The Markets
New York: Wall Street extended losses for the third consecutive day amid mixed economic data released yesterday and ahead of the Fed Chairperson Janet Yellen’s speech on the US monetary policy. The S&P 500 fell 0.3%, dragged down by the healthcare sector.
Asia: Equities are trading higher. The Nikkei 225 added 1.8%, led by the government’s target to increase nominal GDP by 20% to about ¥600tr. While, the Hang Seng was trading 0.2% up at 7:00 am.
Continental Europe: Markets ended in the red, as the negative impact of Volkswagen’s emissions scandal offset positive economic data released in Germany. Moreover, investors remained concerned over global economic slowdown. France’s CAC 40 and Germany’s DAX shed 1.9% each.
Crude Oil: Yesterday, WTI and Brent oil prices increased 1.0% and 0.9%, respectively. The spread between the two varieties stood at US$3.3 per barrel.
Today’s news
Mortgage lending in UK rises sharply in August
As per the British Bankers’ Association, the number of home loans approved in the UK rose to 46,473 in August, the highest level since February 2014, from 46,315 in July. In addition, net mortgage lending increased to £1.95bn in cash terms, the highest level since August 2010, from £1.70bn in July.
Company News
Armadale Capital (LON:ACP) – Speculative Buy
Yesterday, Armadale Capital (Armadale) released an update on the development and funding for its 80% owned Mpokoto Gold Project, located in the Democratic Republic of the Congo. The company has decided to undertake additional metallurgical test work in Q4 2015 to further enhance the previously identified two-phased processing routes for gold recovery. The Definitive Feasibility Study (DFS) is on-going and well supported by Africa Mining Contracting Services group (A-MCS). Management expects to complete the DFS in Q4 2015 to allow inclusion of the additional metallurgical work and further inputs from A-MCS. Armadale is also continuing its discussions with A-MCS in regards to the proposed funding package of up to US$20m (£13.1m) for the project. Additionally, the company raised £0.7m in August 2015 from institutional and other investors. The company expects to commence production in H1 2016 with a target of around 25,000 ounces (oz) of gold annually for a period of nine years and estimated cash costs of US$647/oz. The Mpokoto project’s net present value is US$32.3m based on a gold price of US$1,100/oz.
Our view: The additional metallurgical tests will help Armadale optimise its proposed two-phase processing routes for gold recovery at Mpokoto. Results could potentially enhance the already robust economics of the project with its low capex and low opex estimates. We look forward to the completion of the DFS by Q4 2015. Armadale has raised sufficient funds that should cover the costs incurred during the DFS. We are encouraged with the overall pace of development at Mpokoto and are confident that the project remains on target for commercial production in H1 2016. Going forward, the company plans to carry out further activities to enhance resource potential from the mine. Therefore, in view of the continuous progress being made at Mpokoto, we maintain a Speculative Buy rating on the stock.
Strat Aero (LON:AERO) – Hold
Strat Aero, the international aerospace services company focused primarily on the provision of training solutions, management systems and consultancy services to the international aviation market, yesterday released its unaudited interim results for the six month period ended 30 June 2015. There was a lot of news for shareholders to consume. Highlights included details of a wholly redefined strategy to build a fully integrated UAV solutions provider to ‘capture more of the value on offer from this rapidly developing market’. Strat Aero now intends to build a far larger business than originally envisaged, while stressing the international, company-building credentials of the Group’s recent management additions. With new structure and strategy in place, the re-constructed Board (under recently appointed CEO, Tony Dunleavy) state they are confident of building a significant international and fully integrated player in the UAV arena. Indeed, it has already cited four most advanced acquisition targets, together said to have a potential pipeline of revenue opportunities approximating US$200m. Against this, however, it warned that financial year to date performance has been greatly impacted by shifting market dynamics and contract conversion delays and, accordingly, the Group is currently trading significantly below expectations. In terms of numbers, the Group recorded revenues of just US$57,441 compared with US$630,685 for the year to 31 December 2014. The loss for the six months to 30 June 2015, before and after taxation, was US$1,311,117 (Year to 31 December 2014: US$1,200,844). The loss per share was 1.61 cents (2014: loss per share of 3.77 cents).
Our view: That was all a bit of a shocker! Strat’s shares had already been punished back in June, when it became apparent that its Board was finding it difficult to accurately predict the pace of development of its marketplace or exact timing of firm incoming orders. Now it appears that these expectations may have been set more by hope than experience. Of course, nobody has been in any doubt as to the long-term and giant potential UAV/UAS opportunity. The need is undoubtedly there and growing, but whether a recently created, small cap can actually position itself to secure long-term, high margin, high visibility training/licensing contracts is another thing altogether. Not least because it’s most immediate task masters are giant US military enterprises, which require their contractors to have negotiated high hurdles (in the form corporate of certification, historical track record, industry references, etc.) before being willing to commit. So Strat’s strategic reinvention, together with a strengthen management team, should provide a shareholders with a higher level of forward understanding, credible targets and visibility as its business strategy develops over the next two to three years. Driving this forward, the Group has already identified several international M&A opportunities as a first step toward creation of ‘a full solutions provider offering the full spectrum of UAV global client needs’. Moreover, the Board states it is confident that each of these transactions represent value for shareholders and that the collective synergies will ensure that they are highly earnings enhancing. Meanwhile, of course, the balance sheet has become severely depleted. Borrowings are now similar to total current assets, which suggest some form of re-financing cannot be far away in order to kick-off this ambitious strategy. Ahead of this, however, Beaufort is sharply cutting back its 2015E revenue forecast from US$4m to just US$1m, which now suggests full year losses of some US$2.4m. Beaufort’s model for Strat Aero, based on the new management business plan, further predicts the Group will also remain in losses for both two following years. Beaufort retains its ‘Hold’ recommendation on Strat Aero while awaiting greater insight to its operations over the coming months.
Angle (LON:AGL) – Speculative Buy
Yesterday, Angle informed that Barts Cancer Institute (BCI) has published its work in prostate cancer patients using ANGLE’s Parsortix system in the PLOS ONE Journal. The results showed that, researchers were able to successfully harvest cancer cells from 100% of the patients for analysis, using the Parsortix system. This system harvested a variety of circular cells including epithelial cells along with mesenchymal cells and cell clusters. The purity of cells harvested using the Parsortix system was three times higher than the best antibody. Furthermore, the cells harvested using the system can be used in clinics and carry the potential to be used as non-invasive liquid biopsy for prostate cancer patients.
Our view: could also be used in downstream analysis. Further, Angle is in the process of seeking FDA (Food and Drug Administration) approval in the US to harvest cancer cells from patient blood. Going forward, Angle plans to launch Parsortix as a diagnostic tool to help the clinics select the best treatment and improve patient outcomes. We expect the company to improve its share in the cancer diagnostic market owing to the rapid progress in the Parsortix system. In view of the above argument, we maintain a Speculative Buy rating on the stock.
Poundland Group (LON:PLND) – Sell
Poundland Group, Europe’s leading single price general merchandise retailer, yesterday announced its intention to raise approximately £50m through a placing of new ordinary shares to institutional investors. The Placing will be conducted through an accelerated book-build process which will be launched immediately, with a view to financing the £55m cash acquisition of 99p Stores Ltd., which has since been cleared by the CMA with no remedies required. Further to this, a proportion of the consideration is also payable under the Acquisition to be satisfied through the issue of new Ordinary Shares to the sellers on closing of the Acquisition. The number of new Ordinary Shares to be issued to the sellers is calculated as a proportion of the equity value of 99p Stores at the time of closing of the Acquisition, currently expected to occur on 28th September 2015. The Board currently expects that this proportion of equity value will be approximately £4m. This acquisition is considered largely as an asset deal, which will increase the Group store count by 40% by adding 251 stores to Poundland’s existing UK estate. Management state that they expect significant benefits from converting 99p Stores to Poundland, in terms of sales from introducing its own range and value offer, plus margin benefits through increased scale and cost dilution. Poundland’s opening programme is ahead of plan and it expects to have opened 50 net new stores in the UK and Ireland during the first half of the current financial year, compared with 28 in the comparable period last year, and it expects to end the half year with around 638 stores in the UK and Ireland. The Group also reported sales for the 14 weeks ended 20th September 2015 were ahead by 6.6% on a constant currency basis.
Our view: Most tellingly, like-for-like sales growth for the 14 weeks ended-20 September was down at -2.9%, compared with +4.7% for the first half of last year. Admittedly the comparative was strong, benefitting in particular from a late Easter, but nevertheless the writing appears to be on the wall. Saturation in this low value-added UK sector is looming and the normal phase of consolidation has commenced. In this respect, loaded with high pre-opening costs, it is not surprising that first half earnings are set to fall below the comparable period, even if management insists that the pre-tax outcome for the full year (fingers crossed for a good, seasonally strong, fiscal-Q3) to March 2016 should still remain within the range of market consensus. But perhaps what is, is the fact that management currently anticipates little, or even no, actual closures of existing 99p Stores underperforming or directly over-lapping outlets; neither will the Poundland new opening programme, which should total 70 or so in the current year, be cut back going forward. Undoubtedly, such an aggressive expansion will ensure the Group’s dominance of the UK sector, although with such extremely low barriers to entrance it could well be forced to suffer very low-to-negative like-for-like figures until a good number of existing bit-part players and sole traders have either decided to run together for protection or ‘throw in the towel’. That could take some time, and the question must be whether-or-not Poundland shareholders are sufficiently patient to see such event play out. So the bottom line is that while pound shops have become a long-term fixture of UK high street, the sector is now close to going ex-growth on an individual outlet basis as premium locations become largely populated and defensive barriers are increasingly erected by national supermarket chains and other established discounters. On this basis, even after yesterday’s sharp decline, Poundland’sforward adjusted FY2016E consensus rating of around 20.3 x, followed by 2017E of 18.9x (EV/EBITDA of 11.4x, 10.1x) is still asking too much. Beaufort retains its Sell rating, setting a price target of 250p/share.
Thomas Cook Group (LON:TCG) – Hold
Yesterday, Thomas Cook Group (Thomas Cook) released its pre-close trading update for the year ended 30th September 2015. The total bookings in the summer of 2015 improved 2% y-o-y led by Airlines Germany with a 7% rise in bookings. However, the average selling prices declined 2% y-o-y. The company’s 91% of summer holidays were sold, in line with the same time last year. For the winter trading, 39% of the season is sold with all the major markets ahead of last year in terms of booking volumes. On the operational front, the company’s joint venture with Fosun (Chinese investment firm) would develop domestic, inbound and outbound tourism activities for the Chinese market, and expect it to be operational by the end of this year. Thomas Cook will declare its results for the full year on 25th November 2015.
Our view: Thomas Cook delivered solid performance in line with the market expectations offsetting the impact of external shocks in some markets. The company reported 91% bookings for the summer of 2015 and with 38% of winter season already sold, revenue visibility look promising. Thomas Cook continued on its plan to transform its business as it developed a strong core holiday proposition based on its own-brand hotels, reduced costs, and improved capital structure. Going forward, the company plans to integrate business across geographies with better quality and services delivered through its New Operating Model. However, the company’s exposure to different currencies is expected to decline profits by £39m. The impact of adverse currency fluctuations are likely to prevail in the near future. Additionally, Thomas Cook faces tough challenge in Continental Europe owing to the competitive trading environment in the region. Therefore, in view of the mixed outlook, we assign a Hold rating to the stock.
Daily Mail & General Trust (LON:DMGT) – Buy
Yesterday, Daily Mail & General Trust (Daily Mail) released a pre-close trading update for the eleven months to August 2015. Revenues declined 1% y-o-y on a reported basis, but remained flat on underlying basis. The company’s Business to Business (B2B) segment saw 4% revenue growth on reported basis and 2% rise on underlying basis. However, DMG media division witnessed a 3% drop in revenues mainly due to weak print advertising revenues and declining circulation volumes. On the operational front, Genscape, the company’s energy business, acquired Energy Fundamentals and a controlling stake in Petrotranz. Additionally, Genscape acquired Locus Energy, a leading US-based solar photovoltaic (PV) performance monitoring and data analytics provider in September 2015. The company completed its £100m share buy-back programme on 10th September 2015. Daily Mail expects the net debt to EBITDA ratio to be below 2.0x at the end of year. The company kept its full year results guidance unchanged and in line with the market expectations.
Our view: Daily Mail is performing in line with expectations owing to the continued growth at its B2B division’s revenues which grew 4% y-o-y, outweighing the 3% revenue decline at DMG Media. While growth in print advertising remains a concern, strong digital growth is likely to drive revenues going forward. Revenues from newspaper companion websites were up 15%, with other digital advertising up 29%. Daily Mail continued on its portfolio management activity throughout the period. The company acquired stake in a lot of firms including Energy Fundamentals, Starfish Retention Solutions, Empower, Elite Daily and Locus Energy. The acquired companies are functioning in diversified fields and are expected to enhance Daily Mail’s prospects both in terms of offerings and access to a range of customers. Additionally, the company disposed of some of its non-performing segments in order to improve its margins. We believe the company is progressing in the right direction and would achieve its profitability target for the year. Therefore, we reiterate a Buy rating on the stock.
Economic News
Germany IFO
The business climate index for Germany rose to 108.5 in September from an upwardly revised 108.4 in August, the survey results from IFO institute revealed yesterday. This was better than market expected reading of 107.9. Executives’ expectation index advanced to 103.3 in September from 102.2 in the previous month, ahead of the market expected fall to 101.4. The current assessment index fell to 114.0 from 114.8, lower than the market expected rise to 114.7.
US initial jobless claims
Number of Americans filing their initial claims for unemployment benefits rose by 3,000 to a seasonally adjusted 267,000 in the week ended 19th September, from last week’s reading of 264,000, the Labor Department said yesterday. Economists had expected claims to increase to 272,000.
US durable goods orders
US durable goods orders fell 2.0% m-o-m in August, after a downwardly revised increase of 1.9% in July, the Commerce Department said yesterday. The reading came better than the economists’ expectations of a 2.3% decrease. The orders excluding transportation equipment remained flat in August, after a downwardly revised rise of 0.4% in July. The markets had expected the orders to improve by 0.1%.
US new home sales
New home sales in the US improved 5.7% to a seasonally adjusted annual rate of 552,000 units in August, the Commerce Department said yesterday. The annualised sales figures for July were revised up to 522,000 from the previously reported 507,000. Economists had expected new home sales to increase at a slower pace of 1.6% to an annualised rate of 515,000.