The Markets
Market opening: UK markets are expected to start the session around 27 points lower this morning.
New York: Wall Street ended broadly unchanged amid positive economic data released on Friday. Fed Chair Janet Yellen’s statement regarding raising interest rates later this year lifted investor sentiment. The S&P 500 closed 0.1% down, with the healthcare sector losing the most. For the week, the markets slipped 1.4%.
Asia: Equities are trading lower. Investor confidence was impacted due to an 8.8% y-o-y decline in Chinese industrial profits in August. The Nikkei 225 shed 1.3%, while the Hang Seng was closed.
Continental Europe: Markets ended higher. France’s CAC 40 rose 3.1% amid the country’s consumer confidence index reaching its highest level since October 2007. Germany’s DAX advanced 2.8%, taking positive cues from Yellen’s statement regarding raising rates as it signals an improving global economy.
Crude Oil: On Friday, WTI and Brent oil prices increased 1.8% and 0.9%, respectively. The spread between the two varieties stood at US$2.9 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.55% higher on Friday at 732.87.
Today’s news
IMF likely to lower global growth forecast
According to International Monetary Fund (IMF) head Christine Lagarde, the agency is likely lower its forecast for global economic growth, mainly due to slower growth in emerging economies. The agency stated that growth of 3.3% in 2015 and 3.8% in the following year is not realistic. However, the agency would keep the growth forecast above 3%.
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 and its unaudited interim results for the period ending 30 June 2015. Based on negotiations with its short-listed project contractors and financiers and with the Government of Ethiopia, the entire development funding for the Tulu Kapi gold project of approximately US$120m is expected to be covered at the project level. Full project funding is planned through a combination of debt, gold streaming and equity funding. Management is now focused on formally appointing with finalised and complementary terms, the syndicate comprising the contractors, debt financiers, gold streamer and the Government of Ethiopia. This includes the contractor for building the plant on a fixed-price basis, the contractor for the mining operation on a per cubic metre price basis over the life of the open pit. A key component is the intended participation by the Government of Ethiopia by funding up to US$20m of infrastructure in exchange for an increase share of project equity. KEFI will announce members of the syndicate as appointments occur, commencing in the first half of October and is finalising the terms of infrastructure funding and associated increase with the Government of Ethiopia. The Group reported a loss for the period of £1.6m (or 0.12p p per share) compared with a loss of £1.9m (0.22 per share) over the same period last year. As at 30 June 2015, the Group had cash balance of £1.0m versus £1.4m in H1 2014.
Our view: We are encouraged in the rapid pace of development and the discussions with various parties regarding funding at the project level, including the involvement of the Government of Ethiopia and its planned increase in equity of the Tulu Kapi project. We look forward to further announcements regarding finalisation of financing options and preferred construction contractors and operations as well as the terms of the Government of Ethiopia’s planned funding of infrastructure in exchange for an increase in equity in the project. In the meantime, we maintain a Speculative Buy on the stock.
Beaufort Securities acts as a corporate broker to KEFI Minerals plc
Jiasen International Holdings (LON:JSI) – Speculative Buy
On Friday, Jiasen International Holdings Limited reported its unaudited results for the six month period ended 30 June 2015. Jiasen is an international property fit-out business specialising in designing, manufacturing, and installing a range of wooden products for residential and commercial properties. Highlights included a revenue increased by 2.6% to RMB 427 million (HY2014: RMB 416 million), while gross margins of 27.5% remained in line with stated guidance in range of 27% to 30% (HY2014: 35.5%). Profit after tax decreased by 25.8% to RMB 68 million (HY2014: RMB 92 million), while reporting a strong order book of RMB 159 million as at 30 June 2015 (HY2014: RMB 137 million). This order book is mainly made up of orders from property developers and is expected to be completed by end of 2015. Cash and cash equivalents as at 30 June 2015 amounted to RMB 339 million or roughly GBP34m (31 December 2014: RMB 334 million). Management note, however, that trading to date for the current financial year was slightly below the Group’s expectations, although in accordance with policy, it declared a dividend of 0.5p/share, going XD on 15th October. The Group statement also detailed the appointment of two new directors, Gareth Wong, as Finance Director, and Curt Riley, as Non-executive Director.
Our view: Amid the carnage of the overall London basket of 45 Chinese AIM-quoted shares, Jiasen on Friday stood out like a shining star! Upon coming to market last year, the Group committed to a dividend policy equivalent to 28.5% of forward net profits. In declaring a 0.5p/share payment for its half year period (which alone implies a 7% coupon) despite delivering earnings of just 0.6p, the market gave management a ‘thumbs up’ big enough to see the share price almost doubled at one stage! Looking deeper into the statement, however, the Executive Chariman, Weigang Chen, was making it quite clear that Jiasen was able to respond quickly and effectively to changes in its underlying market place and that its future opportunity remains huge and long-term; but he was also clear that prospective capital costs to acquire land and, amongst other things, the proposed build/fit-out of the major new factory needed to capture this growth, had forced a policy review that could result in a reduction, or even cancellation, of future dividend payments. That said, with cash-in-hand more than three-times the Group’s current market £10m capitalisation, there appears little doubt now that the expansion will go ahead. Understanding also that integrity issues, as opposed to operational performance, has been the principle factor undermining London’s Chinese quotes, his statement went a long way toward re-building investor confidence. The junior market, in any case, is much more about growth than income. So although Jiasen has a lot still to prove over the next couple of years, each of its Property Developer, Wholesale Distribution and Export divisions are expected to sustain good growth during this period. A continued focus on winning supply agreements for larger and higher-spec projects suggests competitive pressures will continue to restrain gross margins during the second half, although an order book up 16% on last year leaves Beaufort’s 2015E revenue forecast of RMB 940m (RMB 871m) unchanged, providing EPS of RMB 2.1/share (RMB 1.9/share). Despite Friday’s spike, Beaufort retains its Speculative Buy rating on Jiasen shares.
Beaufort Securities acts as corporate broker to Jiasen International Holdings plc
SerVision (LON:SEV) – Speculative Buy
On Friday, SerVision informed the company raised £797,684 gross through the issue of 22,790,972 new ordinary shares. The placing was organized by Beaufort Securities, the company’s joint broker. A total of 17,645,258 shares amounting to £617,584 were sold at 3.5p, a 25% discount to company’s closing mid-market price of 4.625p on 24th September 2015. These shares would rank pari passu in all respects and are expected to be admitted on AIM on or around 1st October 2015. Further, the remaining 5,145,714 shares representing £180,100 would be admitted to AIM subject to shareholders’ approval. Post the admission of all the shares, SerVision’s number of shares traded would increase to 113,903,609, with the newly placed shares representing 20% of total share capital.
Our view: The aforementioned issue of shares would provide SerVision sufficient funds to cater to its rapidly growing order book. For the past one year, the company has been working to improve its pipeline, particularly in the UK market. Recently, SerVision entered into an agreement with GreenRoad UK, to provide its unique live video streaming solution to GreenRoad’s new and existing customers. Additionally, the company opened a new office in Manchester Airport. Furthermore, SerVision won a contract with Gatwick airport, UK’s second busiest airport, to supply its live mobile CCTV systems and monthly data services to enhance, secure and protect the mobile assets of the airfield operations. Going forward, the company plans to look for such exciting opportunities and improve its market position. In view of the overall developments surrounding SerVision, we assign a Speculative Buy rating to the stock.
Beaufort Securities acts as corporate broker to SerVision plc
Rockhopper Exploration (LON:RKH) – Speculative Buy
On Friday, Rockhopper Exploration informed that the company along with Premier Oil has entered into an agreement with Falkland Oil & Gas to drill another well on the Isobel/Elaine complex. The companies are working together offshore the Falkland Islands in the Sea Lion Project. The well would target the Isobel Deep reservoir having oil in well 14/20-1, at a distance of 4km from the original well bore. The drilling in the well would replace existing drilling campaign in the Jayne East well. Under the new terms of the agreement, Rockhopper would pay a compensation amount to Falkland Oil & Gas (FOGL) to discontinue drilling at the Jayne East well. The company would pay FOGL US$4m, of which US$2m is to be paid immediately with the balance in 2016. Further, Rockhopper and Premier Oil would carry FOGL for its 40% costs on the replacement well.
Our view: Rockhopper continues to make progress in the Falkland Basin as it reached an agreement to drill well on the Isobel/Elaine complex. The Isobel Deep exploration well is estimated to have more than 400 million barrel (mmbbls) of oil. Additionally, the Zebedee oil field in the North Falkland Basin is expected to have around 50 mmbbls of oil. Recently, Rockhopper received Environment Impact Assessment (EIA) approval for Ombrina Mare project in Italy, providing the company an access to a prospect with around 26.5 mmbbls of oil. The company remains on track to start the gas production from Civita onshore gas field in Q4 2015. Going forward, Rockhopper plans to invest in the Greater Mediterranean and North Africa region, which would further enhance the company’s resources. We believe Rockhopper is well placed with strong assets and resources to keep its growth momentum for the entire year. Therefore, we maintain a Speculative Buy rating on the stock.
Falkland Oil & Gas (LON:FOGL) – Speculative Buy
On Friday, Falkland Oil & Gas (FOGL) released an operational update on the Humpback exploration well and a revised drilling programme. The company informed that it took a long time to resolve the equipment issues related to the Humpback well. However, drilling has now begun and FOGL expects the results of the well in October 2015. Separately, the company entered into an agreement with Premier Oil and Rockhopper Exploration to drill another well on the Isobel/Elaine complex. This well would replace the originally planned drilling in the Jayne East well. As per the new agreement, FOGL would receive US$4m from Rockhopper and US$6m from Premier Oil as a compensation amount for not drilling the Jayne East well. The swapping agreement awaits approval of the Falkland Islands Government.
Our view: The aforementioned update would improve FOGL’s prospects as it awaits results from the Humpback exploration well, located in the Fitzroy sub-basin and having a total prospective resource of over one billion barrels of oil. The results of drilling from the prospect may unearth important resources that may add to the company’s overall reserves potential. Additionally, the company would continue to remain a partner in the Falklands Basin (Sea Lion Project) owing to its 40% holding stake and also receive US$10m as compensation amount. Further, as per the recently announced interim results the company has discovered oil in the Zebedee oil field and Isobel Deep well. Going forward, FOGL has the freedom to continue the exploration of its assets as it remains fully-funded with no near-term liquidity risk. We believe the company has long-term growth potential and would pay-off handsomely when the oil sector stabilizes. In light of the above argument, we maintain a Speculative Buy rating on the stock.
Economic News
Eurozone M3 money supply
Eurozone’s M3 money supply expanded at an annual pace of 4.8% in August after growing 5.3% in the previous month, the European Central Bank said on Friday. The reading missed the market expected increase of 5.3%. On a three-monthly average basis from June to August, the money supply grew at 5.0% y-o-y.
US GDP annualised
US GDP grew at an annualised rate of 3.9% q-o-q in Q2 2015, after rising 3.7% in the preceding quarter, the Commerce Department stated on Friday. This was better than the market expectations of a 3.7% rise.
US University of Michigan sentiment
US University of Michigan Consumer Sentiment Index rose to 87.2 in September from 85.7 in August, data showed on Friday. Economists were expecting a reading of 86.5. The Consumer Expectations Index, which closely forecasts the direction of consumer spending, improved to 78.2 from 76.4, and the Current Economic Conditions Index increased to 101.2 from 100.3.