The Markets
Market opening: The FTSE-100 is expected to open around 6-points lower this morning.
New York: Wall Street ended in the red, taking negative cues from Fed Chairperson’s statement regarding the possibility of an interest rate hike in December. Additionally, a decrease in oil prices hurt investor sentiment. The S&P 500 fell 0.4%, dragged by the energy sector.
Asia: Equities are trading higher. The Nikkei 225 rose 1.0% as export-driven stocks were supported by a weak yen. The Hang Seng was trading 0.1% up at 7:00 am, tracking the Chinese market.
Continental Europe: Markets ended mixed. Germany’s DAX shed 1.0%, pulled down by the escalation of the Volkswagen scandal. Conversely, France’s CAC 40 rose 0.3% amid the expectation of an additional monetary stimulus by the ECB.
Crude Oil: Yesterday, Brent and WTI oil prices decreased 3.9% and 3.3%, respectively. The spread between the two varieties stood at US$2.3 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.36% higher yesterday at 747.06.
Today’s news
UK’s service sector expands in October
According to Markit, UK’s service sector purchasing managers’ index (PMI) increased to 54.9 in October from 53.3 in September. Furthermore, jobs growth in the services sector was recorded at a five-month high.
Company News
Savannah Resources (LON:SAV) – Speculative Buy
Yesterday, Savannah Resources (Savannah) announced that it has commenced drilling on selected new VTEM targets and historic copper results around the Aarja prospect at the Block 4, located in Oman. The company is earning a 65% interest in the Omani company, Al Thuraya LLC, the owner of the Block 4 licence project, by undertaking exploration activities on behalf of Al Thuraya. Savannah has initiated a 10 hole RC/diamond programme targeting the Aarja, Zuha and Gaddamah prospects. The drill testing at the southern end of the Aarja pit has started, which has shown a trenching result of 14.5m at 8.03g/t gold and 0.9% copper (AJT001). While, the Gaddamah Gossan has witnessed trenching results of 7.7m at 11.35g/t gold, 1.45% zinc and 0.40% copper in GDT01. A total of 6 holes (603m) of the planned 7 hole programme at the Aarja Prospect have finished.
Our view: With this new drill programme Savannah is targeting high priority VTEM targets to test for VMS-type mineralisation while also following up on encouraging trench results. Recently, Savannah identified a new high grade copper mineralization at the Aarja prospect and additional grades of up to 13.9g/t gold at the Salahi 1 prospect. Additionally, the company has found many potential targets, located close to the previously producing copper mines, with production of more than 190,000 tonnes of copper. In view of the findings in the Block 4, we believe the commencement of drilling could enhance the company’s resource base and improve its long-term prospects. Furthermore, Savannah has raised £564,060 (before expenses) in two rounds of fund raising during the month of October. The company plans to use these funds to target early production in Oman and undertake mineral sands initiative in Mozambique. Therefore, in view of overall optimism surrounding Savannah, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Savannah Resources plc
Kibo Mining (LON:KIBO) – Speculative Buy
Yesterday, Kibo Mining (Kibo) announced that it has secured £500,000 loan facility from Sanderson Capital Partners Ltd. The company can use the facility at its discretion during the three month term of the facility. The facility is unsecured and bears no interest. An arrangement fee of £150,000 is to be paid by the company if it utilizes the facility. The arrangement fee will be paid one third in cash and remaining in shares at a fixed price of 6p per Kibo share on, or before the drawdown date of any particular drawdown.
Our view: The aforementioned update provides Kibo with necessary funds to meet its short-term requirements. Meanwhile, the company awaits payment of £526,000 from its previous broker. Additionally, Kibo continues to progress well in the Mbeya Coal to Power Project (MCPP), as it successfully finished Phase 1 of the Mbeya Definitive Mining Feasibility Study (MDMFS) comprising of a geotechnical drilling programme on the Mbeya coal mine. The company concluded the programme as per the schedule and within the budget. Last month, Kibo informed that it completed the financial optimisation study for the coal mine component of the MCPP based on the feasibility results obtained. The company reported encouraging findings with relatively low operating costs, high NPV and improved cash return on capital invested. Kibo boasts of a diversified portfolio of mineral projects including the Lake Victoria Goldfields in the Southern Tanzania, with around 700,000oz JORC compliant gold resource and the highly prospective Haneti nickel project in the Central Tanzania. Furthermore, the company has commenced operations at its uranium JV with Metal Tiger covering the Pinewood uranium project. We believe Kibo has long-term growth potential well supported by its solid assets and substantial resources. Therefore, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Kibo Mining plc
Yesterday, Persimmon released its trading update for the third quarter for the period between 1st July 2015 to 3rd November 2015. Sales advanced 12% y-o-y, since it reported half year results on 18th August 2015. Forward sales rose to £780m as compared to £696m in the same period last year. The company expects an improvement in the operating margin after reporting 20.5% in the first six months. Persimmon expects an increase in cash balances at the end of year (31st December 2014: £378.4m). In addition, the company expects an improvement in the return of capital employed from 27.5% reported in the first half. On the operational front, Persimmon opened 105 new housing developments in the six months to the start of November 2015, and expects to add 20 openings by the end of the year. The company has acquired more than 16,000 plots of new land in the year to date. Persimmon’s new businesses at Stockton in Teesside and Castle Bromwich opened in the first half are trading well.
Our view: Persimmon continues its growing momentum and reported higher sales and forward sales during the period. The strong performance was aided by the availability of competitive mortgage lending and continued growth in employment with rising real wages. Additionally, the company’s new regional businesses opened in first half are performing well. Persimmon’s constant effort to generate operational efficiency has led to an expected rise in the operating margin and cash available. Going forward, the company plans to open new sites and continue investment in high quality land. Persimmon also plans to convert strategic land into land with residential consent. With the recent structural improvements in the mortgage markets and a positive outlook for the housing sector in the UK, we believe the company has bright prospects. Therefore, we continue to recommend a Buy rating on the stock.
Legal & General Group (LON:LGEN) – Buy
Yesterday, Legal & General (L&G) released a trading update for the third quarter and nine months to 30th September 2015. Net cash generation advanced 14% y-o-y to £943m for the first nine months of 2015. While, operational cash generation rose 11% to £936m (Q3 YTD 2014: £844m). Annuity assets stood at £43.1bn, 8% higher than the same period last year. Legal & General Investment Management’s total assets under management rose 8% to £717.0bn (Q3 2014: £662.1bn) and external net inflows increased 161% to £21.7bn. UK Protection premium improved 3% to £1,109m (Q3 YTD 2014: £1,077m). Legal & General America premiums increased 6% to US$877m (Q3 YTD 2014: US$824m), while direct investments jumped 43% to £6.6bn (Q3 2014: £4.6bn). The company plans to make direct investments worth £15bn, across the company over the medium term. Moreover, it remains on track to deliver nearly £80m of operating cost savings whilst incurring £40m of restructuring costs in 2015.
Our view: Legal & General continues to deliver strong organic growth in the UK and the US from its developing as well as established businesses. The company reported an improvement in most of the key parameters including cash generation, annuity assets and assets under management. L&G is proactively disposing of non-core businesses to reduce its costs in real and nominal terms. These initiatives have enhanced efficiency across business lines and enabled the company to focus on key markets. L&G increased its investments in urban regeneration, housing, alternative finance and clean energy to avail the opportunities available in these domains. Going forward, the company plans to look for opportunities in the UK and also expand further in the US and European market. In light of the above argument, we maintain a Buy rating on the stock.
Marks and Spencer Group (LON:MKS) – Hold
Yesterday, Marks and Spencer Group (M&S) declared its results for the half year ended 26th September 2015. Revenues rose 1% y-o-y to £4.9bn in H1 2015, led by a 1.7% increase in UK’s revenues. Pre-tax profit fell 22.7% to £216m in H1 2915, leading to an EPS of 10.5p as compared to 14.0p in H1 2014. Food sales increased 3.3%, with a 0.2% growth on like-for-like (LFL) basis. General merchandise sales fell 0.4%, with LFL sales down 1.2%. However, M&S.com sales advanced 34.2% benefitting from the Group’s investments to improve infrastructure in the past few years. Free cash flow generation before shareholder returns increased to £256.5m from £67.4 in H1 2014. The Group announced an interim dividend of 6.8p, 6.3% higher than the same period last year.
Our view: Marks and Spencer delivered a satisfactory performance for the first half of 2015, despite well signalled challenging market conditions. Amid a competitive and deflationary sector, the Group’s food business outperformed the underlying market by some 3%, driven by speciality products, innovation and improved convenience for consumers. Elsewhere in GM, sales were down 0.4% with like-for-like falling 1.2%; here the focus remained on improving profitability and delivering gross margin ahead of expectations. By contrast, M&S.com reported an improvement in all the key metrics, delivering sales +34.2% on a 20% or so rise in traffic. International sales were down 0.9%, notably deteriorating in Q2 due to unfavourable Euro exchange rate movements. The key takeaway from the management call, however, was a good improvement in the GM business’s H1 gross margin (up by 285%) driven by squeezing supplier margin; as a result, full year GM gross margin guidance was raised by 2-2.5%. Strong cash generation also paved way for an increase in the interim dividends, which Beaufort considers will now be replicated for the full year. Against a background of the Group continuing its share buyback programme, improving overall gross margin, introduction of the new SPARKS loyalty card scheme and having already registered a 20% gain in Christmas food orders, with improved and strengthened distribution, the Group continues to address its most obvious problem areas. Management was also clear that the Group expects to be largely unaffected by the introduction of national living wage, which becomes effective from next year. In view of the current outlook, Beaufort retains its Hold recommendation on M&S, recognising that the shares are unlikely to give much more of the past year’s outperformance back.
Economic News
US MBA mortgage applications
US mortgage applications dropped 0.8% w-o-w in the week ended 30th October after a drop of 3.5% in the preceding week, the Mortgage Bankers’ Association said yesterday.
US ADP employment change
Jobs in the US private sector fell to 182,000 in October, after a revised reading of 190,000 in September, above the consensus estimate of a gain of 180,000, ADP reported yesterday.
US trade balance
US trade deficit narrowed to US$40.81bn in September, from a revised reading of US$48.02bn in August, the Commerce Department said yesterday. Economists had expected the trade gap to reduce to US$41.0bn.