The Markets
Market opening: The FTSE-100 is expected to open around 26-points higher this morning.
New York: Wall Street ended in the green as an improvement in oil prices boosted investor sentiment. Additionally, an increase in car sales was cheered by investors. The S&P 500 advanced 0.3%, with the energy sector gaining the most.
Asia: Equities are trading higher, tracking the global markets. The Nikkei 225 rose 1.3% after successfully listing Japan’s Post Holdings. The Hang Seng was trading 2.1% up at 7:00 am.
Continental Europe: Markets ended positive as higher oil prices outweighed yesterday’s disappointing corporate earnings. Germany’s DAX closed 0.48 points up, while France’s CAC 40 rose 0.4%.
Crude Oil: Yesterday, WTI and Brent oil prices increased 3.8% and 3.6%, respectively. The spread between the two varieties stood at US$2.6 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.62% higher yesterday at 744.41.
Today’s news
UK shop prices fall in October: BRC
According to the British Retail Consortium, UK shop prices declined 1.8% y-o-y in October, compared with 1.9% in September. The agency expects a continuous fall in prices going into the Christmas season.
NIESR forecasts low growth in UK
According to the National Institute of Economic and Social Research (NIESR), the UK’s GDP is estimated to expand 2.4% in 2015 and 2.3% in 2016, down from the earlier forecast of 2.5% for 2015 and 2.4% for 2016.
Company News
Eurasia Mining (LON:EUA) – Speculative Buy
Eurasia Mining (Eurasia), the precious metal exploration and development company released an update yesterday on the progress at its West Kytlim alluvial platinum project, located in Russia. The company announced completion of the production licence award process for the project, following the licence fee payment of 2,126,000 roubles (c £21,000). Also, it mentioned that the development is fully underway with technical design planning, forestry applications and planning for additional mine exploration programme to enhance and expand mine feed. Economic modelling has verified a mine model including electrically powered draglines and commissioning is expected in 2016.
Our view: The aforementioned update is encouraging for Eurasia as it now holds a production licence for the project. The company’s internal geology team has started the exploration work at the site. Additionally, results from economic modelling have been positive with confirmation of a mine model. Eurasia is in the progress of creating technical design for the mine and is also contacting external experts. The company has also made a request to the Forest Department for approval of land on the route of the planned power line to site. We believe Eurasia’s progress on track for production to commence in 2016. Furthermore, the company is progressed well on it’s another venture, Monchetundra project, and is now seeking capital investments. In light of the above argument, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Eurasia Mining plc
Avanti Communications Group (LON:AVN) – Speculative Buy
Yesterday, Avanti Communications Group (Avanti) informed that it has been awarded a contract by Telkom SA to offer national high-speed broadband coverage in South Africa. The company would deliver the service using its HYLAS 2 Ka-band satellite, which provides 100% coverage to South Africa.
Our view: Avanti continues on its plan to collaborate with major telecom firms in Africa, and won a contract in South Africa. The company would build on its existing network to provide services to government sites, businesses and homes across the country. Recently, Avanti reported strong performance in the financial year 2015 supported by strong revenue growth capitalizing on higher number of contracts. The company’s investments in its main markets paved off as it registered a record revenue from its top 20 customers. Avanti won several distribution partners and improved existing relationships to access the huge latent demand for connectivity in high growth markets. The company is progressing well on the planned launch of HYLAS 3 and HYLAS 4 satellite during 2017. Going forward, Avanti plans to invest in the sales and marketing activities to cater to the markets covered by HYLAS 4. Given its strong position and incremental opportunities in the pipeline, we expect the company to maintain its on-going momentum in the near future. Therefore, we reiterate a Speculative Buy rating on the stock.
Faroe Petroleum (LON:FPM) – Speculative Buy
Yesterday, Faroe Petroleum (Faroe) provided an operational and drilling update. Year to date, the production has averaged around 10,350 barrels of oil equivalent per day (boepd). The Blink exploration well 6406/12-5S discovered reservoir but water wet. The Pil, Bue and Boomerang discoveries store huge oil and gas reserves, and the company now aims to start with field development planning. The company would continue with its drilling programme in 2016 with a focus on one frontier exploration well in the Barents Sea and two near field exploration wells. The Njord Future Project is progressing as per the schedule with tow-in expected in Q2 2016. The Butch oil field has successfully passed concept selection and field development expected to start by the end of 2016. The company has attained a 75% interest in the South East Tor oil discovery in Norway from Lundin Petroleum.
Our view: Faroe continues to progress well on operational front despite the weak oil prices and difficult market conditions. The company boasts of excellent exploration prospects along with strong portfolio of pre-development projects. Faroe witnessed large oil and gas discoveries across most of its assets. The company laid its focus on managing its finances, which has resulted in a healthy balance sheet with enhanced cash position and good cash flow. Faroe has planned a reserve based lending facility in 2016, which would increase the debt facility and improve financial flexibility. Owing to strong production in its fields, the company has upgraded the production guidance to average between 9,500-10,500 boepd. In light of its strong proven resources and asset base, we maintain a Speculative Buy rating on the stock.
Associated British Foods (LON:ABF) – Hold
Yesterday, Associated British Foods (ABF) declared its results for the year ended 12th September 2015. Revenues fell 1% y-o-y to £12.8bn in 2015. The grocery division witnessed a 5% drop in revenues to £3.2bn, while the sugar division’s revenues slipped 13% to £1.8bn. The agriculture segment revenues fell 8% to £1.2bn and ingredient’s revenues were down 1% at £1.2bn. However, the retail segment saw an 8% increase in revenues to £5.3m. Pre-tax profit fell to £717m from £1.0bn, leading to an EPS of 67.3p against 96.5p in 2014. Net debt and cash and cash equivalents at the end of period stood at £194m (2014: £446m) and £585m (2014: £399m), respectively. UK sugar production for the year stood at 1.45 million tonnes driven by very high beet yields and good factory performances. On the operational front, the company has opened around 1 million sq ft of selling space to take the total to 293 stores and 11.2 million sq ft. ABF also opened new stores in the Netherlands, Belgium and Germany. The company made investments to increase the warehouse capacity in its existing warehouses. The company has increased interim dividend by 3% to 10.0p. ABF announced a final dividend of 25.0p, to be paid on 8th January 2015.
Our view: The financial year 2015 has been difficult for ABF with low commodity prices and adverse exchange rates hurting the company’s margins. The company undertook various steps to generate operational efficiency across its divisions. ABF saw a sharp dip in net debt and improvement in cash flow. Primark, the company’s fast growing fashion chain, witnessed a 13% jump in sales mainly due to increase in retail selling space of 9%. ABF opened stores in the Euro countries and its first store in the US at the end of period. Going forward, the company plans to make investments to increase the number of stores and expand its presence in growth markets. However, substantial fall both in sugar prices in the EU and world has exerted pressure on the global sugar industry. ABF expects higher effect of currency movements on its business in the coming period. We would like to wait and watch the company’s performance in the near future. For the time being, we downgrade the rating to a Hold from Buy.
Imperial Tobacco (LON:IMT) – Buy
Yesterday, Imperial Tobacco (Imperial) declared its preliminary results for the year ended 30th September 2015. Revenues fell 4.4% to £25.3bn in 2015. The company’s Growth brands volume jumped 10.7% to 145.1 billion SE in 2015. Pre-tax profit rose to £1.8bn from £1.5bn in 2014, leading to an EPS of 177.4p against 148.5p in the same period last year. Adjusted net debt stood at £11.6bn, £3.5bn higher than the last year. On the operational front, Imperial worked on its cost optimization programme and expects to make savings of £85m. The company also entered into a purchase agreement to acquire certain US cigarette and e-cigarette brands and assets, owned by Reynolds and Lorillard, for a consideration of £4.6bn. Imperial has proposed a final dividend of 49.1p, taking the total dividend to 141.0p, 10% higher than the previous year.
Our view: Imperial’s growth momentum in its Growth and Specialist brands was able to partially offset challenging market conditions due to rising health awareness, higher taxes and tighter regulation. Moreover, the company’s focus on cost optimization has led to improved cash flows and higher margins. Imperial also witnessed an improvement in cash conversion to 97% from 91% in 2014. Additionally, the company’s deal with Reynolds American would provide the company an easy entry into the potential US cigarette market. Imperial continued to enhance shareholder value through higher dividend payable. Going forward, the company plans to optimize its brand portfolio and market along with undertaking initiatives to effectively manage cost and cash. We believe the company is strongly positioned both financially as well as operationally to deliver long-term growth. Therefore, we maintain a Buy rating on the stock.
Economic News
US factory orders
US factory orders fell 1.0% m-o-m in September after declining 2.1% in August, the US Department of Commerce said yesterday. The markets expected a 0.9% drop in orders. Excluding orders for transportation equipment, factory orders fell 0.6% in September, following a 1.1% decrease in the previous month.