The Markets
Market opening: Markets are likely to open higher today. FTSE 100 futures were trading 92 points up at 7:00 am.
New York: Wall Street ended in the red after a volatile trading session yesterday, despite positive data on new home sales and consumer confidence. Moreover, investors ignored Chinese central bank’s decision to cut interest rates to stabilise the markets. The S&P 500 fell 1.4%, dragged down by utility stocks.
Asia: Equities are trading higher amid stability in China’s markets due to the People’s Bank of China (PBOC)’s decision to cut interest rates. Furthermore, a rise in oil prices boosted investor confidence. The Nikkei 225 added 3.3%, while the Hang Seng was trading 0.1% up at 7:00 am.
Continental Europe: Markets ended higher on bargain hunting by investors. In addition, PBOC’s move to cut rates by 25 basis points, along with an increase in the money available for lending, fuelled buying. Germany’s DAX and France’s CAC 40 jumped 5.0% and 4.1%, respectively.
Crude Oil: Yesterday, WTI and Brent oil prices improved 2.8% and 1.2%, respectively. The spread between the two varieties stood at US$3.9 per barrel.
UK small caps: The FTSE AIM All-Share index closed 2.09% higher yesterday at 717.06.
Today’s news
China’s central bank cuts interest rates
Yesterday, PBOC reduced its one-year benchmark lending rate by 25 basis points to 4.6%, its fifth rate cut since November 2014. The central bank also reduced the reserve requirement ratio by 0.5%. These measures are aimed at boosting the markets and improving economic conditions.
Company News
DekelOil (LON:DKL) – Speculative Buy
Yesterday, DekelOil Public Limited provided an update regarding its progress towards becoming a certified producer of palm oil in line with the standards set by the Round Table for Sustainable Palm Oil (RSPO). RSPO is a globally recognised certification standard for sustainable palm oil and DekelOil has been a member of the organisation since 2008. The company plans to become the first RSPO certified, fully functioning producer of crude palm oil in Cote d’Ivoire and to be among the first in West Africa. The Mill is anticipated to be certified first with the Company’s oil palm estates to be certified within three years of the completion of the Mill certification. The company has also engaged with an Oxford based consulting company, Proforest, to seek assistance for implementation of social environmental programmes to prepare its Milling operations and oil palm estates for certification. A certification committee has also been formed to implement the detailed action plan prepared by Proforest.
Our view: DekelOil is likely to be benefitted by the successful membership application with RSPO as it will give the company an edge over its peers as a responsible and credible palm-oil producer. The progress update comes on the back of DekelOil’s recent appointment as an approved supplier to a World Bank-backed programme. Both these developments demonstrate the increasing recognition the company’s projects are receiving from key international organisations. Of late the company has also upgraded its facilities at the Ayenouan palm oil project with the construction of the new Kernel Crushing plant. In addition, DekelOil’s upgradation of the logistics system has given a major boost to the company’s overall efficiency in receiving the feedstock for processing. Further, West Africa seems to be a promising destination for palm oil developers and continues to attract those who are seeking future expansion. Going ahead, we expect a sharp rise in the company’s profitability due to combined production from the existing plants and the new KCP. In view of the above argument, we reiterate Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to DekelOil plc
Antofagasta (LON:ANTO) – Hold
Yesterday, Antofagasta released its interim results for the period ended 30 June 2015. Group revenues fell 31.4% to US$1.79bn driven by reduced copper prices and decline in sales volume. EBITDA dropped 48.6% y-o-y to US$561.6m and the pre-tax profit decreased to US$297.3m from US$820.6m. Consequently, basic EPS from continuing operations was USc8.8, a decrease of 72% from H1 2014. Net cash costs for H1 2015 were US$1.53 per pound, 4.8% higher than the same period last year. During the period, copper sales slipped 15.5% to 290kt, similarly gold sales fell 15.3% to 106koz however, molybdenum sales increased 37.5% to 4.4kt. Meanwhile, copper production declined 12.9% to 303.4kt, largely due to lower grades and lower throughput and recoveries at Los Pelambres. Group gold production was 112.5koz 9% lower than H1 2015 however, molybdenum production was higher at and 4.7kt compared with 3.3kt in H1 2014 on the back of higher grades being mined during Q2. Among the growth projects, Antucoya’s first production was delayed to the end of Q3 2015 due to commissioning issues related to the crushing circuit. As a result, Group full year production guidance was reduced to 665kt from 695kt. Construction is underway at the Encuentro Oxides project, with production expected in late 2016. Feasibility study on the molybdenum plant at Centinela was completed with first production expected in Q1 2017. During the period Antofagasta acquired a 50% interest in the Zaldivar copper mine in Chile from Barrick Gold for a total consideration of US$1.0bn in cash and is expected to be accretive to Antofagasta’s earnings and cash flow per share. Although down from USc11.7 per share in H1 2014, the Group declared a H1 2015 dividend of USc3.1 per share, representing a 35% pay-out ratio of H1 2015 net earnings.
Our view: During H1 2015, Antofagasta experienced a significant decline in revenue that severely limited the company’s ability to generate higher profits on the back of depressed copper prices that marred the company’s overall growth prospects. On the other hand, the company has made efforts to improve its operational efficiency and reduce mining costs to enhance profitability. Despite the poor performance for the period, company continues to hold world class assets that underpin its long term growth potential. Thus in view of weak global demand for copper, we maintain a Hold on the stock.
Sirius Minerals (LON:SXX) – Speculative Buy
Yesterday, Sirius Minerals released an update on the approval process for the York Potash Project. The company has received permission for four out of the five planning applications submitted to the local authorities. In addition, Sirius has been granted permission for the mine and mineral transport system and the materials handling facility from Redcar and Cleveland Borough Council (RCBC). The Scarborough Borough Council permitted the company for temporary construction accommodation and a Park and ride facility. In addition, Sirius also got operational Park and ride facility from the North York Moors National Park Authority (NYMNPA). The company expects the decision for the mine and mineral transport system planning application from the NYMNPA to be approved by September.
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 aforementioned update takes the company a step closer towards completion of the Project. Recently, Sirius Minerals renewed its take-or-pay supply contract with one of its prevailing agri-business customer for the supply of 1.5 million tonnes per annum of polyhalite. The renewal increased company’s offtake agreements to a total of 3.1 million tonnes per annum and an extra 4.8 million tonnes per annum from other deals. It also reinforces the fact that the quality of polyhalite supplied by Sirius Minerals is of a high grade. In view of the high demand, Sirius Minerals is now planning to expand its annual production of polyhalite from 6.5 million tonnes to 10 million tonnes. Therefore, we maintain a Speculative Buy rating on the stock.
Falkland Oil & Gas (LON:FOGL) – Speculative Buy
Yesterday, Falkland Oil and Gas released its interim results for the six months ended 30th June 2015. During the period, the company’s loss from operations was little changed at US$2.156m compared with US$2.2m a year ago. However due to changes in the net finance income the loss for the period expanded to US$2.0m from US$1.3m. Consequently the loss per share widened to 0.37c from 0.24c. On the operational front, the company discovered two oil wells in the North Falkland basin. On 5th April 2015, Zebedee well oil and gas discovery encountered 27.5 metres of net oil-bearing reservoir and 17.5 metres of net gas-bearing reservoir. On 28th May 2015, Isobel Deep oil discovery was drilled up to a depth of 2,527 metres, where the bottom 24 metres of the well consisted of oil bearing F3 sands. Going forward, the company expects to release the results of the ongoing operations at the Humpback exploration well in September 2015. In addition, Mr John Martin was appointed as Non-Executive Chairman in June 2015.
Our view: The first six month of 2015 proved to be highly successful for the company owing to significant advancement on the exploration front. In the North Falkland Basin, FOGL has announced two material oil and gas discoveries comprising Zebedee well and Isobel Deep oil discovery. Meanwhile, the drilling on the Humpback prospect continues to advance without any hindrance and may throw up some exciting results in September. In addition, despite the gloom in the oil industry, the company has the freedom to continue the exploration of its assets as it remains fully-funded with no near-term liquidity risk. We believe the move would pay-off handsomely in the long-run when the oil sector stabilizes. Thus, eyeing the interesting discoveries till now and the unexplored potential, we maintain a Speculative Buy rating on the stock.
The UK Competition and Markets Authority (‘CMA’) yesterday published its preliminary findings in relation to its Phase 2 review of the proposed acquisition of 99p Stores Ltd (“99p Stores”) by Poundland. The CMA has provisionally concluded that the merger may not be expected to result in a substantial lessening of competition and has therefore provisionally cleared the anticipated acquisition of 99p Stores by Poundland. Poundland management stated that it welcomed the CMA’s provisional conclusion and is studying the report’s findings in detail. Management also noted that it looks forward to working further with the CMA ahead of the publication of the full review in October.
Our view: It was always something of a surprise that the CMA should decide to refer Poundland’s proposed take-over of 99p Stores. After all, barrier to entry in the poundshop ‘fixed-price-discounting’ sector are virtually nothing; there is no USP, which effectively means that the complications of a monopoly situation could never be created. If one shop closes or is taken over, a competing operator can set up very rapidly at minor cost with an almost identical stock offer vending, naturally, the same price (give or take a penny). High streets across the UK (particularly in the tier 3 and 4 towns and cities which are the natural home of the poundshop) are in such surplus that a new entrant can typically get 2 years rent free just to move in. Indeed, this is the trouble. Sector saturation is approaching and annual l-f-l growth for the quoted players is likely to fall down close to just 1% by the end of this year, as they jostle with private players such as Poundworld, Home Bargains, Poundstretcher, TJ Morris, G&B etc., along with hundreds (nay, thousands) of sole traders competing for exactly the same customers. Having fallen sharply from the crazy heights being achieved in Q1’15, since July Poundland shares rebounded somewhat, as the market began to anticipate a positive outcome from the CMA. While yesterday’s news certainly provides some temporary relief, particularly given that the agreed purchase price/store is about one-sixth of the value awarded to each of Poundland’s units, sector woes will now force a phase of on-going consolidation. Of course, Poundland does have a high profile brand, greater buying power and an altogether more sophisticated operation than most peers, but nevertheless will now face a series of hefty costs associated with closures, redundancies and integration of the ‘to be acquired’ units. The bottom line is that while poundshops have become a long-term fixture of UK high street, the sector is now close to going ex-growth as saturation approaches and defensive barriers are increasingly erected by national supermarket chains and other established discounters. On this basis, Poundland’s forward adjusted FY2016E consensus rating of around 25x is just asking too much. Beaufort recommends using the recent rally as an opportunity to lighten holdings. Sell.
RSA Insurance (LON:RSA) – Hold
Yesterday, RSA announced that it has received an all-cash offer from Zurich Insurance. The offer, at 550p per ordinary share, values the 305-year-old company at £5.6bn. As per the takeover offer proposed, RSA ordinary shareholders also get to retain the right to receive the 3.5p interim dividend announced by the company on 6th August. Zurich Insurance has time until 22nd September to hammer out a formal deal.
Our view: The proposed deal values RSA at a significant 25% premium to its market price of July 27, the day on which news about a takeover offer from Zurich Insurance first resurfaced. The deal is good news for shareholders of RSA, which until a few years ago, was battered by a series of profit warnings and an accounting scandal. With a new owner in the form of Zurich Insurance, Europe’s fourth-largest insurer by market value, RSA can look at significant business growth, both in the home turf and beyond. We recommend a Hold.
Economic News
Germany GDP
German GDP growth expanded 0.4% q-o-q in Q2 2015, unchanged from the preliminary estimate and Q1 2015 reading, the Federal Statistics Office said yesterday. Meanwhile, private consumption and government spending grew 0.2% and 0.3%, respectively. On a y-o-y basis, GDP grew 1.6%, in line with the market expectations and previous month’s reading of 1.6%.
Germany IFO
The business climate index for Germany rose to 108.3 in August from 108.0 in the previous month, the survey results from IFO institute revealed yesterday. The reading came ahead of the market expectation of 107.6. Executives’ expectation index dropped to 102.2 from 102.3 in the previous month, ahead of the market expected reading of 102.0. The current assessment index increased to 114.8 from 113.9, higher than the expected reading of 113.9.
US new home sales
New home sales in the US improved 5.4% to a seasonally adjusted annual rate of 507,000 units in July, the Commerce Department said yesterday. The annualised sales figure for June was revised down to 481,000 from the previously reported 482,000. Economists had expected new home sales to increase at a faster pace of 5.8% to an annualised rate of 510,000.
US consumer confidence index
As per the Conference Board, US consumer confidence index rose to 101.5 in August, from an upwardly revised 91.0 in July. Economists had forecasted a drop to 93.4.