The Markets
Market opening: Markets are likely to open higher today. FTSE 100 futures were trading 17.0 points up at 7:00 am.
New York: Wall Street moderately declined on new hints of an interest rate hike in September by a Fed president, Dennis Lockhart. Investors largely ignored gains in June factory orders and oil prices. The S&P 500 shed 0.2%, with utilities leading the laggards.
Asia: Equities pared initial losses to trade higher after China’s services PMI expanded to an 11-month high of 53.8. The Nikkei 225 advanced 0.5% by close, whereas the Hang Seng was trading 0.3% higher at 7:00am.
Continental Europe: Markets turned mixed yesterday eyeing the weakness in the recently reopened Greek stock market. Germany’s DAX added 0.1% while the France’s CAC 40 narrowed 0.2%.
Crude Oil: Yesterday, WTI and Brent Crude Oil prices increased 1.3% and 0.9%, respectively. The spread between the two varieties stood at US$4.3 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.46% higher yesterday at 755.09. To read our latest research click here.
Today’s news
Shop prices in UK fall in July : BRC
According to the British Retail Consortium, shop prices in the UK fell 1.4% y-o-y in July compared with a 1.3% drop in June. The decline was ascribed to cheaper clothing merchandise with large discounts. On the other hand, food prices gained 0.1% y-o-y after falling 0.4% y-o-y in June.
UK economic growth expected to slow in Q3 2015: NIESR
The National Institute of Economic and Social Research (NIESR) lowered its previous growth guidance for the UK to 0.4% from 0.8% for three months to September due to weakness in the manufacturing sector and lower productivity growth. However, the institute maintained its annual growth forecast for 2015 at 2.5%.
Company News
Ariana Resources (LON:AAU) – Speculative Buy
Yesterday, Ariana Resources provided an update on the progress of the Kiziltepe Sector of the Red Rabbit Gold Project in western Turkey, built in collaboration with Proccea Construction Co (JV). The company has made forestry permit payments amounting to US$0.96m to the Department of Forestry. Turkiye Finans Katilim Bankasi A.S., a project financing company has released the initial funds to suffice project cash-flow requirements up to July 2015. Ariana successfully acquired critical land with the help of its JV and is in the process of adding several small parcels. In addition, last round of talks commenced for Turkish supplied plant components and other long lead orders with foreign suppliers were placed. Further, Ariana received final mining contractor quotes and expects to decide on a contractor shortly. The company expects to start with the construction shortly and remains on track to deliver first gold production in H2 2016.
Our view: Ariana continues to make progress in the Red Rabbit Gold Project, a huge resource potential currently having JORC compliant resource of 475,000oz (ounces) of gold equivalent. Kepez West and Karakavak are high priority resource development areas located close to Kiziltepe, expected to have various important drilling targets. The aforementioned update provides the company with initial funds along with the essential pre-requisites required to continue its planned exploration and resource development work at the site. Going ahead, Ariana plans to carry out the drilling programmes in the prospects along with the construction of Kiziltepe mine. Thus, in view of the above developments towards the construction of mine at the Kiziltepe Sector and expected production next year, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Ariana Resources plc
Xtract Resources (LON:XTR) – Speculative Buy
Xtract Resources, the diversified exploration and development company focused on production from its Chepica copper and gold mine in Chile, announced yesterday that it has intersected a second high grade gold bearing vein (Vein B) grading 3.9g/t over 4.1m at its Colin Mining area near the Chepica mine. This new discovery follows on from the update on 15 July 2015 in which the company announced the development at the Colin Mining area having had intersected a new gold bearing system (Vein A) grading 4.2g/t over a width of 3.5m. Development of Vein B is currently underway on level 5 approximately 150m below the surface with 10m being exposed along strike so far. Vein B can be mined from surface to below level 5 to a projected depth of an additional 120m along dip. Xtract has projected Vein B having a strike length of 250m and dipping 75 degrees. The same declined used for access to Vein A can also be used for Vein B. Management believes that the Vein B system could quadruple the previous estimates on contained gold in the area and significantly increase the Life of Mine (LoM) in excess of 20 years for the Colin Mine area.
Our view: We continued to be encouraged with the new discoveries of mineralised veins within the greater Chepica Mine area. Not only will these high grade discoveries increase the mine flexibility the additional ore should significantly add to the existing resources and increase the LoM. Xtract is planning an initial drill program of eight drill holes from surface representing 1,500m to define all gold bearing veins within the Colin Mine area. We look forward to continued new discoveries and updated resource estimation for the entire Chepica mine area. In the meantime, we maintain our Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Xtract Resources plc
Sirius Minerals (LON:SXX) – Speculative Buy
Yesterday, Sirius Minerals announced that it received results for its lately conducted trials on soybeans and corn, indicating that polyhalite is an effective fertilizer for both crops. The soybean trials were performed by Texas A&M University and the University of Sao Paulo, and the corn study was carried out by North Dakota State University. The results showed that polyhalite enhanced soybean yield up to 16% compared to potash chloride or potash sulphate whereas the corn yields were improved by 3% as compared to potash chloride and ammonium sulphate. In a separate announcement, Sirius confirmed the receipt of £9.2m from the exercise of share warrants issued last year. The company has converted a total of 51.2million ordinary shares till date. Sirius’s share capital now stands at 2,216.1 million ordinary shares with voting rights.
Our view: Sirius Minerals is a potash development company focused on the York Potash Project in the UK. The Project has a JORC compliant Probable Mineral Reserve of 250 million tonnes of 87.8% polyhalite. The company’s recent trials have been successful resulting in enhanced yields for both the crops through the use of polyhalite. We expect the yields to facilitate substantial savings and also boost overall earnings. Going ahead, the company plans to expand the capacity from 6.5 million tonnes a year to 10 million tonnes a year. In view of the above argument, we reiterate a Speculative Buy rating on the stock.
Travis Perkins (LON:TPK) – Buy
Yesterday, Travis Perkins announced its interim results for the six-month period ended 30th June 2015. Revenues rose 7.8% y-o-y to £2,943m with like-for-like (LFL) revenue up 5.7% owing to robust performance across all divisions, opening of new branches and the inclusion of Primaflow and Rudridge into the results. General Merchanting division posted a revenue increase of 7.8% year-on-year driven by continued market outperformance with particularly strong growth witnessed in heavyside categories. Property profits for the division, however, reduced 87.5% to £1m owing to profit recognition from the St. Pancras branch development in 2014. Revenues for Plumbing & Heating division reduced slightly, impacted by intense market conditions pressurising sale prices, the non-recurrence of sales linked to the Energy Company Obligation (ECO) Scheme, and disruption from the re-segmentation programme. LFL sales growth, however, was positive in the second quarter and is expected to continue through 2015. The Contracts division revenue surged 17.9% y-o-y driven by improved performance in Keyline and CCF businesses, both businesses commanding a significant market share. The company continued to outperform the market in the Consumer division too where revenues soared 8.6% year-on-year to £693m with LFL sales growth consistently over 6% through the first half of the year. Adjusted operating profit, excluding the impact of property profits, stood at £182m, up by 9.0% over same period last year. Travis Perkins hiked the half year dividend to 14.75p per share, up 20.4%, signifying favourable future growth prospects.
Our view: The company’s half yearly revenues grew strongly, aided by encouraging demand that continued to outpace supply. Robust growth in all the divisions along with opening of news format stores in the first half helped the company post favourable results. Moreover, new trading locations were added and the capital investment was doubled to expand the branch network, improve customer propositions and infrastructure, to drive market performance and grow returns to shareholders over the long-term. The company continues to rebrand and upgrade its plumbing outlets where it faces intense competition. Furthermore, a strong cash flow position provides an assurance of Travis’ ability to fund its five-year strategic investment plan. Therefore, in view of the above and the dividend hike, we reiterate a Buy rating on the stock.
Yesterday, Fresnillo announced its interim results for the six-month period ended 30th June 2015. Revenues were up 11.1% y-o-y to US$ 23.7bn driven by 10.6% increase in silver production and a whopping 37% increase in gold production. While silver production rose on account of the commencement of operations of Saucito II plant, the increase in gold production was primarily contributed by the Herradura plant which resumed operations following a temporary suspension. The start of the dynamic leaching plant, which became fully operational during the period, also enabled higher production. The production from other plants, however, remained pressurised following operational problems as a result of a lower ore grade used. Moreover, a noteworthy decline in gold and silver prices affected the results. As a result, the profit for the period decreased 44.3% y-o-y to US$76.4m. Capital expenditure for the company soared 8.1% y-o-y including Investments in the San Julián project, construction of leaching pads at Herradura and Noche Buena, operational development at Fresnillo and Ciénega, purchase of mobile equipment components for Herradura and Ciénega and acquisition of equipment for the expansion of the Merrill Crowe plant at Herradura. The company declared a dividend of US$ 0.02 per share, a decrease of 58% from the same period last year.
Our view: Fresnillo put up a resilient performance in wake of the challenging pricing environment for metals. The results were weighed down by the instability in operations, increased sales cost associated with higher depreciation and a variation in work in progress due to smaller rise in inventories for H1 2015. A reduced capital expenditure estimate to US$570m vis-à-vis the previous expectation of US$700m, and deferring US$130m of the planned US$700m until 2016, add to the concern. The company, however, maintained a strong balance sheet with an increase in cash and cash equivalents. In addition, the production of gold and silver remains on track for the full year. Thus, in light of the slightly better-than-expected results we may consider a rating upgrade in the future but retain our Hold rating for now.
Direct Line Insurance (LON:DLG) – Hold
Direct Line announced its interim results for the six-month period ended 30th June 2015. Gross written premium from ongoing operations improved 0.4% to £1,552.0m; where motor and home own brand in-force policies remained broadly stable. Operating profit from ongoing operations increased 42.5% to £335.8m. The growth can be attributed to successful investments in brand differentiation efforts, through repositioning of Direct Line and Churchill, improved customer services resulting in increased retention rates and Net Promoter Scores in Personal Lines. The company also completed the sale of its International division comprising the Italian and German operations, to Mapfre S.A resulting in proceeds of £438.1m. Consequently, Direct Line returned the proceeds via a special interim dividend of 27.5 pence per share on 24th July 2015. The company also declared an interim dividend of 4.6p, representing a 4.5% growth y-o-y.
Our view: The company’s focus on operating efficiency and disciplined underwriting in competitive markets, among other improvements led to improved customer retention rates and net promoter score. The company was further helped by the absence of claims from major weather events and higher than expected prior-year reserve releases, that resulted in higher operating profit from ongoing operations. However, the highly volatile market with modest price rises in the Motor market and price deflation in the Home market remain a concern. Against this backdrop, the company has adopted a cautious approach to carefully manage the trade-off between margin and volumes. Meanwhile, for the company continues to seek potential investments for increasing future capability and improving efficiencies. We would like to wait for further improvement in the company’s insurance business and thus reiterate our Hold rating on the stock.
Economic News
UK House Prices
As per Nationwide’s latest report, house prices in the UK increased 0.4% m-o-m in July, matching the market expectation and offsetting the 0.2% decline in the previous month. On a y-o-y basis, the growth rate accelerated to 3.5% y-o-y from 3.3% y-o-y in June.
US factory orders
US factory orders increased 1.8% m-o-m in June after dropping 1.1% in May, the US Department of Commerce said yesterday. The reading was in line with the economists’ forecast for the month. Excluding orders for transportation equipment, factory orders increased 0.5% in June.