The Markets
Market opening: The FTSE-100 is expected to open around 21-points lower this morning.
New York: Wall Street ended in the green amid strong corporate earnings results of key technology companies. Furthermore, an interest rate cut by the People’s Bank of China (PBOC) boosted investor sentiment. The S&P 500 advanced 1.1%, led by the information technology sector. For the week, the market rose 2.1%.
Asia: Equities are trading mixed amid PBOC’s decision to lower the interest rate and reserve requirement ratio to lift a slowing Chinese economy. The Nikkei 225 added 0.7%, whereas the Hang Seng was trading 0.1% down at 7:00 am.
Continental Europe: Markets gained amid speculation of fresh stimulus by the European Central Bank and positive quarterly corporate earning results. Moreover, an interest rate cut by China lifted investor confidence. Germany’s DAX and France’s CAC 40 increased 2.9% and 2.5%, respectively.
Crude Oil: On Friday, WTI and Brent oil prices decreased 1.7% and 0.2%, respectively. The spread between the two varieties stood at US$3.4 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.38% higher on Friday at 747.48.
Today’s news
China reduces interest rate and bank reserve ratio
The PBOC cut its one-year benchmark bank lending rate by 25 basis points to 4.35%, the sixth reduction in less than a year. The bank also lowered the one-year benchmark deposit rate by 0.25% to 1.50%. Furthermore, the PBOC cut the reserve requirement ratio by 0.5% to 17.5%. The rate cuts were primarily carried out to boost China’s slowing economy.
Company News
Northcote Energy (LON:NCT) – Speculative Buy
On Friday, Northcote Energy (Northcote) informed that it has reached an agreement with Springer Oil & Gas (SOG), its partner in the acquisition of the Shoats Creek Field. As per the deal, the company has agreed to purchase all rights, title and interest in SOG’s proportionate interest in the Wilcox Unit and all related assets, for a consideration of US$150,000. Northcote plans to pay the amount by the issuance of 65,681,445 ordinary shares. The shares will rank pari passu in all respects with the company’s existing ordinary shares. The company has made an application for the shares to be traded on AIM and expects the admission on 29th October 2015.
Our view: The aforementioned agreement boosts Northcote’s working interest in Wilcox Unit to approximately 50%. This would enable the company to work more competently with its partner Indigo Minerals in improving its prospects in the Shoats Creek Field. Moreover, the company has been undertaking a lot of initiatives to improve its presence in the fast growing Mexican energy sector. Earlier this month, Northcote submitted pre-qualification filing for approval by the National Hydrocarbons Commission (CNH), to participate in Phase III, Round 1 of the Mexican licensing round. The company along with its partners Gaia Ecologica have set up a remediation facility in Tabasco, Mexico. Furthermore, the company has received permission to access data from CNH, providing Northcote access to crucial data that could help to identify potential growth areas. Additionally, the Lutcher More 20 well in Louisiana substantially exceeded the company’s pre-drill expectations in multiple areas including thickness of pay-zone, oil cut and daily rates achieved during testing. Going forward, Northcote expects to increase its activities in the Mexico and Indonesia to expand its global foothold. We are encouraged by these developments and maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Northcote Energy plc
Evgen Pharma (LON:EVG) – Speculative Buy
Following first dealing in Evgen on 21st October, on Friday the Group went on to notified the market that high profile institutional investor, AXA Investment Managers, now holds 8.9% of its ordinary equity. AXA’s highly ranked and recently expanded pharmaceutical and healthcare team is part of an active, long-term, global, multi-asset fund management business with assets under management of EUR 694 billion.
Our view: A big endorsement of Evgen’s technology! Having just raised £7m with its IPO, Evgen can now also lean on the shoulders of AXA as it takes its clinical stage developments through Phase II and beyond. The Group is positioning itself to become the world’s unique provider of sulforaphane and sulforaphane-like pharmaceuticals. Its highly protected core technology allows for the production of a stable version of this molecule which, in turn, hold potential to create a technology platform for provision of a broad range of conditions, including cancers and neurological disorders such as stroke, Multiple Sclerosis etc. Significant academic research has already demonstrated the benefits of Sulfuraphane, but historically its highly unstable nature created barriers to its pharmaceutical development. Evgen’s Sulforadex, however, now permits the low cost production of a synthetic and stable version of the compound. This unlocks the medical and commercial potential of the drug and positions it to become the unique international provider of a range of sulforaphane/sulforaphane-derived drugs. In anticipation of the Group receiving expressions of interest for licensing first indications upon completion of Phase II and pre-clinical studies (which is likely to mean hefty up-front cash payments plus royalties), shareholders could find themselves in receipt of significant payback within just two years. A post-money valuation based both on peer group and DCF indicates fair value in excess of £60m, suggesting the IPO should offer quite dramatic upside for the equity, albeit with limited liquidity. Beaufort starts Evgen Pharma with a Speculative Buy recommendation and sets a price target of 60p/share.
Genel Energy (LON:GENL) – Speculative Buy
On Friday, Genel Energy (Genel) informed that its partners DNO, operator of the Tawke field in Iraq, have received payment of US$30m for oil exported to the Kurdistan Region of Iraq. Genel’s share in the payment amounts to US$9m.
Our view: The above mentioned payment received from the Tawke field is the 2nd payment received, following the US$8m reported in September 2015. Apart from this, the company also received US$16.5m earlier this week, arising from the exports from the Taq Taq field. The Q3 2015 trading update release also indicated that Genel delivered decent performance despite difficult trading conditions. The company undertook various initiatives to reduce costs and achieve operational efficiency. Genel remains on track to complete the second central processing facility at Taq Taq by the end of 2015, which has a planned capacity of 90,000bopd. Genel has been receiving such substantial payments since Q3 2015, which would enable the company to undertake necessary investments to boost production. Furthermore, the company is all set to commence drilling at the prospective CI-508 licence (Genel 24% working interest) offshore Côte d’Ivoire on the Aigle prospect. In light of the above and the company’s capability to withstand a challenging commodity pricing environment, we retain a Speculative Buy rating on the stock.
William Hill (LON:WMH) – Hold
On Friday, William Hill announced an unaudited trading update for the 13 weeks ended 29 September 2015 (Q3 2015). Group’s net revenues declined by 9% for the quarter due to the weaker gross win margin for both online division (-0.8%) and retail division (-3.1%). Group’s operating profit was down 39% due to an additional £23m cost from the Point of Consumption Tax (POCT) and increased rate of Machines Games Duty (MGD). The Company saw a 3% fall in the online net revenue due to a 40% decline in non-core markets continuing its negative trend seen in H1 2015. For the retail division, the Company achieved 3% growth in revenue after adjusting for 108 exceptional shop closures in H2 2014 (8% before adjustment). The Company’s Australia division, saw 36% fall in net revenue amid continuing reshaping of the customer base and trading policies and the migration to the William Hill brand from tomwaterhouse.com, Sportingbet and Centrebet. Despite this, the Group positively announced that it has become the first-ever betting partner for the Australian Open Tennis Tournament, the country’s largest annual sporting events. Also, more positively, the Group’s US operation delivered strong wagering growth up 35% in Q3. Given the weaker than expected result, the Board now expects full year operating profit to be around the lower end of the consensus range £291m to £312m.
Our view: A very mixed bag, most of which is still pointing downward. Against a background of higher tAXAtion, regulatory change and a tough comparative, the market already knew that Q3 was always going to be tough. But, perhaps, management could still have steered the market better regarding other complicating factors that compounded to make this a quarter that most would wish to forget. Management now expects operating profits to tumble to the bottom of a £290m-£312m market range, suggesting 2015E EPS will now come in around 22.7p (29.9p in 2014), with scope to lift to only perhaps, 24.6p next year. Looking beyond the currency impact, sports results around the world proved challenging, the retail performance remained dull, online momentum appears to have stalled, while restructuring in Australia continues to drag. Not a good backdrop for recently appointed CEO, James Henderson, who must now work hard to rebuild market credibility. A 2015E multiple of around 14x, followed by 12.5%, coming with a yield of about 3.5% might be acceptable if shareholders were convinced that the Group’s rather arduous run of bad luck was finally over, that activity levels were picking up and that some payback on management initiatives, such as the Trafalgar platform, would be in evidence in 2016. We are not quite there yet. Beaufort retains its Hold recommendation on William Hill.
Economic News
Germany manufacturing PMI
As per the data released by Markit on Friday, the preliminary manufacturing PMI of Germany fell to 51.6 in October from 52.3 in September. This was behind the market expected reading of 51.7.
Eurozone manufacturing PMI
The preliminary manufacturing PMI for the Eurozone stood at 52.0 in October, following a similar reading in September, as per data released by Markit on Friday. This was better than the market expected reading of 51.7.
US manufacturing PMI
The Preliminary Markit PMI for the US rose to 54.0 in October, from 53.1 in September. This was better than the market expected reading of 52.7.