The Markets
Market opening: The UK market is likely to open higher this morning. FTSE 100 futures were trading 85 points up at 7:38 am.
New York: Wall Street ended in the green following the upsurge in Chinese markets and a better than expected economic data from Europe. The S&P 500 advanced 2.5%, with the healthcare and information technology stocks gaining the most.
Asia: Equities are trading higher, on encouraging cues from the global markets. News that China would take steps to stabilise its financial markets lifted investor confidence. The Nikkei 225 added 7.7%, supported by comments from Prime Minister Shinzo Abe to lower corporate tax. The Hang Seng was trading 3.3% up at 7:00 am.
Continental Europe: Markets ended higher amid improvement in the Eurozone GDP. Furthermore, Germany’s trade surplus reaching a record high boosted market sentiment. Germany’s DAX and France’s CAC 40 rose 1.6% and 1.1%, respectively.
Crude Oil: Yesterday, Brent oil prices improved 4.0%, while WTI oil prices slipped 0.2%. The spread between the two varieties stood at US$3.6 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.30% higher yesterday at 734.73.
Today’s news
UK shop prices slip in August
As per the British Retail Consortium (BRC), UK shop prices fell 1.4% y-o-y in August, following a similar decline in July. Food price inflation rose 0.2%, while non-food prices declined 2.4% in August. Competition among retailers and a decline in commodity prices led to the fall.
Mortgage lending rises in UK
According to the Bank of England and Financial Conduct Authority, Total mortgage lending in the UK soared to £52.5bn between April and June, up 15.1% y-o-y. The improvement is ascribed to record low borrowing costs and competition among the banks. Average interest rates dropped to 2.83% from 2.99% in the first three months of the year.
Company News
KEFI Minerals (LON:KEFI) – Speculative Buy
KEFI Minerals, the gold exploration and development company with projects in the Federal Democratic Republic of Ethiopia and the Kingdom of Saudi Arabia, announced today an update on the development funding plan for its 1Moz Tulu Kapi gold project in Ethiopia. KEFI’s Board has approved the funding plan which includes equity capital to be raised at project level, rather than the PLC level to minimize dilution to shareholders. In addition, the approved plan has reduced on the estimated peak funding requirement. In its discussions with the shortlisted construction contractors, KEFI anticipates a reduction in the peak funding requirement from US$130m, estimated in the 2015 DFS to US$120m, despite the planned gold production increase to an average of 100,000oz per annum as announced on 7 September 2015. The Group still plans to secure up to US$100m via a senior secure syndicate arrangement. The remaining equity investment is estimated at US$20m, which KEFI plans to source as minority equity investment at the project subsidiary based on Tulu Kapi’s net present value which is estimated at US$90m using current gold prices.
Our view: We are encouraged in the rapid pace of development as well as any potential reductions in the project funding requirement, especially on the back of the recently announced increase in average annual production. We look forward to further announcements regarding the formalisation of financing options and the selection of construction contractor as well as mine contractor, which is scheduled for Q4 2015. In the meantime, we maintain a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to KEFI Minerals plc
Frontier Resources International (LON:FRI) – Speculative Buy
Yesterday, Frontier Resources informed that it has retained Dallas-based Moyes & Co to help in its ongoing farm-out process for the oil block in Oman.
Our view: The aforementioned retention of Moyes & Co comes at a crucial time considering the difficult trading conditions. Frontier is expected to gain from the rich experience of its partners in the international oil and gas transactions. Recently, the company received positive results from the operations in Owambo Basin, Namibia. The new data collected from the survey would improve the understanding on existing blocks and help in finding regions requiring extra seismic data before drilling. Earlier, the company informed of its plans to continue drilling activities without the need for a 3D seismic survey at Block 38 in Oman. In addition, discussions are underway to enter into a farm-out agreement with Middle East-based partners for the same. Frontier’s strategy looks promising as it is expected to attract potential investors and also limit the company’s risk exposure in the asset. Thus, in view of the above developments, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Frontier Resources International plc
CityFibre Infrastructure Holdings (LON:CFHL) – Speculative Buy
Yesterday, CityFibre informed that it has extended its Gigabit City project in Edinburgh to 294 other council-owned sites. The deal is worth at least £5.6m. The agreement is placed along with telecommunications provider Commsworld, for a seven year period, along with an option to extend to a maximum of 19 years and a lifetime contract value of £16m. The deal would replace the expensive, capacity-constrained copper circuits provided as part of a long-term contract by British Telecommunications. The company’s Total contract value (TCV) post this contract stands at £15m. The key areas that stand to gain include council offices, community centres and libraries. The agreement is a part of £186m outsourced ICT procurement for the council won by global ICT firm CGI, that would make single largest pure fibre city roll-out in the UK.
Our view: The aforementioned contract is CityFibre’s largest contract win to date and substantially improves its TCV. The deal strengthens company’s Gigabit City model as the cities are set to adapt to a new generation of infrastructure. The project would not only help the community areas but would also benefit more than 17,000 businesses in Edinburgh, making it one of the best connected cities in the world. In August, the company entered into a new contract with wireless broadband provider Connexin for a period of 10 years to extend its fibre infrastructure in Kingston-Upon-Hull to 19 Connexin wireless hub sites. In addition, CityFibre has signed contracts covering 70 new connections, spanning a diverse range of sites with a TCV of £527,000. The company is well placed with some impressive contracts, national level partners and joint ventures with UK’s leading broadband service providers covering a large customer base. We believe CityFibre’s strong asset base would facilitate its growth and earnings for the entire year. Therefore, we maintain a Speculative Buy rating on the stock.
Petards Group (LON:PEG) – Speculative Buy
Yesterday, Petards Group (Petards) announced its interim results for the half year ended 30th June 2015. During the period, the revenues fell to £6.1m from £7.2m in H1 2014, mainly due to £3m of lower margin equipment deliveries for the Ministry of Defence. The company reported a 39% rise in EBITDA to £609,000 and the operating profits soared to £436,000 (2014: £346,000). Pre-tax profit rose 30% to £356,000 resulting in an EPS of 1.03p against 0.79p in H1 2014. The Total cash stood at £2.0m (31st Dec 2014: £1.4m) with no bank debt. On the operational front, the company won a several key contracts including orders worth more than £2.5m for Petards’ eyeTrain CCTV systems and a new project from Bombardier. Petards order book at the end of period stood at £19m.
Our view: The first half of 2015 has been quite successful for Petards with improved margins and a stronger order book. The results are in line with the company’s plan to become highly profitable and cash rich. The company’s performance follows its over 100% rise in orders from MOD, Siemens, Bombardier and Hyundai Rotem along with higher number of contracts from its existing and new customers. Petards received orders worth £3m after a five-year framework deal with Siemens Mobility for the supply of Petards train related products and services. Further, the company plans to avail new opportunities in its relatively small scaled division of Emergency Services. We expect Petards’ second half to be in line with the market expectations largely due to the number of contracts, pre-orders and higher customer acquisitions. Given the above, we maintain our Speculative Buy rating on the stock.
Yesterday, Whitbread released its trading update for the 11 weeks to 13th August 2015. Total sales advanced 11.1% y-o-y, and the like-for-like (LFL) sales rose 3.3% as all the business segments performed well. The Costa segment saw a 16.2% rise in the sales with the LFL sales increasing 4.0%. In the Premier Inn segment, the Total sales increased 11.6% and 4.3% on LFL basis. The Hotels and Restaurants division witnessed an overall sales improvement of 8.6% with LFL sales rising 3.2%. Sales in the Restaurants segment rose 2.0%, and inched up 0.6% on LFL basis. The Total sales for 24 weeks to 13th August 2015 improved 11.8% y-o-y with a 3.9% rise in LFL. The company’s plans for the current year include opening 5,500 new Premier Inn UK rooms, add around 220 new Costa stores worldwide and install 700-800 new Costa express machines. Whitbread’s committed UK hotel pipeline has grown to 14,106 rooms.
Our view: Whitbread continues to deliver solid performance for the second consecutive quarter this year. The growth was led by its major brands Costa and Premier Inn, reporting improved results over the previous year. The robust market demand ensured steady business and the company’s plans to open new hotels and stores across the world would give it access to a wider customer base. Further, Whitbread is ready to respond to government’s new national living wage as it plans to increase the prices marginally and reduce costs by enhancing productivity. The company has set growth milestones for 2020 including an increase in the Premier Inn UK rooms to around 85,000 and global system sales of nearly £2.5bn for Costa. Given, the strong growth potential of the various segments and the future expansion plans of the company, we maintain our Buy rating on Whitbread.
Berkeley Group Holdings (LON:BKG) – Buy
Yesterday, Berkeley Group Holdings (Berkeley) released its Interim Management Statement for the period between 1st May 2015 and 31st August 2015. During the period, the company continued to invest across businesses, as it contracted to purchase five new sites and further invest to achieve its three year earnings targets. Berkeley agreed to acquire a 2.6 acre site at West End Green in Paddington on unconditional terms. St William, the company’s joint venture with National Grid, has already contracted three sites since its formation including addition of Fulham in this period. Berkeley maintained normal transaction levels in the market owing to a decisive General Election result in May 2015. Further, the company disposed of its ground rent assets for £53m, resulting in higher cash flows. Berkeley reiterated its earning guidance of around £2bn to be delivered over the next three years to 30th April 2016, 2017 and 2018. Further, the company expects to make dividend payment of 90p per share amounting to £122.9m on 17th September 2015. The payment would mark the beginning of its long-term plan to return £13 per share to shareholders by 2021.
Our view: Berkeley’s interim statement is quite encouraging with significant developments across its businesses. The company improved its asset base as it acquired key land sites during the period. Berkeley received up gradation in this month’s indices review and it would to join the FTSE 100 ranks shortly. Recently, the company delivered strong results for the year ended 30th April 2015 where the revenues soared 30.8% to £2,120.0m and the operating profits widened 39.8% to £524.1m. The company delivered nearly 10% of all new homes in London and 10% of the capital’s affordable homes across 74 sites. Going forward, the overall improvement in UK’s economic scenario with better employment opportunities and rising wages bodes well for the housing business. Also, the company is financially well-placed as its balance sheet continues to be strengthened by cash inflows due to robust forward sales. In view of the overall optimism surrounding Berkeley, we maintain our Buy rating on the stock.
Economic News
Eurozone GDP
Eurozone GDP expanded 0.4% q-o-q in Q2 2015, following a 0.3% growth in Q1 2015, European Union’s statistic office revealed yesterday. The data came better than the market expected rise of 0.3%. On a y-o-y basis, the economy grew 1.5% from 1.2% in the previous quarter.