The Markets
Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 92 points down at 7:00 am.
New York: Wall Street ended in the green after declining for six consecutive days. The positive data on durable goods order and comments from a Fed official citing possibility of a delay in interest rate hike boosted investor sentiment. The S&P 500 surged 3.9%, led by the information technology sector.
Asia: Equities are trading higher, taking cues from the US market. Furthermore, the People’s Bank of China (PBOC)’s decision to infuse US$ 21.8bn into the financial system lifted investor sentiment. The Nikkei 225 added 1.1%, while the Hang Seng was trading 1.9% up at 7:00 am, tracking the Chinese market.
Continental Europe: Markets ended in the red amid growing concerns over China’s economic health. Investors closely eyed the developments related to the Fed’s decision on interest rate hike. France’s CAC 40 and Germany’s DAX shed 1.4% and 1.3%, respectively.
Crude Oil: Yesterday, WTI and Brent oil prices fell 1.8% and 0.2%, respectively. The spread between the two varieties stood at US$4.5 per barrel.
UK small caps: The FTSE AIM All-Share index closed 2.09% higher yesterday at 717.06.
Todays's News
Mortgage approvals in UK rise to 17-month high in July
The total number of loans for house purchases in the UK increased 11% y-o-y to 46,033 in July, the highest since February 2014. The improved numbers clearly indicate recovery in the UK’s housing market.
US interest rate hike unlikely in September
William Dudley, a Federal Reserve official, informed an interest rate hike is unlikely in September due to slowdown in China’s economy. However, he raised the possibility of a hike later this year after the conditions improve
Company News
Herencia Resources (LON:HER) – Speculative Buy
Herencia Resources, the Chile focused mineral exploration and development company announced yesterday results from its surface sampling program on its advanced Picachos copper project located in central Chile. The company has identified numerous high grade mineralised areas adjacent to the proposed open pit mining operations. Results were based on a hand-held XRF (x-ray fluorescence) analyser used on surface samples at the 40M Shaft East, Flor del Bosque, La Nipa, Santa Rosa and southern tenement areas. High grade results from the 40M Shaft area as well as mapping of additional mine workings confirm the continuity of mineralisation at shallow levels. Previous drilling results had identified high grade zones at depth such as DDH14003 (see RNS 18 Dec. 2014), which returned 117m grading 1.14% Cu (from 182m) including 18m grading 1.53% Cu (from 184m), 9m grading 2.02% Cu (from 193m), 16m grading 1.5% Cu (from 213m), 10m grading 1.95% Cu (from 254), 10m grading at 2.0% Cu (from 268m) and 11m grading 2.21% Cu (from 288m). The area around Shaft 40M, previously modelled as waste, had the highest readings at 24.8% Cu. Extensive geological and structural mapping in conjunction with the surface sampling program confirms the shallow copper mineralisation over a strike length of 1,200m.
Our view: We are encouraged with the consistent and high grade mineralisation from Shaft 40M and surrounding area. Whilst more detailed work is required in order to prove up any additional resources, preliminary results are encouraging given that the area was previously modelled as waste within the proposed pit shell. The surface sampling results could potentially have a significant impact on the overall economics at Picachos. In view of the above results, we reiterate a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Herencia Resources plc
HSS Hire (LON:HSS) – Speculative Buy
Wednesday morning, HSS produced half year results in line with guidance issued in the pre-close trading update issued 29 June 2015. Group revenue was up 12.1% to £146.4m (H1 14: £130.6m), with organic growth of 10.6%, while adjusted EBITDA was flat at £28.9m (H1 14: £28.9m), due to the IPO and new branch start-up costs. Loss before tax of £14.1m (H1 14: £11.1m loss); reduced financing costs partly mitigate Adjusted EBITA movement, producing an underlying basic and diluted loss per share of 4.45p (H1 14: 6.03p). Management also declared an interim dividend of 0.57p per share, payable in October 2015. It detailed its expectation for a continued growing market share through H2, despite variable market conditions, noting that while July was in line with management expectations; trading has been softer in August. As a result, 2015 revenue growth (full year) is now expected to be in the range 8 – 11% and earnings for the full year now expected to be below current market expectations.
Our view: Not a glorious start! This is HSS’s second profit warning just six months after Admission. The share price has tumbled dramatically from the 210p Offer price as bemused investors demand clarity as to exactly what is going wrong. Surely, with booming construction and refurbishment being sustained right across the UK and Ireland, trading condition can rarely have been better? Not so according to management, who consider market conditions ‘remain soft’, therein reducing their full year outlook despite apparently still gaining market share. Narrowing the focus down, we can see OneCall and HSS Training slowing in Q2, with organic growth halving to 6.2% on the previous period driven by reduced activity from key accounts; by comparison, the Specialist business registered 20% l-f-l growth in the first six months, significantly more if acquisitions are also included. So what next? While gross profits rose 9% on last year, a sharp move back to operating losses also reflected investment in strategic investment (including drag from branch rollout) and higher depreciation due to demand-led investment. Given that the effects will linger in the second half, a reduction in consensus revenue growth of 5% and a virtual halving of 2015 EPS to around 4.4p now appears realistic. That said, the tumbling share price has now taken this on board, which begs the question whether investors might anticipate some form of pay-back during 2016E and 2017E. Here the brave will give management the benefit of the doubt. Less emphasis on market share and more on key customer service, means capital additions could fall quite sharply going forward, during which time both debt and operating costs could be trimmed by £10m or so. Targeting 11% revenue growth for both 2016E and 2017E, suggests earnings could recover to 7.7p and 11.6p for the two prospective years. Multiples of 11x followed by 7.2x, together with dividend yields of 2.5% and 3.4%, the shares are now at a level where value might be found again. Risks remain, however, until management has proven it has the ability to both outperform its underlying market and second-guess its peers. Beaufort reflects this in moving it rating from Buy to Speculative Buy.
WPP (LON:WPP) – Buy
Yesterday, WPP released interim results for the six months ended 30th June 2015. Revenues were up 6.8% to £5.84bn; and 4.9% on like-for-like (LFL) basis. Net sales rose 5.2% to £5.04bn; and 2.3% on like-for-like (LFL) basis. Reported billings increased 5.0% to £23.16bn. WPP experienced strong growth across geographies and business sectors. The company’s PBIT increased by 7.6% to £669m, thanks to a 0.3 margin point expansion in net sales margin. Reported profit after tax jumped 51.7% to £601m, reflecting net exceptional gains. Headline diluted EPS stood at 33.5p, up 14.7% over the previous year. WPP completed 25 transactions in the first half; six acquisitions and investments were in new markets and 19 in quantitative and digital. The company revised its forecast for the full year to expect LFL revenue and net sales growth of over 3%. WPP declared an interim dividend of 15.91p per share.
Our view: WPP, the world’s biggest advertising company and owner of JWT and Ogilvy & Mather, posted strong results. Though, growth in China had been weak in the second quarter, demand in mature countries helped offset the decline. The company remains confident of achieving its full-year sales target. CEO Martin Sorrell is bullish on China prospects, where it employs nearly 16,000 people. In light of the above, and the company’s superior position in key markets, we reiterate our Buy rating on WPP.
Yesterday, Carillion reported its half yearly financial results for the six months ended 30th June 2015. During the period, the company’s revenues jumped 21% to £2.25m from £1.9m due to the surge in the new contracts in 2014. The underlying profit from operations improved 16% to £112.5m whereas the pre-tax profit increased 11% to £84.5m. Consequently, the company’s underlying earnings per share enhanced 8% to 15.0p. On the operational front, the new first-half orders plus probable orders declined to £1.0bn from £3.2bn owing to the suspension of public sector contract awards due to the UK General Election, whereas the overall secure orders plus probable orders stood at £17.1bn. In addition, the company has Framework contracts worth up to £2.5bn. Carillion’s pipeline of contract opportunities also increased to £40.5bn from £39.2 bn. Moreover, the company’s revenues visibility for 2015 was 96% at the end of the period, up from 93% in 2014.
Our view: Carillion continued to perform well in the first half of 2015, mirroring the impact of the company’s smart moves during the economic downturn when it consolidated its market position. The high margins, strong revenue and cash flows are an outcome of a number of major new contracts win in 2014. Going ahead, we expect the company to achieve its target for the year owing to rise in the number of orders, an increase in pipeline contracts and an expected improvement in market conditions. In view of the above argument, we reiterate a Buy rating on the stock.
International Greetings (LON:IGR) – Speculative Buy
Yesterday, International Greetings provided a trading update for the first quarter ended 30th June 2015. During the period, the company’s sales and customer order levels were in line with the management expectations. The company informed about several new initiatives in the US comprising a phased investment in a US manufacturing facility. On the other hand, the company received a 2015 Christmas commitment from a drugstore chains to feature in over 7,500 stores. Moreover, a range of creative play products are also expected to be launched in Autumn 2015 with a chain of over 8,000 discount stores. International Greetings also entered into a licensing contract with Coca Cola Enterprises, Disney for the Star Wars franchise. Also, the latest National Geographic licensed product offering gift packaging, gifting and stationery across categories would be promoted in over 3,000 additional stores in the US. The company expects to continue performing in line with the guidance despite the impact of the weak Euro and Australian Dollar exchange rate.
Our view: The above updates indicate that the International Greetings are well positioned to continue its growth in a profitable manner. The company is benefitting from strengthening cross regional customer relationships and also from the exciting new licensing arrangements. The company’s management team has got a shot in the arm with the appointment of the new CEO Gideon Schlessinger. Meanwhile the management continues to look around for opportunities to grow both organically and through well considered acquisitions. A widespread geographic reach provides varied revenue streams with diversification benefits. Thus, eyeing the overall performance of the company on all counts, we reiterate a Speculative Buy on the stock.
Economic News
US MBA mortgage applications
US mortgage applications edged up 0.2% in the week ended 21st August after rising 3.6% in the prior week, the Mortgage Bankers’ Association said yesterday. Refinance index fell 1.0%, while the gauge of loan requests for home purchases rose 1.7% over the week.
US durable goods orders
US durable goods orders rose 2.0% m-o-m in July following a revised increase of 4.1% in June, the Commerce Department said yesterday. The reading came better than the economists’ expectations of a 0.4% decrease. The orders excluding transportation equipment improved 0.6% m-o-m in July, after a 1.0% rise in June. The reading came ahead of the market expected 0.3% increase.