The Markets
Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 14.40 points down at 7:00 am.
New York: Wall Street ended in the red amid mixed corporate earnings, despite better-than-expected data on housing starts.The S&P 500 slipped 0.3%, with materials losing the most.
Asia: Equities are trading lower, taking cues from global indices. The sharp fall in Chinese stocks weighed on investor sentiment. The Nikkei 225 fell 1.6% and the Hang Seng was trading 1.1% down at 7:00 am.
Continental Europe: Markets ended lower amid growing fears of economic slowdown in China. The continuous slump in metal prices further dampened investor confidence. France’s CAC 40 and Germany’s DAX dropped 0.3% and 0.2%, respectively.
Crude Oil: Yesterday, prices of WTI and Brent oil improved 1.8% and 0.1%, respectively. The spread between the two varieties stood at US$6.2 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.05% higher yesterday at 751.18.
Today’s news
Germany to vote on Greek bailout today
The German parliament would vote on Greece’s third bailout deal today. Chancellor Angela Merkel and her ministers expect the International Monetary Fund (IMF) to assure its participation in the deal. However, the IMF stated it would only commit after evaluating Greece’s progress in October.
Company news
DekelOil Public (LON:DKL) – Speculative Buy
Yesterday, DekelOil informed that it has been accepted as a supplier to Projet d’Appui au Secteur de l’Agriculture de Côte d’Ivoire project (PSAC), which is 70% owned by the World Bank and International Finance Corporation (IFC). The balance 30% shares of PSAC are held by local Inter-professional Association of Oil-Palm Industry. As per the agreement, PSAC would subsidize 50% of DekelOil’s costs related to preparation of nursery plants for sale to smallholders. The company also agreed to grow 140,000 plants in its nursery at Ayenouan in 2015 and 420,000 plants in 2016. PSAC plans to plant around 10,000 hectares (ha) of palm plantations in the region and also begin a pilot zone in the company’s operating region to improve the quality of roads and provide 5,000 ha of land for basic operations.
Our view: The aforementioned update provides DekelOil an opportunity to work in the PSAC project. The company would benefit from its partners, World Bank and IFC, to expand and improve its share in the fast growing palm oil industry. The project would not only help DekelOil, which has a world-class nursery with a 1 million seedlings a year capacity, but also support thousands of local smallholders, communities and families in the region. Further, DekelOil is on track to commence production at Ayenouan palm oil project in Côte d’Ivoire. The region has been a promising destination for palm oil developers and still has a lot of potential for future expansion. The company is well placed to commence production by the year end owing to the advancement in operations supported by a strong local response. DekelOil produced 21,836 tonnes of crude palm oil (CPO) in the first half of 2015, up 53% over previous year’s overall production of 14,242 tonnes as per the recent trading update. In spate of the above developments, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to DekelOil Public
Mariana Resources (LON:MARL) – Speculative Buy
Mariana, the exploration and development company with an extensive portfolio of gold, silver and copper projects in South America and Turkey, yesterday announced its maiden mineral resource estimate (MRE) on its Hot Maden project in north-eastern Turkey. The JORC (Code 2012) compliant MRE was prepared by independent mining consultants RungePincoMinarco (RPM) and was based on the 17 diamond drill holes drilled as at 25th June 2015. Drilling to date has been completed by Mariana’s JV partner Lidya Madencilik Sanayi ve Ticaret A.S (Lydia) earning in up to 70% interest in the Hot Maden project. The total maiden resource estimate is 8.4Mt grading 8g/t Au and 2% Cu which is equivalent to 2.9Moz Au at gold equivalent (Au eq) grade of 10.9g/t (based on current spot prices). On an Au eq basis the indicated resources total 4.7Mt grading 13.1g/t and the inferred resources total 3.7Mt grading 8.0g/t. Of note is the ultra-high grade zone (within the Main Zone) that has a total resource of 1.4Mt grading 36.2g/t Au eq. Mariana’s attributable gold ounce equivalent is 900,000oz, assuming Lydia exercises its exclusive right to earn in up to 70% by spending US$2.5m in exploration expenses and a US$0.5m cash payment within a 48 month period as per the Definitive Agreement signed on 24th June 2014.
Our view: The exceptional maiden resource estimate of 2.9Moz Au eq grading 10.9g/t Au eq (based on current spot prices and weighted average) is an important milestone for the company and its JV partner. Of note is that already 68% of the gold equivalent resource is within the Indicated category, which suggests to us a high degree of confidence of the continuity of mineralisation. We are also encouraged with the rapid progress from initial discovery to compliant resource estimate over a very short time period of six months. More importantly, the MRE was completed on just 17 drill holes and remains open towards the South, North and at depth. We also note that the deposit contains significant Zn mineralisation that was excluded from the initial mineral estimate. We look forward to further drill results and the forthcoming technical report from this potentially world class deposit. In the meantime, we reiterate our Speculative Buy on the stock.
Yesterday, Persimmon announced its results for the half year ended 30th June 2015. During the period, revenues soared 11% y-o-y to £1.33bn due to strong growth in home sales. Legal completions rose 7% to 6,855 new homes while the average selling price increased to £194,378 from £186,970 in H1 2014. The company’s pre-tax profit jumped 31% to £272.8m resulting in an EPS of 78.6p versus 54.8p. The net free cash generation advanced to £191m from £122m in H1 2014 and the net cash during the period stood at £278m. The company’s current forward sales are 12% up at over £1.71bn against £1.53bn in H1 2014. On the operational front, Persimmon secured 11,539 plots in the first half taking the total to 92,404 plots. The company secured planning approval for 2,974 plots converted in H1 2015. Persimmon completed its third payment of surplus capital under the Capital Return Plan and paid £291m to the shareholders on 2nd April 2015.
Our view: Persimmon delivered solid first half results led by growth in homes sold and higher average selling prices. The strong performance was aided by the availability of competitive mortgage lending and continued growth in employment with rising real wages. The company’s performance was in line with the ten year strategic plan launched in 2012. Persimmon possesses a strong balance sheet as it continues to repay the shareholders through its Capital Return Plan. Given the positive market conditions prevailing, we maintain a Buy rating on the stock.
McColl’s Retail Group (LON:MCLS) – Hold
Yesterday, McColl’s Retail Group informed it has signed £85m revolving credit facility and a £15m accordion to replace its existing bank facilities which were due to expire in July 2018. The arrangement has been provided by four banks, namely, Barclays Bank, Royal Bank of Scotland, Santander UK and the AIB Group. The new facilities would be in until July 2020, with margins at a lower cost than the existing arrangements.
Our view: The extension of existing facilities provides McColl’s with medium-term funds to implement its plans. Recently, the company also delivered good half yearly results with a focus on convenience store expansion. However, the UK’s supermarkets are going through a tough time due to increased competition from the German discounters and online supermarkets. Therefore, in view of the uncertainty in McColl’s prospects in the near future, we downgrade the rating to a Hold.
Wood Group (LON:WG.) – Speculative Buy
Yesterday, Wood Group declared its half yearly (H1) results for the period ended 30th June 2015. During the period, the revenues dropped to US$3.0bn from US$3.8bn in H1 2014. However, EBITDA margin improved to 7.4% from 6.5% in the previous year due to overhead costs savings of US$40m. Pre-tax profit slipped 14.3% to US$156.3m leading to a drop in EPS to 40.1 cents from 44.4 cents in H1 2014. On the operational front, Wood focused on improving efficiency, reducing project costs and better utilization. The company secured new long-term awards in the North Sea for Antin, Gabon for Shell in PSN and in Saudi Arabia and Mexico for Engineering. Further, the company declared an interim dividend of 9.8 cents (H1 2014: 8.9 cents) up 10.1%, to be paid on 24th September 2015. In a separate announcement, Wood informed that it has entered into a large contract with Shell for five years to provide services to four onshore fields in Gabon. It, however, did not disclose the value of the contract.
Our view: Despite the challenging market conditions, Wood delivered a decent half yearly performance. The company was able to cope-up fairly well with the difficult situation by adopting a series of cost saving and efficiency building measures. Wood trimmed its workforce by 13%, reduced project costs and pushed for better utilization. In fact, Wood’s guidance for the entire year remains unchanged due to its severe cost control measures to offset pricing pressure and lower activity in the oil and gas sector. Furthermore, the agreement with Shell would help the company to optimize cost efficiency and production across the assets in Rabi, Gamba, Toucan and Koula. Recently, Wood has also been awarded a three-year offshore engineering blanket order by PEMEX Procurement International for field development in Mexico’s Gulf of Mexico waters. Therefore, the company seems well placed both financially as well as operationally in terms of its recent awards and contracts. We reiterate a Speculative Buy.
Avanti Communications (LON:AVN) – Buy
Yesterday, Avanti informed that it has completed financing for its HYLAS 4 satellite. The company has placed US$125m in senior secured notes due in 2019. The notes were issued at a small discount to current trading price of the company’s notes with a coupon of 10%. The investor group was led and managed by MAST Capital Management, a Boston based investment firm. HYLAS 4 is on track for launch in early 2017 and would finish company’s coverage in the EMEA region. Further, Avanti also issued 3.6 million ordinary shares at 200.65p per share to raise around £7.2m to meet the demand from bond investors. An application has been made to the London Stock Exchange for the new shares to be admitted to trading on AIM. Post the admission of shares, the total number of Ordinary Shares with voting rights admitted to trading on AIM will be 145.4 million.
Our view: The completion of funding for HYLAS 4 satellite and raising of capital through issue of new shares brings Avanti closer to its dream of making a commercial launch of services in 2017. In addition, as per the latest trading update the company has won several distribution partners and improved existing relationships to access the huge latent demand for connectivity in high growth markets. A number of significant contracts, including Broadband, Enterprise and Government sectors, were also added to the company’s kitty in 2015. Further, Avanti possesses a patent protected, cloud-based flexible customer interface and has made further investment of US$1.2bn in the network capabilities comprising satellites, ground stations, data centres and a fibre ring. Given its strong position and incremental opportunities in the pipeline, we expect the company to maintain its on-going momentum in the near future. Therefore, we reiterate a Buy rating on the stock.
Economic News
UK CPI
The UK consumer price index (CPI) dropped 0.2% m-o-m in July, following a flat reading in June, the Office for National Statistics (ONS) said yesterday. The markets had expected the CPI to fall by 0.3%. On y-o-y basis, inflation was recorded at 0.1% in July, after a flat reading in June. Core consumer price inflation – which excludes energy, food, and tobacco – stood at 1.2% y-o-y in July, following a 0.8% increase in June.
UK PPI
The UK producer price index (PPI) output slipped 0.1% m-o-m in July, following a similar drop in June, the Office for National Statistics said yesterday. The reading came in line with the market expectations. On y-o-y basis, output prices were down 1.6% in July, following a similar decline in June. The markets expected the prices to fall by 1.5%.
US housing starts
US housing starts rose 0.2% m-o-m to a seasonally adjusted annual rate of 1.21 million units in July, the Commerce department said yesterday. This is the highest number since October 2007. The reading surpassed the market expected 1.19 million units.