The Markets
Market opening: The FTSE-100 is expected to open around 26-points higher this morning.
New York: Wall Street declined as reports of widening US trade deficit in August and a cut in IMF’s global growth outlook hurt investor sentiment. The S&P 500 shed 0.4% due to losses in healthcare stocks.
Asia: Equities are trading higher on gains in energy stocks due to improvement in oil prices. The Nikkei 225 added 0.9%, while the Hang Seng was trading 1.6% up at 7:00 am.
Continental Europe: Markets ended higher, driven by gains in mining and auto stocks. Moreover, recovery in oil prices boosted investor confidence. France’s CAC 40 and Germany’s DAX improved 1.0% and 0.9%, respectively.
Crude Oil: Yesterday, Brent and WTI oil prices rose 5.4% and 4.9%, respectively. The spread between the two varieties stood at US$3.4 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.02% lower yesterday at 733.55.
Today’s news
Shop prices in UK fall in September
As per the British Retail Consortium (BRC), shop prices in the UK declined 1.9% y-o-y in September after a 1.4% drop in August. Food prices fell 0.5%, while non-food prices dropped 2.9% in September.
IMF downgrades global growth forecast
The International Monetary Fund (IMF) reduced its global growth forecast for 2015 to 3.1% from 3.3% due to slowdown in China and weak commodity prices. In addition, the agency downgraded its growth estimate for 2016 to 3.6% from 3.8%.
Company News
Tertiary Minerals (LON:TYM) – Speculative Buy
Tertiary Minerals, the AIM-listed company focused on the identification, acquisition, exploration and development of mineral projects in the fluorspar sector, yesterday raised £650,000 before expenses by way of placing 28,888,889 new ordinary shares at 2.25p per share. The placing was made via a number of institutional investors and will rank pari passu with all existing shares. Application has been made to the London Stock Exchange for the new ordinary shares to be admitted to trading on or around 9 October 2015. Proceeds will be used for continuing evaluations and development of Tertiary’s key fluorspar projects and for general working capital purposes.
Our view: We are encouraged with the continued progress being made at Tertiary’s MB fluorspar project in Nevada as we believe that MB is a world class and strategic fluorspar deposit. The company now has the funds necessary to commence the next round of drilling. We look forward to continued development of the MB deposit. In the meantime, we reiterate a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Tertiary Minerals plc
Eurasia Mining (LON:EUA) – Speculative Buy
Eurasia Mining, the Russian focused PGM exploration and development company, announced yesterday the formal award and receipt of the Mining Licence for its West Kytlim alluvial platinum project. The formal award for the West Kytlim Mining Licence and its official registration in Moscow was completed on 5th October 2015. The Company now has all of the necessary licence documentation confirming its right to commence preparations for alluvial platinum mining at West Kytlim. The Mining Licence, valid until 15 October 2040, covers 21.5 km2 and includes the rights for extraction of alluvial platinum and gold. Initial mining and revenue generation is expected to begin in 2016.
Our view: Whilst the granting of the Mining Licence was initially approved on 8th July 2015, the formal award and receipt by the company is a major milestone for Eurasia and its shareholders. Management can now focus its attention on development and production from its alluvial platinum project. Development is expected to begin in 2016 with initial diesel-powered operation at sites where shallow placer deposits occur and have little overburden. We look forward to a detailed development plan for West Kytlim. In the meantime, we reiterate our Speculative Buy on the stock.
Beaufort Securities acts as a corporate broker to Eurasia Mining plc
DekelOil Public (LON:DKL) – Speculative Buy
Yesterday, DekelOil Public (DekelOil) released its production update for the quarter ended 30th September 2015. The company produced 7,301 tonnes of Crude Palm Oil (CPO) and 1,336 tonnes of kernel, with a 115% rise in like-for-like CPO production against Q3 2014. A Total of 9,814 tonnes of palm oil were sold at an average price of €610 per tonne, and 917 tonnes of kernel sold at €183 per tonne. During the period, CPO was extracted at a rate of 22.9% from 31,893 tonnes of fresh fruit bunches. Total production for the nine months ended 30th September was 29,137 tonnes of CPO and 5,069 tonnes of kernels.
Our view: DekelOil delivered solid performance in the latest quarter despite difficult CPO pricing environment. The company’s CPO production in the first nine months of 2015 was more than double of the Total production reported in the fiscal year 2014. DekelOil benefitted from an upgrade of logistics ensuring timely supply of feedstock, thereby enhancing overall efficiency. Recently, the company reported results for the first half of 2015 with the revenues jumping to €12.9m in H1 2015 from €4.5m a year ago. Consequently, the pre-tax loss narrowed to €86,000 from €761,000 in H1 2014. Further, DekelOil is progressing well on the construction of Kernel Crushing Plant (KCP) and is optimistic to start production by the end of 2015. In addition, DekelOil is expected to be awarded with Round Table for Sustainable Palm Oil (RSPO) certification soon, which would give an edge over its peers. Going ahead, the company plans to continue planting programme in the Ayenouan region and start operations at its second project at Guitry. We believe DekelOil is well placed to accelerate earnings growth given its substantial resources and prospective plans. Therefore, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to DekelOil Public plc
Motive Television (LON:MTV) – Speculative Buy
Motive, the digital television technology, software and services provider, yesterday announced that it has received a Conversion Notice from Bergen Global Opportunity Fund, LP pursuant to the Convertible Securities Issuance Deed between Motive and Bergen dated 12 May 2014 to exercise its right to convert £125,000 of existing debt into equity. Under the terms of the Deed, Bergen has agreed to certain, substantial, limitations on its ability to dispose of the shares following a conversion of the Convertible Securities. Additionally, Bergen has agreed not to short-sell the Company’s Ordinary Shares. The new shares will rank pari passu with the existing issued Ordinary Shares. The Company has also entered into a deed of amendment in relation to the Deed. Under the amendment, the currently outstanding nominal amount of the first convertible security previously issued under the Deed has been amended from £576,534 to £605,855 (and shall be £480,855 following the Company meeting its obligations under the Deed in relation to the Conversion), in consideration of Bergen foregoing certain rights under the Deed. Admission is expected to become effective and dealings are expected to commence on AIM on 9th October 2015, following which it will have a Total of 627,564,221 Ordinary Shares in issue.
Our view: Bergen continues to support Motive’s ambitions in digital television technology. Indeed, having reduced its cost structure, the Company has positioned itself to start reaping the benefits of its investment in technology and strategic positioning. Indeed, with so many ‘irons in the fire’ and a list of obvious consumer ‘likes’, the potential to multiply revenues is undoubtedly there. Having said that, however, the key to success for Tablet TV appears to remain its ability to ensnare the right distribution/enfranchisement with hardware manufacturers and/or broadcasters. Mass international uptake may demand at least one mainstream tablet producer to start the ‘ball rolling’ by committing to incorporate the tuner into its device and, presumably, embed the App into its system after having licensed it or formed some other usage agreement with Motive. This would, of course, require the tablet designer to accept that free OTA reception can comfortably co-exist alongside ‘paid for’ digital streaming. In so doing, this should also speed transition of the Group’s business proposal from one dependent on one-off unit sales, to a significantly more profitable subscription or advertising-based model. Elsewhere, with product development now largely paid for, a giant maritime opportunity can be identified for the Group’s BYOD TV, while its Content Express also finds itself positioned to penetrate important new territories. Both of these could accrue new streams of revenue and longer-term contracts within the current year, whereas Tablet TV possibly remains hindered by a 2-year or so tablet production cycle before being able to gain significant momentum. Motive’s lowly valuation presently wholly discounts a further round of equity funding in order to support continuing development losses. Beyond this, however, it is possible to perceive quite considerable value within Motive’s IP that is capable of being monetised either through outright sale/licensing of one or more of its different technologies or expansion of product revenues. Beaufort maintains a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Motive Television Plc.
Strat Aero (LON:AERO) – Hold
Strat Aero plc, the AIM listed international aerospace company focused on the rapidly emerging Unmanned Aerial Vehicle (‘UAV’) sector; yesterday announced the appointment of Bill Bauer as Sales & Marketing Director, in line with its strategy to build a vertically integrated UAV company, covering all aspects of the value chain including software, hardware and services. The non-Board appointment of Mr Bauer, follows the Board appointments of Mr Tony Dunleavy, Mr Paul Ryan and Mr Gerard Dempsey, who comprise seasoned corporate executives who have held high level positions at blue chip technology companies including Vodafone and Microsoft. Mr Bauer has had a highly successful B2B sales and marketing career with over 20 years’ experience in the IT and telecom sectors, driving complex deals with large business customers. In his most recent sales role at Vodafone he led a cross-functional team responsible for more than 200 global accounts with offices across eight countries.
Our view: With its ambition to build-out a ‘full solution’ UAV offering through separate divisions addressing Training, Military, Commercial and Inspection, the newly formed Board somewhat urgently needs to surround itself with the necessary skills, contacts and experience at senior management level. With such appointments, investors should become increasingly confident in Strat’s ability to successfully identify, consolidate and develop the now anticipated series of ‘bolt-on’ acquisitions and joint ventures as the Group fills out its business plan. In so doing, Strat will capture a wide range of skills and visions from early movers that will help shape this rapidly developing industry. And there can be absolutely no doubt that the global market opportunity already identified will become absolutely giant. The US administration, for example, is presently taking steps toward an opening of US airspace for Unmanned Aerial Vehicles, from which the Federal Aviation Administration suggests a new market worth as much as US$100bn could eventually be created in its territory alone. But actually converting current interest and enquiries into firm, near-term profitable contracts is, as Strat’s previous management found out to their pain, the trickiest part – especially when dealing with military and utilities. The newly adopted more deliverable approach (focussing first on commercial applications) should provide greater visibility for forward earnings. That said, it must now be realistic to anticipate the Group delivering losses, not just for the current year but also 2016E. Beaufort retains its ‘Hold’ recommendation in anticipation of Strat’s operational portfolio being built-out in the coming months and operational/revenue strategy becoming increasingly clear.
Beaufort Securities acts as corporate broker to Strat Aero plc.
CityFibre Infrastructure Holdings (LON:CFHL) – Speculative Buy
Yesterday, CityFibre Infrastructure Holdings (CityFibre) informed that it won its first contract under the Master Services Agreement with Vodafone Limited. As per the agreement, the company would supply fibre connectivity to some parts of Vodafone UK’s estate of mobile cell site locations, certain corporate customer locations, and also provide extra interexchange connectivity. The contract would cover the City of York, using CityFibre’s existing 120km York Core metro fibre network.
Our view: The aforementioned contract is an important milestone for CityFibre as it bags a contract from one of the leading telecommunication firm worldwide. CityFibre would provide its pure fibre connectivity to Vodafone’s customers. With this, the company can now boast to have partnership with all the major service providers globally. Furthermore, CityFibre delivered solid results in the first half of 2015 with improved revenues and enhanced cash position. The company extended its Gigabit City project in Edinburgh to 294 additional council-owned sites, strengthening the 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. CityFibre is well placed with some impressive contracts and national level partners, and joint ventures with UK’s leading broadband service providers to cover 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.
Melrose Industries (LON:MRO) – Buy
Yesterday, Melrose Industries (Melrose) announced that it plans to implement a corporate reorganization to efficiently and promptly return the proceeds of the disposal of the Elster Group to the shareholders. The company had acquired Elster Group in August 2012 for £1.8bn, which currently has a return of 2.3 times on equity investment and 33% equity IRR in three years. The proposed reorganization would be carried out in three steps that are the Scheme, the Initial Reduction of Capital and the Proposed Return of Capital. Post the completion of the disposal, the company’s Board intends to return between £2.0-£2.5bn to shareholders.
Our view: The aforementioned proposal strengthens Melrose’s business strategy of buying, improving and selling. The company has more than doubled its equity investment in Elster, enabling it to offer a £2.0 to £2.5bn return of capital to investors. Over the past 10 years the company has distributed more than £2bn to the shareholders showcasing its constant efforts to enhance shareholder value. Additionally, the company paid an interim dividend of 2.8p Totalling to £27.9m on 3rd September 2015. Meanwhile, the company continues to invest in research and development to enhance the earnings from its Brush group. The first set of generators in China are nearing completion and testing phase for delivery is expected to be completed by this year. Going ahead, we expect Melrose to have better opportunities as it seeks for acquisitions and continues to increase the shareholder wealth. In light of the above argument, we maintain a Buy rating on the stock.
Economic News
Germany factory orders
German factory orders dipped a seasonally adjusted 1.8% m-o-m in August, after declining a revised 2.2% in July, the Federal Ministry of Economy and Technology said yesterday. Economists had forecasted orders to increase by 0.5% during the month.
US trade balance
US trade deficit widened to US$48.3bn in August from a revised reading of US$41.8bn in July, the Commerce Department said yesterday. Economists had expected a trade gap of US$48.0bn. Overall imports of goods and services rose 1.2%, while the exports dropped by 2.0%.