The Markets
New York: Wall Street ended in the red after a volatile trading session yesterday. Falling oil prices and weak manufacturing data from China dented investor sentiment. The S&P 500 dropped 0.2%, dragged down by the materials sector.
Asia: Equities are trading lower. Weak economic data from China and the US hurt investor confidence. The Nikkei 225 shed 2.8%, reacting to the recent economic events as it opened after three days. The Hang Seng was trading 0.7% down at 7:00 am.
Continental Europe: Markets ended in the green, as the Eurozone’s manufacturing data was in line with market expectations. However, investors remained concerned over China’s economic health. Germany’s DAX and France’s CAC 40 rose 0.4% and 0.1%, respectively.
Crude Oil: Yesterday, WTI and Brent oil prices decreased 2.9% and 2.7%, respectively. The spread between the two varieties stood at US$3.3 per barrel.
Today’s news
Eurozone’s manufacturing PMI in line with expectations
As per Markit, the Eurozone’s preliminary manufacturing PMI fell to 52.0 in September, in line with market expectations, from the final reading of 52.3 in August. The Eurozone’s preliminary composite PMI declined marginally to 53.9 in September from 54.0 in August.
Company News
Kibo Mining (LON:KIBO) – Speculative Buy
Kibo Mining, the exploration and development company focused on mineral and energy projects in Tanzania, announced yesterday that the Company’s uranium JV with Metal Tiger covering the Pinewood uranium project had commenced. The Pinewood JV will initially focus on updating a 2009 study and report on the prospectivity and exploration potential in Tanzania, including the Pinewood uranium licence portfolio. The Pinewood portfolio is located in south west Tanzania and comprises 43 licences, offers, applications and tenders with a combined surface area of approximately 9,033km2. Under the terms of the JV agreement (following completion of due diligence in January 2015), Metal Tiger will cover licence fees and other maintenance costs for a minimum of one year and up to a maximum of three years (estimated to be US$100,000). In addition, Metal tiger will expend the first US$800,000 under the JV agreement in expenses and exploration costs after which expenses will shared 50/50 between both parties. Kibo also announced yesterday that is has issued 363,290 shares at a price of 5.38p for cash settlement shares with respect to work carried out on the on-going Mbeya Coal to Power Project (MCPP) definitive feasibility study.
Our view: Whilst Kibo remains focused on its MCPP and finalisation of the DFS with its strategic partner SEPCO III, we note that the company has a diversified portfolio of mineral projects in Tanzania. The commencement of work on the Pinewood uranium project under terms of the JV signifies that both partners see the potential for a resurgence of interest in the uranium sector. With Japan recently restarting its first reactor since Fukushima and utility companies preparing to renew long term uranium supply contracts, we believe the uranium sector may finally be showing signs of recovery. As such, we are encouraged that Kibo has taken a strategic decision to increase the company’s exposure to a potential uplift in the uranium sector. In meantime, we maintain a speculative buy on the stock.
Beaufort Securities acts as a corporate broker to Kibo Mining plc
DDD Group (LON:DDD) – Speculative Buy
DDD Group yesterday announced that the Company has entered into agreements to complete a placing and subscription of, in aggregate, 24,175,000 new ordinary shares of 1 pence each at a price of 2 pence per share. Equity Placing commitments for £428,000 or 21,400,000 new shares came from institutional and accredited investors, while subscription agreements for £55,500 or 2,775,000 New Shares were from existing holders. Net proceeds of approximately £458k will be directed to financing business development and licensing activities. Licensing activities are targeted at recently launched video conferencing and soon-to-be-launched social photography apps for tablet, smartphone and PC. Business development includes planned phased increase in headcount from 17 to 20 staff in line with commercial license and development agreements.
Our view: DDD is in a period of transition, moving from stereo 3D products to 2D solutions. Yesterday’s Placing will ensure necessary funding is available to speed this change. The 3D TV market revenues have been impacted by TriDef 3D conversion technology’s re-focussed from HDTVs to UHD/4K TVs since the end of the first quarter. Management expects, however, these to recover somewhat in the near term in expectation of continued growth in sales of UHD TVs along with the successful extension of its license agreement with Samsung. Looking beyond this, DDD will focus on securing 2D technology agreements with sizeable video conferencing & gamecasting partners, in order to expand the daily downloads for TriDef SmartCam towards its 1,300 paid downloads/day break-even goal. Before year end, the Group is also expected to launch its innovative social photography App in Google Play store. This will allow a broadening of the target customer base from PC to mobile phones and tablets and also to augment the consumer and OEM revenue derived from SmartCam technology. Here the focus will be on securing license agreements with photo manipulation software app developers (Instagram) and also phone handset makers. Meanwhile, there remains potential for a bonanza pay-off for the Group as it moves toward concluding licensing negotiations with patent licensees prior to year end. Ahead of such an event, however, cash burn will continue to place some strain on the balance sheet as it rolls out 2D applications, appoints licensees and undertakes end-use marketing. But given the market size for gamecasting/video conferencing that is forecast to deliver growth from hundreds of millions of existing end-users, potential shareholder rewards remain very large indeed. Beaufort retains its Speculative Buy recommendation on DDD Group.
Premier Oil (LON:PMO) – Speculative Buy
Yesterday, Premier Oil (Premier) released an update on its recent operational activities. The company’s production year-to-date has averaged 57.1 thousand barrels of oil equivalent per day (kboepd). Premier finished summer maintenance activities and resumed production at normal levels. The company hedged around 60% of liquid production in H2 2015 at US$92/bbl and 30% of expected production in 2016 at US$68/bbl. A new project, Solan, in the British North Sea, is set to commence oil production in Q4 2015. The capex guidance for 2015 remains unchanged and the company expects a reduction in y-o-y capex in 2016. Premier installed a lot of platform systems including the firewater deluge system and other safety related systems like the gas detection system. The company has US$1.3bn in cash and no maturities on any debt till the end of 2017.
Our view: The aforementioned update showcases Premier’s continuous efforts to cope with the difficult conditions in the energy market. The company’s plan of hedging its liquid volumes would help it mitigate volatility in oil prices. Premier expects to kick-start production from its Solan project by the end of 2015 which would further enhance its production level. Similarly, the Catcher project is expected to commence in 2017. The company’s remains cash rich with no debt maturities until 2017. As a result of cost savings made by Premier, it expects full year operational expenditure to be around US$16 per barrel of oil equivalent (boe). Additionally, Premier recently received grants in Blocks 2 and 7 in Mexico’s Round 1 auction, providing an easy and cost-effective entry to a region known for its abundant oil and gas resources. Going forward, the company plans to seek for acquisition to enhance its asset base and also dispose of non-core assets where it can generate value. In view of the overall developments surrounding Premier, we maintain a Speculative Buy rating on the stock.
Yesterday, Diageo released a trading update ahead of its Annual General Meeting. Performance is in line with the company’s expectations benefiting from improved volume growth. The company kept its guidance unchanged for Diageo North America for the first half; it expects organic net sales to decline by 0.2%. The company expects adverse exchange rate movements in emerging markets to reduce its operating profit for FY16 by around £150m versus the last year. Diageo expects to achieve mid-single digit organic revenue growth from FY17 and operating margin expansion of 100 basis points over three years.
Our view: Diageo, whose brands include Smirnoff, Guinness and Johnnie Walker, is delivering as per the guidance supported by enhanced volume growth. The company remains cautious in the emerging markets as weaker currencies would hamper its margins. Diageo is focused towards brand building through innovative marketing techniques and improving its distribution platform. The company has implemented several cost saving and pricing measures to boost earnings and continues to make efforts to expand into new markets. Recently, the company reported strong performance for 2015 with improved free cash flow and a 9% increase in the final dividend to enhance shareholder wealth. In view of Diageo’s solid financial position and expected improvement in revenues going forward; we upgrade our rating to a Buy.
United Utilities Group (LON:UU.) – Buy
Yesterday, United Utilities Group (United) released a trading update for the six months ending 30th September 2015. Revenue is expected to be similar to H1 2014 affected by higher non-regulated sales. Underlying operating profit to be in line with management expectations, but lower than H1 2014. The reduction in operating profit is mainly due to increase in customer compensation and one-off costs totalling £25m. The company has to pay this amount because of a water quality incident in some parts of Lancashire region. United issued a boil water notice to more than 300,000 properties, which is around 10% of its customer base. The company expects net debt to be on a higher side as compared to the figures as on 31st March 2015. On the operational front, United received top quartile performance as reported through Ofwat key performance indicators and the Environment Agency’s assessment. The company plans to invest around £800m in 2015/2016 to speed up to its five-year capital investment programme. United Utilities would declare its half year results on 25th November 2015.
Our view: United expects to deliver performance in line with its expectations partly offset by the water quality incident in Lancashire. United achieved top rating from two quality assurance agencies highlighting company’s strength to provide excellent services to its customers. Going forward, the company plans to invest heavily in its capital programme to further enhance customer satisfaction. We believe the impact of the water quality incident at Lancashire would be short-lived and the company’s earnings would rebound as it remains the largest listed water company in the UK. In addition, United has agreed to pay compensation of around £25m to the affected consumers. We believe this company offers attractive, long-term growth potential capitalizing on its extensive investment plans and partnerships that would strengthen its position in the market. In view of the above argument, we retain a Buy rating on the stock.
Smiths Group (LON:SMIN) – Hold
Yesterday, Smiths Group announced its results for the year ended 31st July 2015. Revenues fell 2% to £2.9bn with the John Crane division, the largest contributor to the top-line reporting a 2% dip in revenue growth. The operating profit advanced to £511m from £504m in 2014. Pre-tax profit rose 3% to £459m leading to an EPS of 86.1p versus 81.8p in 2014. Free cash-flow improved to £158m (2014: £143m). Net debt at the end of period stood at £818m from £804m in 2014. On the operational front, the company initiated a new programme called Engineered for Growth to improve its organic revenue performance. Smiths Group made investments in the sales and marketing department along with increasing investments in R&D activities. The company has also opened a new office in Shanghai, China. Smiths Group declared a dividend of 41p (2014: 40.25p) to be paid on 20th November 2015.
Our view: Smiths Group’s overall results were adversely impacted by unfavourable currency movements, challenging market conditions and falling oil prices. Nevertheless, the company reported an improvement in profit owing to lower finance charges and improved profitability of Smiths Detection division. The company undertook number of initiatives to ensure quality improvement and innovation. Smith Group’s Our Fuel For Growth restructuring programme helped the company generate savings of £33m. The company’s latest programme Engineered for Growth would focus on four key areas- sales and marketing excellence, quality improvement, China, and innovation. However, the global energy markets remain challenging in the near future with volatile oil prices and uncertain market conditions. Thus, in view of a mixed outlook, we maintain a Hold on the stock.
Chariot Oil & Gas (LON:CHAR) Hold
Yesterday, Chariot Oil & Gas (Chariot) declared its unaudited interim results for the half year ended 30th June 2015. Pre-tax loss narrowed to US$4.4m in H1 2015 from US$36.1m in H1 2014, mainly due to an impairment charge of US$33.6m for the Northern Blocks offshore Namibia reported in H1 2014. Cash balance at the end of period stood at US$45.5m (31st December 2014: US$53.5m). On the operational front, the company extended its licence in Mauritania to carry out de-risks prospects before drilling. Chariot terminated the farm-out agreement with Azilat Limited on the four licences in the Barreirinhas basin, located in Brazil. The fallout resulted from a disagreement over the commercial terms of the agreement. The company awaits Environmental Impact Assessment for 3D seismic programme, Brazil. Further, the company is looking to source partners for some of its assets in Morocco, Mauritania, Brazil and Namibia.
Our view: Chariot delivered resilient half year performance despite challenging trading conditions. The company’s asset quality remains intact and is well funded for its future endeavours as evident from its strong cash position. As oil and gas industry is undergoing a challenging phase, the company has increased its focus on risk management and capital discipline. In view of the same, the company announced a 50% reduction in board remuneration from May 2015. However, the termination of the agreement with Azilat is likely to put some financial constraints on the company as Azilat was bearing the 50% of the 3D seismic costs to earn a 25% stake in the project. Chariot would have to look for a new technically competent and financially secure partner for these licences. Additionally, the oil and gas trading environment remains tough with fluctuating prices. We would like to wait and watch Chariot’s performance in the near future, and retain a Hold for now.
Economic News
Germany manufacturing PMI
As per the data released by Markit, the preliminary manufacturing PMI of Germany for September stood at 52.5, versus a reading of 53.3 in August. This was behind the market expected reading of 52.6.
US MBA mortgage applications
US mortgage applications advanced 13.9% in the week ended 18th September, after a 7.0% fall in the previous week, the Mortgage Bankers’ Association said yesterday. Refinance index jumped 17.7%, while the gauge of loan requests for home purchases rose 9.1% over the week.
US manufacturing PMI
The Preliminary Markit PMI for the US stood at 53.0 in September, similar to August’s final reading. The reading came better than the market expected 52.8.