Beaufort Securities Breakfast Alert Strat Aero, Providence Resources, BP and St. James's Place


The Markets

Market opening: The FTSE-100 is expected to open around 3-points lower this morning.

New York: Wall Street ended in the red amid weak economic data and disappointing corporate earnings reported yesterday. Furthermore, ambiguity over the US interest rates and decreasing oil prices dented investor sentiment. The S&P 500 slipped 0.3%, dragged down by the energy sector.

Asia: Equities are trading mixed. The Nikkei 225 added 0.7%, as investors expect the central bank to provide additional stimulus in its policy meeting later this week. The Hang Seng was trading 0.6% down at 7:00 am, tracking the losses across global markets. Investors await the Fed’s policy statement today.

Continental Europe: Markets closed lower as a dip in oil prices and mixed corporate earnings hurt investor confidence. Moreover, investors remained concerned over the economic slowdown in China and await the Fed’s decision on interest rate. Germany’s DAX and France’s CAC 40 shed 1.0% each.

Crude Oil: Yesterday, WTI and Brent oil prices decreased 1.8% and 1.5%, respectively. The spread between the two varieties stood at US$3.6 per barrel.

UK small caps: The FTSE AIM All-Share index closed 0.74% lower on Tuesday at 742.88.

Today’s news

UK economic growth eases in third quarter

As per the Office for National Statistics, UK’s GDP grew 0.5% q-o-q in Q3 2015, after increasing 0.7% in Q2 2015. On y-o-y basis, the economy expanded at 2.3% as compared to 2.4% in the previous quarter. The slowdown was mainly due to sluggish performance in the construction and manufacturing sectors.

Company News

Strat Aero (LON:AERO) – Speculative Buy

Yesterday, Strat Aero informed that Geocurve Holdings Ltd, the company’s Unmanned Aerial Vehicle (UAV) inspection and surveying division is all set to enter into a £1.3bn contract. Barhale Plc, a UK-based infrastructure-focussed civil engineering firm, informed Geocurve about its intent to award the latter a five-year contract to provide engineering, inspection and surveying services.

Our view: The aforementioned update is encouraging for Strat Aero as Geocurve stands close to win a contract from Barhale. The contract bodes well with the company’s strategy to build a vertically integrated UAV offering, covering all aspects of the value chain including software, hardware and services. Earlier this month, Strat Aero raised £1.28m (before expenses) through the issue of shares, which would fund the company’s initiatives to expand in the UAV domain. Furthermore, the company also entered into a joint venture (JV) agreement with UAV Airways Limited (UAVAir), a UK CAA Approved National Qualified Entity, specializing in the provision of UAV training. The JV would be targeted on starting future Remotely Piloted Aircraft & Systems training centres and providing RPAS training courses in territories overseas. The mixture of Strat Aero’s existing training business pooled with the technical knowledge and training reputation of UAVAir from its streamlined 3-day integrated course could win over businesses across multiple areas. We believe the company is moving in the right direction with continuous developments to improve the UAV technology covering all the needs of the clients. In view of the overall optimism surrounding Strat Aero, we upgrade the rating to Speculative Buy from Hold.

Beaufort Securities acts as corporate broker to Strat Aero PLC.

Providence Resources (LON:PVR) – Speculative Buy

Yesterday, Providence Resources informed that it has commenced with the divestment process at the Frontier Exploration Licence (FEL) 2/04 and FEL4/08 licences in the Spanish Point area of the northern Porcupine Basin located at the offshore west of Ireland. The company would divest 32% of its interest in the licence, and retain a 26% stake. The area is operated by Capricorn Ireland Limited (38% interest), a wholly owned subsidiary of Cairn Energy and Sosina Exploration Limited (4% interest).

Our view: The aforementioned update highlights the divestment of Providence’s certain interest in the FEL licences in Spanish Point Area, which consists of gas condensate field and Lower Cretaceous Burren oil discovery along with other leads and prospects. The drilling programme has been delayed due to the Spanish Point appraisal programme, and Cairn Energy expects to commence drilling from 2017. The operator would leverage on the low drilling and service costs. The company still holds a 26% interest in this region and would benefit once the drilling starts. Recently, Providence has signed an agreement with Schlumberger for the southern Porcupine and Goban Spur Basins. This deal would provide support to the company’s technical team to assess the burial and hydrocarbon expulsion history of these basins. Furthermore, the company has recently recognised several shallow buried Cretaceous four-way dip closure at the Newgrange prospect and also improved its capital position by raising US$28m through a combination of open and institutional offer. Thus, in view of the above developments, we maintain a Speculative Buy rating on the stock.

BP (LON:BP.) – Buy

Yesterday, BP declared its results for the third quarter ended 30th September 2015. Underlying replacement cost profit stood at US$1.8bn in Q3 2015 against US$3.0bn in Q3 2014, mainly due to lower oil and gas prices despite strong downstream environment and lower cash costs. While, replacement cost profit for the first nine months of 2015 stood at US$5.7bn (2014: US$9.9bn). Upstream segment reported pre-tax underlying replacement cost profit of US$0.8bn, as compared to US$0.5bn in Q2 2015 and US$3.9bn in Q3 2014. Downstream segment recorded a pre-tax underlying replacement cost profit of US$2.3bn, compared with US$1.9bn in in Q2 2015 and US$1.5bn in Q3 2014. The company reported operating cash flows of US$5.2bn in Q3 2015, and Total of US$13.3bn for the first nine months of 2015. Total capital expenditure on an accruals basis for the Q3 2015 was US$4.3bn, against US$5.3bn in Q2 2014. Net debt at the end of period stood at US$25.6bn (2014: US$22.4bn). On the operational front, BP won contracts for five new blocks in the UK North Sea and three shallow water blocks in the Mediterranean Sea off Egypt. The latter allocation is subject to government approval. The company announced a quarterly dividend of 10 cents, which is expected to be paid on 18th December 2015.

Our view: Though the company’s performance was weak on y-o-y basis primarily owing to weak oil and gas prices, the q-o-q improvement in replacement cost profit supported by strong results from upstream and downstream segments is encouraging. To overcome the prevailing weakness in the oil and gas prices to some extent, BP is undertaking efforts to contain cost and improve operational efficiencies. The company’s downstream segment and fuels business gained from improved refining margins, better operations and efficiency programmes. Furthermore, the company’s partnership with Rosneft is progressing well as it reported expected underlying net income of US$382m (Q3 2014: US$110m) in Q3 2015 from the latter along with a dividend of US$271m during the quarter. In addition, the recently won contracts would improve the company’s prospects. In view of BP’s continuous efforts to mitigate the difficult trading conditions and improving operations, we believe the company would sustain its market position and continue to enhance shareholder wealth. Therefore, we maintain a Buy rating on the stock.

St. James’s Place (LON:STJ) – Buy

Yesterday, St. James’s Place released an update on new business inflows and funds under management for the third quarter ended 30th September 2015. Gross inflow of funds under management advanced 20% y-o-y to £2.3bn in Q3 2015, and moved to £6.7bn (2014: £5.8bn) for the first nine months of 2015. Net inflow of funds under management soared 17% to £1.5bn in Q3 2015, and 12% over the nine months to £4.2bn (2014: £3.7bn). Funds under management stood at £54.5bn (2014: £49.1bn). While, the retention of client funds stood at 95%. The net asset value on the European Embedded Value (EEV) basis on 30th September 2015 was around 675p per share and 665p per share post the payment of the interim dividend on 2nd October 2015.

Our view: The third quarter has been remarkable for St. James’s Place in spite of the variability in the global stock markets. The company’s investments were at a record high accompanied by strong retention of clients and their investments. Consequently, the company recorded a huge jump in the net inflow of funds. The company was also benefitted by the government’s reform encouraging tax-free savings to individuals with the funds in order to drive them away from saving in bank accounts. Furthermore, St. James’s Place delivered solid performance in H1 2015 with improved profit and higher net asset value per share. Additionally, the company witnessed an increase in partnership numbers and number of advisers since the start of the year. The company reached an agreement to acquire Rowan Dartington Holdings Ltd, a specialist stockbroking and discretionary investment service. This move would broaden the company’s portfolio of services to existing clients and also help in acquiring new clients who require such services. We believe the company has future growth potential to improve its business profits and generate substantial returns for its shareholders. Therefore, we continue to recommend a Buy rating on the stock.

Economic News

Eurozone M3 money supply

Eurozone’s M3 money supply expanded at an annual pace of 4.9% in September, following a similar growth in the previous month, the European Central Bank said yesterday.

US durable goods orders

US durable goods orders fell 1.2% m-o-m in September following 3.0% decline in August, the Commerce Department said yesterday. The economists expected a 1.5% decrease in orders. Excluding orders for transportation equipment, durable goods orders fell 0.4% in September, after falling 0.9% in the previous month.

US consumer confidence index

As per the Conference Board, US consumer confidence index fell to 97.6 in October, from a downwardly revised 102.6 in September. The markets expected a reading of 102.9.

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