The Markets
Market opening: The FTSE-100 was trading 37 points lower at 8:10 this morning.
New York: Wall Street dropped slightly lower on Wednesday, as retailer Macy’s showed poor quarterly results and a selloff in energy stocks weighed on the indexes.
The Dow Jones lost 56 points to 17,702. The S&P 500 dropped 0.3% to 2,075 whilst the Nasdaq traded 0.3% lower.
Asia: Share markets brusshed off the early losses from Thursday with crude oil prices pulling away from the lows overnight.Japan’s Nikkei sotck inxed rose slightly away from the earlier losses. Hong Kong’s Seng Index was trading 1% higher and China’s Shanghai Composite Index dropped 0.63%.
Continental Europe: Euro markets were anticipated to open marginally weaker today, covering losses on Wall Street and more general poor updates from companies on the broader stock market.
UK small caps: The FTSE AIM All-Share index closed 0.12% lower yesterday at 742.78.uy; DekelOil- Buy; Motif Bio – Speculative Buy; Sainsury (J) – Hold; Barratt Developments- Buy
Today’s news
Dyson loses energy efficiency labelling claim
Dyson vacuum cleaner manufacturer recently lost the bid on changing the European energy labelling laws. Sir James Dyson, the company’s founder, has previously argued that their vacuum cleaners were only ever tested once they were emptied of any dust. Sir James Dyson claimed that the tests were misleading "consumers on the real environmental impact of the machine they were buying".
Company News
KEFI Minerals (LON:KEFI) – Speculative Buy
KEFI Minerals, the gold exploration and development company with projects in the Federal Democratic Republic of Ethiopia and the Kingdom of Saudi Arabia, announced yesterday that it has received formal confirmation from the Government of Ethiopia of its intent to invest US$15-20m in the Tulu Kapi gold project. Following the completion of the investment and considering the Government’s pre-existing 5% free carried interest, the Government of Ethiopia would hold a total of 20-25% of KEFI Minerals (Ethiopia) Ltd, a wholly owned subsidiary of KEFI Minerals Plc that owns and operates the Tulu Kapi project. The Government’s investment will be used to fund roads, power and certain other infrastructure required for the project. KEFI is planning annual gold production of 115,000oz during the first 8 years with an estimated all-in sustaining costs of between US$731/oz and US$752/oz. Using a consensus gold price of US$1,250/oz and a discount rate of 8% the project’s NPV is c US$168m based on the unleveraged after tax cash flow. The intended investment by the Ethiopian Government implies a project value of c US$75m.
Our view: We are encouraged with the Government of Ethiopia’s formal confirmation of its intended equity investment in the Tulu Kapi project. We see this commitment as a vote of confidence in the project’s economics as well as KEFI’s ability to manage the project. We look forward to further announcements regarding the finalisation of financing options comprising senior debt facilities of c US$70m and a combination of streaming of c US$40m and project equity of c US$20m. We understand that finalisation of the equity component will occur in early 2016 after procurement has been completed to ensure adequate cost-overrun facilities. In the meantime, we maintain a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to KEFI Minerals.
Xtract Resources (LON:ZTR) – Speculative Buy
Xtract Resources, the gold and copper mining and development company with projects in South America, South Africa and Mozambique, announced today that it has deferred payments on the Chepica earn-in option until March 2016 and has also extend the option period on the Slime Dumps agreement from 31 October 2015 to 29 February 2016 with the O’Kiep Copper Company (OCC). Xtract has re-negotiated the terms of the earn-in option at Chepica with all payments due in 2015 now deferred until 2016. Under the terms of the current agreement, a payment of US$0.35m was due October 2015 with further quarterly payments totalling US$2.4m payable by December 2016 and a final US1.1m payment due January 2017. On aggregate, this would equate to US$3.85m for 100% interest in Chepica. Under the revised terms, Xtract will make a payment of US$0.385m in March 2016 and further nine monthly instalments of US$0.385m with the last payment occurring in December 2015 for a total of US$3.85m, as such Xtract will then own 100% interest in the Chepica mine. Similarly, the original agreement with OCC regarding the copper dumps has been revised. Xtract had until 29 October 2015 to complete its technical assessment and feasibility report at which point a ZAR12m (£0.56m) payment was due in the event that Xtract elected to proceed with the projects, followed by payment of ZAR4m (£0.185m) and a final payment of ZAR4m (£0.185m) after 180 days and 360 days respectively from the initial payment. Under the revised terms, Xtract has agreed to an additional payment of ZAR1.5m (£0.07m) for a four month extension of the exclusivity period, until 29 February 2016 to complete further technical assessment of the projects. Should Xtract elect to proceed, the initial payment of ZAR12m (£0.56m) will become payable immediately followed by payments of ZAR4m (£0.185m) due 180 days and 360 days respectively after the initial payment..
Our view: Despite the additional payment of ZAR1.5m (£0.07m) for extending the exclusively period for the copper dumps by four months, we are encouraged with the extra time to properly evaluate the economics of re-processing the O’Kiep and Carolusburg copper tailings projects. The decision to proceeds hinges on the metallurgical test results, which we understand are still pending. We also note the added flexibility gained by the deferred scheduled payments required for the Chepica earn-in option agreement while management continues-develop new access to Chepica Main mine. We look forward to results from the metallurgical tests on the copper dumps at Carolusburg and O’Kiep as well as completion of the Definitive Feasibility Study (DFS) on the Manica. In the meantime, we reiterate a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Xtract Resources.
It has been announced that the Fund Management Company Miton Group (MGR.L) has bought a 3.35% stake in DekelOil. The renowned Income and Small Company fund manager, Gervais Williams is Managing Director of the AIM listed Miton Group.
Our view: It is reassuring that our long held position view on DekelOil is supported by such as aminent and respected investor. We continue to recommend DekelOil as a Buy.
Beaufort Securities acts as corporate broker to DekelOil.
Motif Bio (LON:MTFB) – Speculative Buy
Motif Bio plc, the clinical stage biopharmaceutical company specialising in developing novel antibiotics, yesterday announced that it has received written advice from a Scientific Advice Meeting with the Medicines Evaluation Board in Utrecht, The Netherlands, held on 16 September 2015, in relation to the Phase III Clinical Development Programme for iclaprim. The MEB’s advice confirms that two Phase III clinical trials plus microbiological data derived from the planned surveillance studies, are acceptable as pivotal registration studies for approval in the European Union through the “centralized” regulatory procedure of intravenous iclaprim, a targeted spectrum antibiotic designed to be effective against multi-drug-resistant bacteria, including MRSA.
Our view: Not wholly unexpected, but this represents the passing of another important regulatory milestone for Motif. The MEB’s acceptance of the Group’s proposal for two Phase III clinical trials for iclaprim, ensures it remains firmly on track to meet its goal of completing the two ABSSSI trials in 2017, and submitting a Marketing Authorisation Approval in Europe. Against the background of a looming crisis in the antibiotic world, it is not surprising that commercial interest in antibiotics has recently taken off. Yet valuating such clinical stage opportunities remains far from an exact science. While discount cashflow and other such financial methodology could create a valuation for Iclaprim, the size of the prospective opportunity (which potentially runs into billions of dollars in revenues) more often than not is seen to befuddle such an approach. In which case, peer group comparisons possibly provides a more realistic assessment. Paratek Pharmaceuticals, Inc. (NASDAQ: PRTK), appears to be the closest peer to Motif, having a similarly advanced antibiotic development product in Phase III trials and comes with a similar history. Right now, Paratek, is valued at around US$350m, or almost four times the current market capitalisation of Motif Bio. Beaufort retains its Speculative buy recommendation on Motif Bio with a price target of 110p/share.
Sainbury (J) (LON:SBRY) – Hold
Yesterday, Sainsbury released its interim results for the 28 weeks to 26 September 2015. Underlying Group sales (including VAT) dropped 2% to £13.6bn (H1 2014: £13.9bn) and the retail sales (including VAT) went down by 0.1%. On a like-for-like (LFL) basis, sales decreased by 1.6% and the underlying profit before tax narrowed 17.9% to £308m (H1 2014: £375m). Consequently, the underlying basic EPS contracted 17.2% to 12.0p per share from 14.5p. Overall return on capital employed stood at 9.1% (H1 2014: 11.1%). On a statutory basis, the Group sales decreased 2% to £12.4m and earnings per share was 13.6p compared to loss per share of 18.0p in H1 2014. On the operational front, the Group has invested £150m in lowering regular prices which helped drive transaction growth of some 3% and volume growth of 1%. It also opened a new one million sq ft general merchandise depot in Daventry International Rail Freight terminal. The Group declared a reduced interim dividend, of 4.0p per share, a fall of 20% year-on-year from 5.0p per share in H1 2014, as per earlier guidance.
Our view: Sainsbury, together with other mainstream grocers continued to struggle amid challenging market conditions and food price deflation. The sector witnessing its LFL sales and profit falling, mainly driven by excellent harvests in Europe bringing down prices and growing market share by the discounters. Despite a rise in the real wages of people in the UK, consumers are tends to be spending their additional income on clothing, holidays and dining out. Sainsbury continue to put their effort on cutting their costs, now expecting savings of around £225m by the end of financial year, ahead of expectations, and is on track to deliver their target of £500m cost savings over the next three years. During the period, Sainsbury opened 37 new convenience stores, delivering sales growth of some 11%, taking its total to 741 stores. Online groceries delivered sales growth of 7% y-o-y, although it’s growth were slower than the previous year. On the other hand, Sainsbury’s non-food division had good performance. The Group launched Tu online successfully and saw its clothing sales up by nearly 10%. Sainsbury’s Bank delivered 6% increase in total income. Mobile by Sainsbury’s, a £5m share of loss Group joint venture, is due to close in January next year. We believe success is still in the nascent stage and would like to wait and see their progress through the Christmas period. We applaud their cost cutting strategy but in view of the persisting tough trading conditions, we maintain our Hold rating on the stock.
Barratt Developments (LON:BDEV) – Buy
Not wholly unexpected, but this represents the passing of another important regulatory milestone for Motif. The MEB’s acceptance of the Group’s proposal for two Phase III clinical trials for iclaprim, ensures it remains firmly on track to meet its goal of completing the two ABSSSI trials in 2017, and submitting a Marketing Authorisation Approval in Europe. Against the background of a looming crisis in the antibiotic world, it is not surprising that commercial interest in antibiotics has recently taken off. Yet valuating such clinical stage opportunities remains far from an exact science. While discount cashflow and other such financial methodology could create a valuation for Iclaprim, the size of the prospective opportunity (which potentially runs into billions of dollars in revenues) more often than not is seen to befuddle such an approach. In which case, peer group comparisons possibly provides a more realistic assessment. Paratek Pharmaceuticals, Inc. (NASDAQ: PRTK), appears to be the closest peer to Motif, having a similarly advanced antibiotic development product in Phase III trials and comes with a similar history. Right now, Paratek, is valued at around US$350m, or almost four times the current market capitalisation of Motif Bio. Beaufort retains its Speculative buy recommendation on Motif Bio with a price target of 110p/share.
Our view: Rarely do the Boards of major quoted companies deliver such an emphatic and confident vision of their strategic positioning, market and forward opportunity – particularly when they are running notoriously cyclical businesses, such as housebuilding! But then again, rarely have highly developed western nations experienced such a combination of positive drivers for the major residential developers, including significant structural, shortages of supply, direct government incentives (Help-to-Buy, Buy-to-Let), relatively easy access to mortgage financing supporting a population determined to own its own abode, while small ‘mom-and-pop’ housebuilders (which historically has deliver more than half the UK’s completions) are being starved of capital. Clearly, however, the market yesterday thought it had ‘heard it all before’ as Barratt’s share price fell modestly, continuing the sector decline that was established a couple of weeks back after various of the UK-sector distributors and building materials suppliers warned they had experienced a slowdown in activity since mid-year. Beaufort has stated in recent research that it considers this ‘hiccup’ was the result of concerns over a possible change of UK government back in May, which was then followed by contractors being seen to concentrate their vacations around the traditionally busy August and early September building periods. While there certainly are some clouds on the longer-term horizon (such as the ending of Help-to-Buy in 2020, etc.), for now a forward 2016E P/E for Barratt of just 10.7x together with a yield of 5.5% still appears to give away too much. In that respect, the recent sector setback is probably providing a buying opportunity, although those who want to remain at the front of the curve could also look at the oversold Building Material sector (such as Travis Perkins, SIG etc.), as well as the severely hit equipment hire sector (most particularly HSS Hire).