The Markets
Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 17.70 points down at 7:00 am.
New York: Wall Street ended in the red amid disappointing corporate earnings. The decline in commodity prices also hurt market sentiment. The S&P 500 fell 0.2%, with energy stocks losing the most. For the week, the markets improved 1.2%.
Asia: Equities are trading lower following a slump in the commodity markets. The drop in China’s purchasing manager index (PMI) to a two-year low in July further weighed on investor confidence. The Nikkei 225 fell 0.2%, while the Hang Seng was trading 0.9% down at 7:00am.
Continental Europe: Markets ended higher, tracking an improvement in the euro and positive reported earnings. France’s CAC 40 and Germany’s DAX advanced 0.7% and 0.5%, respectively.
Crude Oil: On Friday, WTI and Brent Crude Oil prices declined 2.9% and 2.1%, respectively. The spread between the two varieties stood at US$5.1 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.13% higher on Friday at 751.16. To read our latest research click here.
Today’s news
Greek financial markets to open today
Greek financial markets are set to open today after a five-week suspension, as the country enforced capital controls to reach a deal with creditors. Investors are permitted to buy only if they use funds transferred from abroad, cash-only deposits or money from existing brokerage accounts. Foreign investors are also allowed, provided they were active before controls were imposed.
Company News
Armadale Capital (LON:ACP) – Speculative Buy
Armadale Capital, the investment company focused on natural resource projects in Africa, announced today that a review of all previous metallurgical testwork has supported the development of a two Phase process route for gold recovery at its 678,000oz Mpokoto gold project in the Katanga Province of the Democratic Republic of the Congo. Armadale is targeting a 25,000oz of gold per annum over an initial nine year life of mine beginning in H1 2016m, with an average operation cost of US$647/oz. Based on the results, Phase 1 of the proposed recovery will process weathered and strongly oxidised ore through scrubbing, milling and a batch Knelson concentrator to recover the free gold and flotation to be used on the Knelson tailings with the concentrate being intensely cyanided. Phase 2 will involve the processing of transitional and fresh ore with a regrind ball mill added to grind the flotation concentrate and a Carbon-In-Leach (CIL) circuit will be added to leach the flotation tailings. Armadale expects the recoveries between 88% and 90% on the weathered ore and 84% on the transitional and fresh ore prior to the CIL circuit being added. Further testing will be completed to determine the effect of adding the CIL circuit to the treatment of the transitional and fresh ore.
Our view: Armadale continues to technically de-risk the Mpokoto gold project as it progresses towards production in 2016. A previously announced drill programme is to start imminently and could add additional resources to the existing 678,000oz. More importantly, with an agreement in place with Africa Mining Services to fund develop, construct and operate Mpokoto, the project is progressing rapidly. Thus in view of the progress to date, we maintain a Speculative Buy on the stock.
Beaufort Securities acts as broker to Armadale Capital PLC
Motive Television (LON:MTV) – Speculative Buy
On Friday, Motive Television informed that it’s fully owned subsidiary Motive Television Services has modified the service level agreement (SLA) with Sagemcom Broadband SAS of Rueil-Malmaison, France. The modifications to the SLA were made to change the definition of the NLS Library and include Motive software required for the 4K UHD competences in Sagemcom devices for Digiturk. The company gets a license royalty from Sagemcom based on the number of devices manufactured using Motive technology, while the specific terms of the SLA and licensing agreement remain confidential.
Our view: Motive’s changes to the SLA would increase the number of products produced by Sagemcom resulting in a rise in the royalty received. Earlier, the company also amended SLA with long-standing customer Digiturk to upgrade and extend the Content Express™ platform, providing a one-stop shop for digital terrestrial broadcasters, satellite, DTT cable pay television platforms, and Internet OTT content providers to offer new services. As per the latest reports, more than 190,000 set top boxes comprising of Motive’s technology have been used by Digiturk’s subscribers. The above improvements along with the recent BYOD partnership and an anticipated re-launch of TabletTV, are likely to maintain the growth momentum for the company. Thus, in wake of these developments, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as broker to Motive Television Plc
Inspired Energy Holdings (LON:INSE) – Speculative Buy
On Friday, Inspired Energy announced the completion of its acquisition of Wholesale Power UK Limited (WPUK), for an initial consideration of £2m through a cash payment of £1.5m and the issue of 4.6 million new ordinary shares in the capital of Inspired Energy. An additional sum of £0.75m is to be paid in three instalments of £0.25m each, if certain financial performance parameters are met for the years ending 31st October 2016 and 31st October 2017. WPUK is an energy procurement consultant from Blackpool providing energy solutions to UK corporates. Post the acquisition, the company’s corporate book order would surpass £20m. The consideration shares would rank pari passu in all respects and an application has already been made to London Stock Exchange for the admission of shares to AIM for trading, following which the company’s total share capital would be 433.4 billion ordinary shares of 0.125p each.
Our view: Inspired Energy’s acquisition of WPUK complements its plan of making strategic purchases to expand its range of services. The company is expected to improve its offerings to the core corporate customers by delivering them the best possible advice to reduce their energy costs and generate substantial savings. The acquisition also provides Inspired Energy an easy entry into new industry segments including leisure and logistics. Inspired plans to leverage on the highly skilled and experienced team of WPUK to increase its customer base and improve its market position. Earlier this year, Inspired Energy delivered strong results owing to its growth in corporate division and significant additions to the SME division. Going ahead, we expect the company to deliver strong earnings owing to its strong fundamentals and plans to seek attractive acquisition targets to spearhead its growth programme. In view of the overall optimism, we reiterate a Speculative Buy rating on the stock.
Beaufort Securities acts as broker to Inspired Energy Holdings plc
Parkmead Group (LON:PMG) – Speculative Buy
On Friday, Parkmead Group declared that it has been granted three new licences covering three offshore blocks in the second tranche of UK’s 28th Licensing Round. Two of the above licences are located in West of Shetland, to be operated by Parkmead with the help of its partners Atlantic Petroleum and Dyas. The first of them is Block 205/13 (Parkmead 56% and operator) located to the east of Parkmead operated Block 205/12, having crucial Davaar prospect. The second is the Block 205/19b (Parkmead 43% and operator) located to the North of Parkmead’s current West of Shetland blocks, comprising the huge Cretaceous Eddystone prospect. The company’s third licence is Block 48/8b (Parkmead 50%) located around 20km south east of the Babbage gas field in the Southern North Sea, to be operated by its partner Atlantic Petroleum. The block has seven prospects, with Selene as the most important one. The grant of these licences follows Parkmead’s award of six licences covering nine offshore blocks in the first tranche of 28th Round awards.
Our view: The 28th Round awards have proven to be successful for Parkmead as now it possesses a total of 12 offshore blocks in the UK following the grant of the new licences. These blocks would add to the company’s present solid asset base of oil and gas and are expected to improve the exploration prospects along with development of its main Perth-Dolphin-Lowlander (PDL) oil hub. In addition, the company plans to take advantage of its technical expertise in these regions as it has previously worked in these regions with considerable success in the Southern Gas Basin with gas discoveries at Platypus and Pharos. Going ahead, Parkmead plans to look for additional acquisition opportunities to maintain its market in the challenging oil sector. In view of the above argument, we reiterate a Speculative Buy rating on the stock.
On Friday, JD Sports released a trading update for the first half of 2015. The company delivered strong results, with the like-for-like sales surpassing the management’s estimates. However, JD Sports reported slight decline in margins in the Euro denominated business owing to the weak Euro. The company expects its pre-tax profit for the year to be around £110m, 10% ahead of the market expectations. JD Sports would declare its results for the half year ended 1st August 2015, on 16th September 2015.
Our view: JD Sports has started the first half on a positive note aided by improving economic scenario and optimistic business conditions. The company’s results were driven by exclusive premium brand offerings that continue to attract customers and suppliers alike. Further, JD Sports’ high standards of visual merchandising provided a robust platform for profitable growth, at home and international markets. Overall, JD Sports is well poised financially as well as operationally to deliver robust revenues and earnings growth for the entire year. We believe that the improving macroeconomic scenario and rising real wages in the UK would help the company maintain its earnings growth rate for the rest of the year. Therefore, we retain a Buy rating on the stock.
Lloyds Banking Group (LON:LLOY) – Hold
On Friday, Lloyds declared its half yearly results for the six months ended 30th June 2015. During the period, the total income for the company increased 2% to £9.0bn led by a 6% rise in the net interest income to £5.7bn. The underlying profit advanced 15% to £4.3bn and the statutory pre-tax profit jumped 38% to £1.2bn, despite charges of £1.4bn for PPI and £660m relating to the disposal of TSB. The company’s overall profit for the period advanced 32% to £925m and the underlying earnings per share improved 0.5p to 4.6p in H1 2015. Net lending was up 5% to £1.5bn and net interest margin for the full year improved to around 2.6%. On the operational front, the company continued to invest in the digital division and simplifying operating processes by automation to improve customer satisfaction. In addition, the company remains on track to deliver the targeted savings of £1bn by the end of 2017. Meanwhile, the company also completed the sale of TSB to Banco Sabadell to fulfil its commitment to the European Commission ahead of the mandated deadline. The UK government’s stake in the company reduced to less than 15% as of 15th July 2015. The company expects the other income to remain almost unchanged and the cost to income ratio to decline for 2015. The company also declared an interim dividend of 0.75p per share amounting to £535m.
Our view: The upbeat half result is testimony to the fact that the company is finally out of its recessionary days and heading towards attaining complete ownership of its banking operations. As on 15th July 2015, the UK government had reduced its stake in the company to less than 15%. Lloyds had run into trouble during the financial crisis of 2008, following which, the UK government stepped in and bailed it out in return for a 39% stake. Since late 2013, the UK government gradually began to reduce its stake in the bank in order to restore its complete private ownership. Recently, the bank signalled a return to normal operations with a profitable year and declaration of a dividend. Moreover, the bank also made several changes to the future strategies by offloading several non-core business assets and streamlining the focus to its key business territories in six countries from 30 earlier. Lloyds Bank introduced several process changes comprising more efficient and customer friendly systems. However, consideraing that Lloyds is already a mature player in the banking sector (particularly in the UK), and is going through a major transformational phase, we are a little uncertain of a dramatic upside change in its growth prospects. We retain a Hold on the stock.
International Consolidated Airlines (LON:IAG) – Hold
On Friday, International Consolidated Airlines (IAG) announced its results for the half year (H1) ended 30th June 2015. The revenues for Q2 2015 advanced 11.2% to €5,656m with the passenger unit revenue increasing 5.0%. Operating profit for the half year jumped to €555m from €230m in H1 2014 and advanced to €530m in Q2 2015 (Q2 2014: €380m). The pre-tax profit for H1 rose to €412m from €155m in H1 2014 leading to a rise in EPS to 15.8p from 4.2p in the previous year. The fuel and non-fuel unit costs for the quarter declined 3.0% and 3.2%, respectively. The total cash on 30th June 2015 stood at €6.4bn as compared to €1.4bn at end of 2014. On the operational front, IAG announced the take-over of Ireland’s Aer Lingus Group for a consideration of €1.4bn. IAG is offering €2.55 a share in an all-cash deal, involving a share offer and a cash dividend of five European cents per share. IAG and AERL Holding waived the 90% acceptance condition and confirmed the Offer is now unconditional as to acceptances.
Our view: IAG delivered strong half year results owing to the reduced costs and improved passenger count. The company made most of its earnings in the second quarter due to sharp drop in oil prices that led to lower costs. Owing to its strong balance sheet, IAG has planned to acquire Aer Lingus Group to improve its market share in European belt. Further, IAG plans to add 8 Airbus Group SE A350 long-range jets for Iberia to change older planes, and add five A330 wide bodies to increase the capacity of Spanish carrier. However, the company’s share prices have risen considerably in the past one year, thereby providing limited scope for upside potential. In addition, the company’s bid to acquire Aer Lingus is still witnessing some uncertainty with Ryanair’ formal commitment to sell its almost 30% stake in Aer Lingus. We would like to wait and watch the impact of the acquisition of the company’s future prospects and therefore maintain our Hold rating on the stock.
Economic News
Eurozone CPI estimate
Consumer price inflation (CPI) in the Eurozone increased 0.2% y-o-y in July following a similar reading in June, and was in line with economists’ projections, as per the estimates published by Eurostat on Friday. Core prices, excluding those of energy, food, and tobacco, improved 1.0% y-o-y, missing the market expectations of an increase of 0.8%.
US Chicago purchasing manager
The Chicago purchasing managers’ index (PMI) improved to 54.7 in July from a reading of 49.4 in June, missing the expected reading of 50.8, data from MNI Indicators suggested on Friday.
US University of Michigan sentiment
The US University of Michigan’s consumer sentiment index for July decreased to 93.1, from a 96.1 in June, data indicated on Friday. Economists expected a reading of 94.0. The consumer expectations index, which closely forecasts the direction of consumer spending, fell to 84.1 from 87.8, whereas the current economic conditions index declined to 107.2 from 108.9.