The Markets
Market opening: The FTSE-100 is expected to open around 9-points higher this morning.
New York: Wall Street ended largely flat amid better-than-expected jobs data released on Friday. The positive data increased the possibility of an interest rate hike in the next Fed meeting. The S&P 500 fell 0.73 points, with the utilities sector declining the most.
Asia: Equities are trading higher, led by an increased likelihood of an interest rate hike in the US. Investors largely ignored weak economic data from China. The Nikkei 225 rose 2.0% after strong performance of export-driven stocks. The Hang Seng was trading 0.1% up at 7:00 am.
Continental Europe: Markets advanced as positive economic data boosted investor sentiment. Moreover, weakness in the euro aided the region’s export competitiveness. Germany’s DAX and France’s CAC 40 gained 0.9% and 0.1%, respectively.
Crude Oil: On Friday, WTI prices decreased 2.0%, while Brent oil prices dropped 1.2%. The spread between the two varieties stood at US$3.1 per barrel.
UK small caps: The FTSE AIM All-Share index closed flat on Friday at 746.34.
Today’s news
UK’s economic output increases in three months ended October
According to the National Institute of Economic and Social Research (NIESR), the UK’s economic output increased 0.6% in the three months ended October vis-à-vis a 0.5% rise reported in the three months ended September. Furthermore, the Bank of England expects the UK’s fourth-quarter economic growth to be 0.6%.
Company News
Stratex International (LON:STI) – Speculative Buy
On Friday, Stratex International (Stratex) released an update stating that it has achieved the first gold pour at its 45% owned Altintepe Gold Project in Turkey. The pre-production costs including US$39m related to the construction work were recently being financed by its joint venture partner, Bahar Madencilik (Bahar). Stratex has made an initial investment of US$1.5m in this project. The company expects Stage 1 operations to generate at least 30,000oz of gold annually for a period of 34 months, indicating total gold recovery of 110,000oz. Bahar will be entitled to first recoup the pre-production costs from 80% of net free cashflow. Thereafter, both the partners (Stratex owning 45%, and Bahar holding 55%) will receive their respective shares of net proceeds. The project is expected to reach full production within few months. Meanwhile, the company will undertake additional technical and economic assessments on the Extension Ridge and Camlik zones.
Our view: This is a major milestone for the Stratex moving from the explorer to the producer. The company has been progressing well on its projects and has also reported strong performance in the first half of 2015. Apart from lowered pre-tax loss, an improved cash position and strong support from the Joint venture partner and a strong project pipeline are key positives for the stock. The company has a diverse range of projects including the Dalafin project in Senegal, the Muratdere project in Turkey, and the Homase/Akrokrere project in Ghana. All these projects have shown exciting exploration opportunities. Stratex is also exploring gold assets and other high-value base metals across Turkey, East Africa and West Africa, indicates potential exploration upside. We are encouraged by the company’s progress on projects and strong results. In light of the overall optimism surrounding Stratex, we retain a Speculative Buy rating on the stock.
Beaufort Securities acts as a broker to Stratex International plc
AstraZeneca (LON:AZN) – Hold
On Friday, AstraZeneca announced that it has agreed to buy ZS Pharma, a NASDAQ listed pharmaceutical company, in an all-cash deal worth around US$2.7bn. ZS Pharma manufactures novel treatment for hyperkalaemia (increase in blood potassium level), which causes heart and kidney diseases. With this acquisition, company gets access to potassium-binding ZS-9 compound which is currently under the US FDA’s regulatory review and has a potential to reach global peak sales of more than US$1.0bn. The acquisition of ZS Pharma will generate strong synergies for the drug pipeline and portfolio of AstraZeneca’s key therapeutic area, Cardiovascular and Metabolic Disease. After acquisition, ZS Pharma would become wholly owned subsidiary of AstraZeneca. Acquisition is forecasted to generate Product Sales from 2016 and be minimal earnings dilutive in 2016 and 2017. The acquisition is projected to be accretive to AstraZeneca’s core earnings from 2018. Following this acquisition news, the company’s financial guidance for 2015 remains unchanged. As per the agreed terms, AstraZeneca will initiate an offer to buy all outstanding shares of ZS Pharma’s common stock at a price of US$90 each, representing premium of 42% on Thursday’s closing price of US$63.31.
Our view: The aforementioned update is a strategic move by AstraZeneca which will help it to strengthen its foothold in key therapeutic areas such as cardiovascular & metabolic disease. With this acquisition, AstraZeneca gained access to the proprietary ion-trap technology to develop treatments for hyperkalaemia, thereby expanding its existing portfolio of innovative medicines. By the end of 2015, ZS Pharma plans to apply for European Marketing Authorisation which would provide the company with added revenue stream. We believe this acquisition is a strategic fit to AstraZeneca’s long term growth plans and business development, drawing on company’s expertise in marketing medicines for cardiovascular and metabolic diseases. Furthermore, the recent approval of AstraZeneca’s Lesinurad 200mg and BRILINTA tablets by the FDA is a positive development for the company. The company’s efforts to cut costs and acquire new treatments to substitute ageing drugs are commendable. In view of the overall development, we retain our Hold rating on the stock.
International Consolidated Airlines (LON:IAG) – Buy
On Friday, International Consolidated Airlines (IAG) appraised markets with its Long-term goals for 2016-2020. Announcing substantial upgrade in its financial and operational parameters, the Group raised its operating margin forecast to 12.0% – 15.0% from 10.0% – 14.0% earlier, while forecast for an average EPS growth was increased to 12.0% annually from 10.0%. Consequently, EBITDAR forecast has been raised to an average of €5.6bn annually from €5.0bn. Furthermore, in a separate statement, IAG announced group traffic (Revenue Passenger Kilometres) in October increased 16.6% y-o-y, while group capacity (Available Seat Kilometres) grew 13.2% y-o-y. Recently, the Board of Directors declared Group’s first interim dividend of 10 cents per share and proposed full year dividend payout of 25.0% of its underlying profit after tax upon announcement of year end results in 2016.
Our view: IAG again, delivered strong monthly traffic statistic in October reported a healthy rise in the passenger unit revenue and increase in the seat factor on y-o-y basis. And, of course, remains well supported by continuing lower oil prices further improving IAG’s operating margins and free cashflow. Capitalizing on its healthy balance sheet and strong performance in the first nine months of 2015, the Group recently announced the first dividend payment to its shareholders. Furthermore, 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 addition, IAG announced changes in its executive management teams including Executive Chairman and Chief Financial Officer of British Airways effective in April next year. All good news and, as a result, management made a material upgrade to its long-term (2016 -20) financial targets. Beaufort believe the Group is well placed to maintain the earnings growth momentum going forward benefiting from positive demand scenario and acquisition synergies. Beaufort, therefore, reiterate its Buy rating on the stock.
Economic News
Germany industrial production
Industrial production in Germany fell 1.1% m-o-m on a seasonally adjusted basis in September, after a revised fall of 0.6% in August, the Federal Ministry of Economics and Technology said on Friday. Economists, on the contrary, had expected production to grow 0.5% for the month. On a y-o-y basis, industrial production increased 0.2% in September, following a 2.3% increase in August, behind the market expected rise of 1.3%.
UK industrial production
UK industrial production fell 0.2% m-o-m in September, compared to a 0.9% increase in August, the Office for National Statistics reported on Friday. The August data was marginally revised downward from the 1.0% increase reported earlier. Markets were expecting a 0.1% fall. On a y-o-y basis, industrial production improved 1.1% in September, from 1.8% in August, better than the market expected gain of 1.3%.
UK manufacturing production
The Office for National Statistics reported that the UK manufacturing output rose 0.8% m-o-m in September, after a 0.4% rise in August. This was better than the market expected increase of 0.6%. On a y-o-y basis, manufacturing output fell 0.6% in September, after a 0.9% dip in August.
US change in nonfarm payrolls
US non-farm payrolls stood at a seasonally adjusted 271,000 jobs in October, the US Labor Department said on Friday. Markets had expected payrolls to increase to 185,000. September payrolls’ increase was revised downwards to 137,000 versus 142,000 reported initially.
US unemployment rate
The unemployment rate for October stood at 5.0%, in line with the market expectations. Previous month’s reading was 5.1%.