The Markets
Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 15.60 points down at 7:00 am.
New York: Wall Street ended in the green following recovery in oil prices and slight improvement in Chinese equity markets. The S&P 500 advanced 1.3%, led by gains in the energy sector.
Asia: Equities are trading mixed amid a strong handover from the US and China’s devaluation of its currency to combat an economic slowdown. The Nikkei 225 fell 0.3%, while the Hang Seng was trading 0.8% up at 7:00 am.
Continental Europe: Markets ended higher amid improvement in commodity prices and reports of a third bailout for Greece. Germany’s DAX and France’s CAC 40 rose 1.0% and 0.8%, respectively.
Crude Oil: Yesterday, prices of Brent and WTI and crude oil increased 3.7% and 2.5%, respectively. The spread between the two varieties stood at US$5.5 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.05% higher yesterday at 753.52. To read our latest research click here.
Today’s news
UK retail sales growth slows in July:BRC
As per the British Retail Consortium (BRC), like-for-like retail sales rose 1.2% m-o-m in July, after a 1.8% increase in June. On y-o-y basis, overall retail sales grew 2.2%, after rising 2.9% in the previous month.
China devalues yuan following weak economic data
The People’s Bank of China devalued the yuan by a record 1.9% amid decreasing exports and economic slowdown. The move is expected to make China’s exports cheaper and align the yuan with the movement in global markets .The yuan stood at 6.3273 to the US dollar compared with 6.2097 on Monday.
Company News
W Resources (LON:WRES) – Speculative Buy
Yesterday, W Resources announced the completion of its drilling campaign at Régua Mine in Northern Portugal. The tests from the drilling campaign have revealed high grade extensions to the north east and significant new extension of the orebody to the North West. Furthermore, five short holes at the centre of the orebody have defined the initial open pit mining area with high grade tungsten mineralisation at surface or close to surface. Plans are in progress to proceed on an initial shallow open pit mine design along with a second phase for a greater scale underground operation. Subsequently, optimal mine development plans will be designed besides the metallurgical and plant design work.
Our view: The aforementioned results suggest that the company’s drilling campaign at the Régua mine has been quite successful, surpassing the initial estimates. Not only were thick extensions identified to the North east and North West but the ore body also remains open at all the directions at depth. These results are now being included in the updated resource model. On the other hand, the company’s La Parrilla tungsten mine remains on track for production in 2016, the full mine is anticipated to be operational by 2018 and would produce at a rate of about 5,000 tonnes of tungsten trioxide and 400 tonnes of tin. Thus in view of the overall optimism surrounding the company, we reiterate a Speculative Buy rating on the stock.
Rockhopper Exploration (LON:RKH) – Speculative Buy
Yesterday, Rockhopper Exploration released an update on the Ombrina Mare project in Italy. The company informed that the Environment Impact Assessment (EIA) for the project has been approved by the Minister for the Environment and countersigned by the Ministry of Cultural Heritage. The decree is now due to be considered by the Ministry of Economic Development to complete the process for awarding the production concession for the project.
Our view: The aforementioned update takes Rockhopper a step closer towards the commencement of production at the Ombrina Mare project. The prospect is estimated to have around 26.5 Million barrels of oil equivalent (Mmboe) and the company plans to leverage on its 100% stake in the project to enhance Ombrina’s resources. Rockhopper also expects to invest in additional technical and engineering work at the site. In addition, the company’s recent exploration at the Isobel Deep exploration well 14/20-1 in the North Falkland Basin proved successful with discovery of substantial amount of oil. Further, to cope with the challenging market conditions, Rockhopper recently acquired the Mediterranean Oil and Gas to diversify into the Mediterranean and East African basin from its major operations in the Falkland basin. Overall, the company is comfortably placed with strong assets and good resources to maintain its momentum for the entire year. Given the above, we maintain a Speculative Buy rating on the stock.
Meggitt (LON:MGGT) – Buy
Meggitt announced that it has agreed to acquire the advanced composites businesses of Cobham for a cash consideration of US$200m, which is to be financed from existing sources. Cobham’s businesses comprising design, development and production of highly engineered aerospace composite engine components, radomes and complex secondary structures, would be integrated into Meggitt’s Polymers & Composites (MPC) division. Further, Cobham’s businesses operating facilities are located in the US and the UK and the revenues in 2014 stood at US$81.1m. The purchase price implies a multiple of 10x 2016e EBITDA.
Our view: With the above acquisition, Meggitt seems to have taken an important step ahead to bolster its composites capability. The combination of Meggitt’s MPC division with Cobham’s businesses is expected to create a perfect combination owing to the latter’s complementary business model. Meggitt stands to gain in materials and manufacturing technologies apart from enhancing its product offerings in complex composites. The deal would prove to be earnings accretive and is expected to deliver substantial cost savings by 2017. In January, Meggitt had purchased aerospace engineering company Precision Engine Controls Corporation for US$44.2m to widen its industrial valve capability. Thus in view of these acquisitions and the recent contract wins by the company; we retain our Buy on the stock.
Yesterday, Carillion informed that it was among the 19 suppliers to be selected by the UK Government for new Facilities Management Services Agreement. The agreement entails Total Facilities Management, Hard Facilities Management and Soft Facilities Management and aims to replace the current framework for facilities management contracts. The new Agreement would provide a more efficient procurement framework to the customers. The Government expects this to result in over £200m of savings to public sector customers. The Government plans to outsource between £1.3bn and £4.1bn of services using the new Agreement, until July 2019.
Our view: Carillion has cemented its position as a leading facilities provider to the public sector after winning the above contract. It was among the very few companies to win a contract in each of the three slots. Recently, the company’s half yearly trading update suggested that the company had shown considerable resilience in its performance despite challenging market situations. Later this month, the company expects to release revenue, margins and healthy cash flows in line with the expectations despite the slowdown in contract awards due to the UK General Election. Going ahead, the expected improvement in market conditions, rise in the number of orders and an increase in pipeline contracts would likely help the company achieve its target and remain competitive. Accordingly, we reiterate our Buy rating on the stock.
Esure Group (LON:ESUR) – Hold
Yesterday, Esure released its interim results for the six months ended 30th June2015. During the period, the company’s gross written premiums jumped 5.8% to £275.5m and the in-force policies improved 2.5% to 1.9 million. The combined operating ratio enhanced 4.9 percentage points to 95.8% owing to a reduction in favourable development of prior accident year reserves to 14.9% of net earned premiums. However, Esure’s underlying profit declined 21.3% to £46.5m and consequently the EPS slipped 20.4% to 9.0p. On the operational front, the company acquired Gocompare and owns 100% of the ordinary share capital of Gocompare and 100% control over the voting rights. Further, Esure also resumed its marketing campaign Gio Compario along with several other steps to improve the visibility of its business. The company declared an interim dividend of 4.2p (H1 2014: 5.1p) comprising of base dividend of 3p and special dividend of 1.2p to be paid on 16th October 2015.
Our view: Esure delivered decent half yearly results amid increasing car insurance costs and tough market conditions. The company’s recent acquisition of Gocompare, an online website to compare various vehicle, home and pet insurance, breakdown cover, utilities and financial products is expected to complement its business line and boost the earnings. However, Esure plans to increase the cost of car insurance premiums this year, to offset the rising number of personal injury claims in the first half. This move may reduce the customer count and the number of policies purchased by them owing to the increased premium costs. Going ahead, the claims environment for the motor market is expected to worsen which may hamper the earnings for the company. In view of the overall uncertainty in the market conditions, we reiterate a Hold rating on the stock.
Economic News
Eurozone Sentix Investor Confidence
According to a survey by Sentix, the Eurozone investor confidence index slipped to 18.4 in August from 18.5 in July. The reading lagged the market expectations of a rise to 20.2.