US$6.1bn in Q2 as compared to US$8.6bn in Q2 2014. Royal declared a dividend of US$0.47 per share and US$0.94 per American Depositary Share, similar to Q2 2014. The company distributed dividends worth US$3bn in Q2 2015 with US$0.7bn settled under the Scrip Dividend Programme. On the operational front, Royal announced the acquisition of BG Group, the British oil and gas producer for a consideration of US$70bn in April 2015. In a separate announcement, Royal provided an update on its recent developments and combination with BG Group. The company kept its dividend commitment unchanged at US$1.88 per share in 2015 and at least US$1.88 per share in 2016 and also declared share buy-back programme of US$25bn between 2017 and 2020. Royal plans to reduce the operating costs by 10% to US$4bn with an expected 6,500 job cuts in 2015 along with a decrease in capital investment to US$7bn in 2015, 20% lower than the last year.
Our view: Royal delivered below par results majorly driven by the decreasing oil prices in the past few months. However, the company’s recent plans to reduce its operating costs by cutting 6,500 jobs and also decreasing its capital investments would help Royal remain competitive in a challenging environment. In addition, the company’s recent acquisition of BG Group is progressing well with timely regulatory filings and integration. Post the completion of transaction, we expect the company to cut spending in exploration re-structure its capital allocation and achieve better economies of scale owing to a good asset base. The company has been impacted by an industry wide problem but remains fundamentally strong to deliver good results in the long term owing to the recent measures taken. Therefore, we reiterate a Buy rating on the stock.
Merlin Entertainment (LON:MERL) – Buy
Yesterday, Merlin declared its interim results for the half year ended 27th June 2015. The company’s revenues increased 6.6% (constant currency) to £544m whereas the like-for-like (LFL) revenues advanced 2.8%. Growth was primarily led by rise in LFL revenues in the LEGOLAND Parks Operating Group and Midway Attractions Operating Group by 6.0% and 2.9%, respectively. However, the trading in theme parks group was impacted by the accident of Alton Towers Resort, with the LFL revenues for the segment declining by 2.0%. During the period, Merlin’s pre-tax profit rose to £49m from £40m in the previous year, resulting in an EPS of 3.5p against 2.8p last year. The net financing costs reduced 28.4% to £22m owing to the refinancing and £110m reduction in debt declared earlier. On the operational front, Merlin opened a lot of new attractions including Midway – New ‘Star Wars’ at Madame Tussauds London and Berlin, LEGOLAND Parks – LEGO ‘Friends’ in LEGOLAND Windsor, Florida and California, and Resort Theme Parks – The ‘Oblivion’ at Gardaland. The company transformed its theme parks to destination resorts as it opened a 152 room new themed hotel at LEGOLAND and a new 125 lodge ‘Enchanted Village’ at Alton Towers Resort. Merlin also opened six new Midway attractions in 2015 at different locations in London. Further, the company has three new parks in development stage in the LEGOLAND segment in Dubai (Q3 2016), Japan (Q2 2017) and Korea (2018). In addition, the company also announced an interim dividend of 2.1p, 5.0% higher than the previous year.
Our view: Merlin Entertainment delivered strong half yearly results owing to strong performances from LEGOLAND Parks Operating Group and Midway Attractions Operating Group. The company’s reduction in the financing costs helped them offset the impact of the recent accident in Alton Towers Resort. In addition, the company has committed support to the injured and plans to implement extra safety norms to improve its services. Further, Merlin continues to grow in its other segments by successfully launching two parks in the US and expects to expand further in new markets. Overall, Merlin seems to have a long term growth potential in view of its new attractive theme based parks that are complemented by the rising number of visitors. We believe the impact of the incident at Alton Towers Resort would be short-lived and the company would bounce back to high earnings once again as it remains the largest European entertainment company. Therefore, we maintain a Buy rating on the stock.
Millennium & Copthorne (LON:MLC) – Buy
Yesterday, Millennium and Copthorne announced its half year (H1) and quarterly (Q2) results for the period ended 30th June 2015. The company’s RevPAR increased 4.0% to £68.28m in H1 2015 largely due to higher average room rate. Overall revenues for H1 2015 jumped to £404m from £380m in H1 2014, and the revenues for the quarter rose 4.9% to £215m, led by an improvement in the US and Australasia regions. Australasia was the fastest developing region with a 15.9% upsurge to £45.90m in H1 2015, steered by higher occupancy and average room rate. The US segment saw a 7.1% increase to £73.7m for H1 with support from Novotel New York Times Square, progress in regional US, especially at the Millennium Harvest House Boulder, Millennium Knickerbocker Hotel Chicago and The McCormick Scottsdale. However, the company’s Asian segment witnessed a 10.3% decline owing to reduction in both occupancy and average room rate. Millennium’s pre-tax profit advanced 6.9% to £62m in H1 2015 resulting in an EPS of 11.2p against 9.4p in the previous year. LFL revenue and pre-tax profit H1 2015 increased 0.5% and 2.9%, respectively. The company has also declared an interim dividend of 2.08p in line with the previous year. On the operational front, Millennium completed refurbishments on the third to fifth floor guestrooms at Millennium Bailey’s Hotel London, with the remaining areas planned to be complete by October 2015. Meanwhile, the renovation work at Millennium Alaskan Hotel Anchorage is complete and it is now re branded as The Lakefront Anchorage.
Our view: Millennium is on the growth track with enhanced top line revenues led by substantial improvements in the major markets it serves. The rise in the RevPAR is a positive sign and with improving economy, better results may be expected in the upcoming quarters. Going ahead, the company plans to improve its service through further refurbishments of its major assets to enhance customer experience. We believe the company has good prospects owing to its huge asset base located globally and continuous measures taken to improve its services. In view of the overall optimism, we reiterate a Buy rating on the stock.
Economic News
Germany unemployment change
The number of people without a job in Germany increased by 9,000 on a seasonally adjusted basis to 2.8 million in July, the Federal Labour Agency said yesterday. Economists had forecasted unemployment to drop by 5,000 for the month. The seasonally adjusted unemployment rate remained unchanged at 6.4% in July.
Eurozone consumer confidence
The gauge of Eurozone consumer confidence declined to -7.1 in July compared with -5.6 in June and came in line with the preliminary estimates, the European Commission said yesterday. However, the economic confidence index improved to 104.0 in July from 103.5 in June, and the measure of industry confidence rose to -2.9 from -3.4.
Germany CPI
According to Destatis, Consumer price inflation (CPI) in the Germany stood at 0.2% m-o-m in July following a decline of 0.1% in the month of June and was in-line with economists’ projections. On y-o-y basis, consumer prices rose 0.2% y-o-y, following a 0.3% increase last month.
US GDP annualized
US real GDP grew at an annualised rate of 2.3% in Q2 2015, after rising a revised 0.6% in the preceding quarter, the Commerce Department stated yesterday. The reading came behind the market expectation of 2.5%.
US initial jobless claims
Initial jobless claims in the US increased by 12,000 to a seasonally adjusted 267,000 in the week ended 25th July, the Labor Department reported yesterday. Last week’s claims remained unrevised 255,000. Economists’ had expected a higher increase to 270,000. The four-week moving average fell to 274,750 from the previous week’s 278,500.