The Markets
Market opening: The FTSE-100 is expected to open around 16-points higher this morning.
New York: Wall Street ended broadly flat amid disappointing corporate earnings and weak economic data released yesterday. The possibility of an interest rate hike in December weighed on investor sentiment. The S&P 500 closed 0.94 points down, with the utilities sector losing the most.
Asia: Equities are trading mixed, taking negative cues from speculations of an interest rate hike by the Fed in December. The Nikkei 225 added 0.8% after the Bank of Japan kept its monetary stimulus programme unchanged at its policy meeting. The Hang Seng was trading 0.2% down at 7:00 am.
Continental Europe: Markets ended lower, dragged by poor quarterly earnings releases. Volatility in oil prices weighed heavily on energy stocks. Germany’s DAX and France’s CAC 40 shed 0.3% and 0.1%, respectively.
Crude Oil: Yesterday, WTI prices increased 0.3%, whereas Brent oil prices decreased 0.5%. The spread between the two varieties stood at US$2.7 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.20% lower yesterday at 740.81.
Today’s news
Consumer confidence in UK falls to four-month low: GfK
As per a GfK survey, the UK’s consumer confidence index slipped to +2 in October from +3 in September, the lowest in four months. Slowdown in construction and manufacturing led to the decrease in confidence.
UK mortgage approvals fall in September
As per data from the Bank of England, mortgage approvals for house purchases fell to 68,874 in September from 70,664 in August, marking the first decrease in four months. However, mortgage lending rose to £3.59bn, the highest net increase since April 2008.
Company News
Herencia Resources (LON:HER) – Speculative Buy
Herencia Resources, the Chile focused mineral exploration and development company announced yesterday that it has executed a Binding Term Sheet to acquire the Pastizal copper project in central Chile via an option agreement. Under terms of the option agreement, Herencia will make four scheduled payments for a Total of US$0.86m to acquire 100% of the project. In addition, a royalty of US$0.05 per pound of refined copper up to a Total of four million tonnes of ore treated from Pastizal. The Binding Option Agreement provides for the option to be enforceable subject to Herencia completing its final due diligence. The Pastizal copper project is located adjacent to Herenica’s Picachos tenements and lies 10km from Teck Resource’s Carme de Andacollo copper-gold project. Results from recent geological mapping and surface sampling confirm that the high-grade mineralisation at Pastizal is a continuation of the 40M Shaft mineralisation where Herencia plans to develop an open pit operation.
Our view: We are encouraged with the option agreement to acquire the adjacent Pastizal project. While we are not aware of any historical drilling on the property, analysis of surface sample indicate high grade copper mineralisation and we note that there is currently small scale mining occurring at Pastizal. In addition, we see the acquisition as strategic fit for Herencia given the continuation of the 40M Shaft mineralisation as it continues with its plans to develop an open pit operation at Picachos. Whilst more detailed work is required in order to prove up any additional resources, we are encouraged with the preliminary surface results. These bode well for the company as it considers options for processing the Picachos ore through the recently proposed JV with the Errazuriz Group, which owns and operates the nearby Tambillos copper project. In the meantime, we maintain a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Herencia Resources plc
Ortac Resources (LON:OTC) – Speculative Buy
Ortac Resources, the diversified mineral exploration and mine development company, announced yesterday results from a surface trench sampling programme completed by Zamsort, the Zambian focused copper company in which Ortac has acquired secured convertible loan notes. Zamsort holds a small scale mining licence (SML) at its Kalaba project located 290km west of Solwezi in northwest Zambia. Highlights from the nine oxide trench results include: 95m with an average grade 2.08% Cu and 0.26% Co from Trench 3, 30m with an average grade of 2.1% Cu and 0.24% Co from Trench 4 and 20m with an average grade of 1.73% Cu and 0.25% co from trench 7. The nine trenches were sampled in and around the Kalaba small-scale open pit operation which has been mined intermittently over the last 10 years. The next stage of exploration is to test for continuity of mineralisation within the saprolite layer to the east through augering or diamond drilling.
Our view: Ortac is providing technical support as Zamsort continues to progress its Kalaba copper and cobalt project in Zambia. We are encouraged with the trenching results as Zamsort moves the project towards production with the commencement earthworks for the construction of the leach plant at Kalaba. We look forward to updates on the plant design as well as continued exploration results within the highly prospective Zambian Copper Belt. In the meantime, we maintain a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Ortac Resources plc
Yesterday, Aviva released an interim management statement for the third quarter and first nine months of 2015. The value of new business (VNB) improved 25% y-o-y to £823m in the first nine months (9M14: £685m). The UK Life VNB rose 36% to £404m, while the Europe VNB grew 11% to £284m. The combined operating ratio (COR) improved to 94.0% (9M14: 95.9%), with the UK and Ireland reporting a COR of 92.8% (9M14: 94.2%), Canada COR of 94.2% (9M14: 96.8%), Europe COR of 97.1% (9M14: 99.8%). General insurance and net written premiums increased 2% to £6.1bn. Meanwhile, the assets management division generated returns of 6.6% in the last 12 months, and the Total funds under management stood at £1.9bn. Net asset value rose 2% to 387p per share (H1 2015: 380p). The company generated £91m of savings from its acquisition of Friends Life.
Our view: Aviva delivered excellent performance in the first nine months of 2015. The company’s VNB has advanced across all the geographies, with UK Life business leading the gains. The customers’ response to the choice of pension freedoms offered has been encouraging, resulting in higher growth in the UK Life. The COR, a key performance indicator in the insurance business has also shown remarkable improvement in all the regions. Aviva’s asset management segment progressed well offsetting the challenging industry conditions, with increase in the funds under management. The company enjoys a healthy balance sheet with an economic capital surplus of £10.1bn in Q3 2015. Aviva continued on its work to expand its digital presence and plans to open its second Digital Garage in Singapore in December 2015. Furthermore, the company’s acquisition of Friends Life has turned fruitful as it recorded an increase in savings. In light of Aviva’s bright prospects going ahead, we upgrade the rating to a Buy from Hold.
Smith & Nephew (LON:SN.) – Hold
Yesterday, Smith & Nephew released a trading update for the third quarter ended 26th September 2015. Revenues for Q3 2015 stood at US$1,105m, 4% higher on an underlying basis and 4% lower on a reported basis. Sports Medicine, Trauma & Other segment grew 2% on an underlying basis to US$447m, while the reconstruction arm improved 3% to US$342m. Advanced Wound Management reported a 6% increase in revenues to US$316m. On the operational front, the company completed the acquisition of the trauma and orthopaedics business of its Russian distributor DeOst LLC and DC LLC. Separately, the company informed that it has agreed to acquire Blue Belt Holdings for a consideration of US$275m.
Our view: Smith & Nephew delivered decent performance in the third quarter despite negative currency fluctuations. The company’s US business led the revenues reporting a 3% growth, with strong contributions from Knee Implants, Sports Medicine Joint Repair and Advanced Wound Care. Smith & Nephew continues to strengthen its European business and reported second successive quarterly increase in revenues. The company also reported revenue improvement in the emerging markets despite prevailing weakness in China. Smith & Nephew is also set to benefit from the recently acquired trauma and orthopaedics business’ manufacturing and distribution platform and knowledge of the Russian markets. Furthermore, the acquisition of Blue Belt Holdings would aid company’s growth in the fast-growing area of orthopaedic robotics-assisted surgery. However, the movements in currency rates are expected to hurt the company’s margins, especially in the emerging markets. We would like to wait and watch Smith & Nephew’s performance in the coming months. For the time being, we upgrade the rating to a Hold from Sell.
Royal Dutch Shell (LON:RDSB) – Buy
Yesterday, Royal Dutch Shell (‘Shell’) declared its unaudited results for the third quarter ended 30th September 2015. On a current cost of supplies (CCS) basis, the company reported a loss of US$6.1bn in Q3 2015 as compared to profit of US$5.3bn in Q3 2014, resulting in loss per share of US$0.97 against EPS of US$0.83 in the same period last year. Cash flow from operations fell to US$11.2bn from US$12.8bn in Q3 2014. Capital investment and divestment proceeds during the quarter stood at US$7.1bn and US$1.0bn, respectively. Total current and non-current debt rose to US$55.6bn at the end of the period from US$45.5bn on 31st December 2014, whereas cash and cash equivalents increased to US$31.8bn (31st December 2014: US$21.6bn). Oil and gas production in Q3 2015 stood at 2,880 thousand barrel of oil equivalent per day (boe/d) as compared with 2,790 thousand boe/d a year ago. On the operational front, Shell halted the construction of the Carmon Creek in-situ oil project in Canada. The company has also stopped exploration activities in offshore Alaska. Shell declared an interim dividend of US$0.47 per class A ordinary share and US$0.94 per class B ordinary share, similar to Q3 2014, to be paid on 18th December 2015.
Our view: The year 2015 has been really difficult for energy companies and Shell is no exception. The continuous downslide in oil prices and higher taxes has weighed heavily on the company’s performance. However, the company undertook various measures to improve operational efficiency which translated in higher production levels. Shell’s healthy cash position would further facilitate future growth initiatives. The company plans to enhance focus on its major assets and halted exploration activities in offshore Alaska and stopped the construction of Carmon Creek. Furthermore, the company’s acquisition of BG Group, the British oil and gas producer is progressing well with timely regulatory filings and integration. Post the completion of transaction, we expect the company to cut spending in exploration, re-structure its capital allocation and achieve better economies of scale owing to a good asset base. We believe Shell would deliver good results in the long-term owing to its fundamentally strong position and measures to counter the challenging conditions. Therefore, we continue to recommend a Buy rating on the stock.
BT Group (LON:BT.) – Buy
Yesterday, BT Group declared its results for the second quarter and the half year ended 30th September 2015. Underlying revenue excluding transit advanced 2% to £4.3bn in Q2 2015, while revenues for H1 2015 stood at £8.7bn, 1% higher than the same period last year. Pre-tax profit rose 14% to £ 642m in Q2 2015 and 15% to £1.3bn in H1 2015. Consequently, EPS rose to 6.3p in Q2 2015, 13% higher than Q2 2014. While, EPS in H1 2015 increased 11% to 12.4p. Net debt at the end of period stood at £5.9bn. The company added 106,000 TV customers in Q2 2015. BT announced an interim dividend of 4.4p, 13% higher than H1 2014.
Our view: The first half of financial year 2015 has been remarkable for BT both financially as well operationally. The company reported improved revenues led by the BT Consumer division. BT’s Sport Europe channel has seen strong demand, resulting in higher customer acquisitions in Q3 2015. The company’s £897m investment to attain the legal rights for Champions League has boosted its TV business. Additionally, the market for fibre broadband connections remained healthy, with net additions of 21%. Meanwhile, the company’s mobile customer base rose to more than 200,000. Earlier this week, BT received provisional approval for the acquisition of EE by UK’s Competition and Markets Authority. The company would benefit from EE’s advanced 4G network along with its widespread network in the UK. Apart from resultant cost and revenue synergies, the acquisition would also ensure seamless services to the combined entity’s customer base along with ensuring various opportunities for product innovation. In light of the above argument, we maintain a Buy rating on the stock.
Economic News
UK House Prices
As per Nationwide’s latest report, house prices in the UK increased 0.6% m-o-m in October, following a 0.5% rise in the previous month. This was better than the market expected increase of 0.5%. On y-o-y basis, the growth rate stood at 3.9% in October, after an increase of 3.8% in September.
Germany unemployment change
The number of people without a job in Germany fell by 5,000 on a seasonally adjusted basis to 2.78 million in October, the Federal Labour Agency said yesterday. Economists had forecasted unemployment to drop by 4,000 for the month. The seasonally adjusted unemployment rate was unchanged at 6.4% in October.
Eurozone consumer confidence
The gauge of Eurozone consumer confidence remained unchanged at -7.7 in October, the European Commission said yesterday. This was in line with the market expectations. The economic confidence index rose to 105.9 in October from 105.6 in September, and the measure of industry confidence improved to -2.0 from -2.3.
US initial jobless claims
Initial jobless claims in the US increased by 1,000 to a seasonally adjusted 260,000 in the week ended 24th October, the Labor Department reported yesterday. Last week’s claims stood at 259,000. Economists expected the claims to increase to 265,000. The four-week moving average slipped to 259,250 from the previous week’s 255,250.
US GDP annualised
US GDP grew at an annualised rate of 1.5% q-o-q in Q3 2015, after rising 3.9% in the preceding quarter, the Commerce Department stated yesterday. The markets expected a 1.6% growth in GDP.
Germany CPI
Consumer price index (CPI) in Germany remained flat in October, after a decrease of 0.2% in September, as per the estimates published by the Federal Statistics Office yesterday. The markets expected a decrease of 0.1%. On y-o-y basis, prices increased 0.3% in October, after a flat reading in September.