The Markets
Market opening: The FTSE-100 is expected to open around 25-points lower this morning.
New York: Wall Street ended in the red amid weak economic data released on Friday. Furthermore, disappointing corporate earnings hurt investor sentiment. The S&P 500 fell 0.5%, with the financial sector losing the most. For the week, the markets closed 0.2% up.
Asia: Equities are trading lower amid weak manufacturing data released in China, which raised the concern of a slowdown in the country’s economy. The Nikkei 225 fell 2.1%, while the Hang Seng was trading 0.8% down at 7:00 am.
Continental Europe: Markets ended in the green as positive economic data boosted investor confidence. Investors digested the mixed corporate earnings reported on Friday. Germany’s DAX and France’s CAC 40 rose 0.5% and 0.2%, respectively.
Crude Oil: On Friday, Brent and WTI oil prices increased 1.6% and 1.2%, respectively. The spread between the two varieties stood at US$3.0 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.39% lower on Friday at 737.91.
Today’s news
Manufacturing in China contracts for third consecutive month
As per data from the National Bureau of Statistics, China’s purchasing managers index (PMI) stood at 49.8 in October following a similar reading in September, marking its third consecutive month of contraction. However, the new export order component rose to 50.7, the highest in ten months.
Company News
Ferrum Crescent (LON:FCR) – Speculative Buy
Ferrum Crescent, the direct reduction (DRI) pellet developer focused on its Moonlight iron project in Limpopo Province, South Africa announced on Friday its quarterly activities and cash flow report for the period ended 30 September 2015. The Group had a cash balance of A$0.6m at the end of the quarter and is continuing with its BFS activities on the Moonlight project following the recently signed JV agreement with Business Venture Investments (BVI). Under terms of the agreement, in return for fully funding and completing the BFS across two phases (BFS Phase1 and BFS Phase 2), BVI will earn up to 43% equity interest in Ferrum Iron Ore, the Group subsidiary that holds the Moonlight project. A previous memorandum of understanding (MoU) with Principle Monarchy Investments has been formally terminated. The BFS Phase 1 is expected to recommence by the end of 2015.
Our view: While it’s unfortunate that Principle Monarchy was unable to fulfil its obligations under the previously announced MoU, we are encouraged that Ferrum now has a fully committed and legally binding agreement it place with BVI for the funding and completion of the BFS on the Moonlight project. We look forward to the recommencement of the BFS and regular updates from the BFS Phase 1 activities. In the meantime, we reiterate our Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Ferrum Crescent plc
SerVision (LON:SEV) – Speculative Buy
On Friday, SerVision informed that it’s fully owned subsidiary SerVision UK Limited has been selected as a supplier for a major global logistics firm. SerVision would supply and install the company’s end-to-end telematics closed-circuit television (CCTV) security system. Post the approval, SerVision has begun work on fitting out a fleet of 101 vehicles in the UK using its video equipment. The company expects to receive £225,000 for the first project, which is scheduled to start on 9th November 2015.
Our view: The aforementioned update is encouraging for SerVision as it enters into a supply agreement with a top logistics firm. The deal showcases high quality of the company’s products as it won the deal against four firms in this domain. SerVision uses advanced video compression technology which permits (CCTV) to be streamed directly and live from moving vehicles. The company expects to generate regular revenue stream from this contract. In September, SerVision successfully raised £797,684 gross through the issue of 22,790,972 new ordinary shares. These funds would cater to its rapidly growing order book. In 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. Furthermore, the company 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 ahead, SerVision plans to look for such potential opportunities and improve its market position. In light of the above argument, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to SerVision plc
International Consolidated Airlines (LON:IAG) – Buy
On Friday, International Consolidated Airlines (IAG) declared its results for the third quarter and nine months to 30th September 2015. Revenues advanced 15.2% y-o-y to €6.8bn in Q3 2015, while revenues for the first nine months of 2015 rose 13.0% to €17.1bn. Operating profit for Q3 2015 before exceptional items improved to €1.3bn (2014: €900m), and for the first nine months jumped to €1.8bn from €1.0bn in the same period last year. Consequently, pre-tax profit jumped to €883m in Q3 2015 (Q3 2014: €634m), and for the nine months to €1.2bn (2014: €790m). EPS rose to 57.1 cents in the first nine months, as compared to 33.4 cents in the same period last year. Cash and net debt at the end of period stood at €6.8bn (31st December 2014: €4.9bn) and €7.2bn (31st December 2014: €6.1bn), respectively. The company expects an operating profit between €2.25-2.3bn for the full year, excluding Aer Lingus. IAG declared its first interim dividend of 10 cents per share, to be paid on 7th December 2015.
Our view: IAG delivered solid performance in the first nine months of 2015 with enhanced revenues and higher margins. The company reported a jump in the passenger unit revenue and increase in the seat factor. IAG’s results were well supported by the decreasing oil prices in the past few months. The company enjoys a healthy balance sheet with improved cash position. IAG’s improved margins facilitated the company’s first dividend payment to its shareholders. IAG plans to pay 25% of its underlying pre-tax profit in the form of dividends at the end of the year. Additionally, the acquisition of Aer Lingus Group has turned fruitful for IAG, as Aer contributed €45m to the operating profit since it joined IAG. Going forward, IAG plans to add 8 Airbus Group SE A350 long-range jets for Iberia to change older planes, and add five A330 wide bodies to increase the capacity of Spanish carrier. In view of the overall optimism surrounding IAG, we upgrade the rating to a Buy from Hold.
On Friday, BG Group declared its results for the third quarter and nine months to 30th September 2015. Revenue and other operating income fell 9% y-o-y in Q3 2015 to US$4.1bn, while for the first nine months stood at US$12.1bn, 20% lower than the same period last year. EBITDA fell 37% to US$1.2bn in Q3 2015 and 43% to US$4.2bn in the nine months to September. Consequently, earnings declined by 63% to US$280m in Q3 2015 leading to an EPS of 8.2cents against 22.3c in Q3 2014. E&P (Exploration and Production) production rose 26% to 716,000 barrels of oil equivalent per day (boepd) in Q3 2015. The company raised its production forecast for the full year to between 680,000-700,000 boepd. While, LNG Shipping & Marketing segment’s EBITDA to be in the range of US$1.3-1.5bn for 2015. BG remains on track for the merger with Shell, as two of the five requirements for the integration have been fulfilled.
Our view: The oil and gas sector is going through a major transformational phase owing to the recent slump in the oil prices. BG reported resilient performance in the first nine months with improved production level. The company laid its focus to improve operational efficiency and efficiency of its assets. BG’s growth was led by Australia, Brazil and Norway. E&P production in Australia witnessed an improvement in capacity utilization, recording highest production level of 118,000 boepd and averaging 98,000 in Q3 2015. Additionally, production in Brazil doubled to 158,000 in Q3 2015, led by the Santos Basin. The LNG Shipping & Marketing reported a huge jump in volumes, which was offset by the lower sales prices. Going forward, the company plans to undertake various measures to generate operating and cost savings, to alleviate the effect of weak commodity prices in its final results. We believe BG would meet its production and EBITDA guidance for the year owing to its continuous efforts to improve operations and reduce costs. Therefore, we upgrade the rating to a Buy from Hold.
Hutchison China Meditech (LON:HCM) – Buy
On Friday, Hutchison China Meditech (Chi-Med) informed that Hutchison MediPharma Limited (HMP), its drug R&D subsidiary, completed its first-in-human Phase I clinical trial of HMPL 523. The study was done to evaluate the safety, tolerability and pharmacokinetics of both single and repeat doses of HMPL 523 in healthy volunteers in Australia. The safety profile of HMPL 523 was as per the initial expectations, with no issues of hypertension and severe diarrhoea seen during the study.
Our view: Chi-Med’s initial clinical trials on HMPL-523 have been positive and in line with its expectations. The drug is useful in various immune system associated diseases, such as autoimmune diseases including rheumatoid arthritis, systemic lupus erythematosus and allergy, as well as haematological cancers including lymphoma and leukaemia. HMPL-23 has several advantages as compared to its competitors including convenience of usage and easy clearance from the body suppressing the risk of infections. Furthermore, HMP is all set to receive a US$10m payment in Q4 2015 from its partner Eli Lilly. Going forward, the company plans to continue development of HMPL-523 in its global Phase II program and also assess the drug for the treatment of lupus. In view of the above argument, we maintain a Buy rating on the stock.
Economy News
Eurozone CPI
Consumer price inflation (CPI) in the Eurozone remained flat y-o-y in October, after a decrease of 0.1% in September, as per the estimates published by Eurostat on Friday. Core prices, excluding energy, food, and tobacco, grew 1.0% y-o-y in October, following a 0.9% increase in September.
US personal income and spending
US personal income rose 0.1% m-o-m in September, after an upwardly revised increase of 0.4% in August, the US Commerce Department said on Friday. The markets expected a 0.2% increase in personal income. Personal spending increased 0.1% m-o-m in September, after a 0.4% rise in August. The reading missed the market expected increase of 0.2%.
US Chicago purchasing manager
The Chicago purchasing managers’ index (PMI) improved to 56.2 in October from a reading of 48.7 in September, better than the expected reading of 49.5, data from MNI Indicators suggested on Friday.
US University of Michigan sentiment
The US University of Michigan’s consumer sentiment index for October fell to 90.0 from 92.1 in September, data indicated on Friday. Economists expected a reading of 92.5. The consumer expectations index, which closely forecasts the direction of consumer spending, fell to 82.1 from 82.7, whereas the current economic conditions index declined to 102.3 from 106.7.