The Markets
Market opening: The FTSE-100 is expected to start the session around 7-points lower this morning.
New York: Wall Street ended marginally higher as investors eyed Black Friday sales results. The S&P 500 inched up 0.1%, with the telecommunications sector gaining the most. The market rose 3.3% during the week.
Asia: Equities are trading mixed, as investors remained concerned over renewed signs of a slowdown in China’s economy. Moreover, a decline in commodity prices hurt investor sentiment. The Nikkei 225 fell 0.7%, while the Hang Seng was trading 0.2% up at 7:00 am.
Continental Europe: Markets ended in the red, taking negative cues from the sharp fall in the markets in China. Investors await the European Central Bank’s additional stimulus measures in this week’s meeting. France’s CAC 40 and Germany’s DAX shed 0.3% and 0.2%, respectively.
Crude Oil: On Friday, WTI and Brent oil prices decreased 3.1% and 1.3%, respectively.
Today’s news
UK GDP growth slows in the third quarter
As per the Office for National Statistics, UK’s GDP grew 0.5% q-o-q in Q3 2015, from 0.7% in Q2 2015. The slowdown was mainly due to widening of trade balance to £14.2bn in Q3 2015 compared to £7.7bn in Q2 2015. Moreover, contraction in the manufacturing and construction sector also added to the decline.
Company News
Orogen Gold (LON:ORE) – Speculative Buy
Orogen Gold, the gold and minerals exploration company focused in Europe, announced on Friday results from its 2015 drill programme at the Mutsk gold project in southern Armenia. Initial interpretation suggests potential for new gold mineralised zones as well as extensions to existing gold zones. Two drill holes intersected shallow gold-bearing intervals including 21m grading 2.68g/t Au from 29m in hole OG15-46 and 22.4m grading 1.08g/t Au from 20m in hole OG15-47. Assay results are still pending from the remaining two drill holes of the 2015 drill programme. Orogen has an exclusive agreement with Georaid CJSC to earn 80% interest in the Mutsk project by spending a total of US$2.5m by the end of August 2016.
Our view: We are encouraged with the shallow and wide gold-bearing intercept results from the recent drill programme. Whilst further drilling is required to define a compliant mineral resource estimate, we are encouraged with the new assay results which extend the main target zone to the south (and possibly to the northeast) beyond the 500m strike length outliner by earlier drilling. We look forward to the assay results from the remaining two holes which were drilled along the main target zone and intersected hydrothermally altered areas. In the meantime, we maintain a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Orogen Gold plc
Xtract Resources (LON:XTR) – Speculative Buy
Xtract Resources, the gold and copper mining and development company with projects in South America, South Africa and Mozambique, announced today an operational update at its Chepica mine in Chile. At the Chepica Main deposit, the new decline and access portal has been developed from surface to a depth of 90m (a further 85m of development will intersect copper and gold mineralisation at level 8) and support is currently being installed from the portal. The Company also notes progress at its Colin prospect where two mineralised zones have been developed on level 5 and is ready for stoping operations. The Connie 1 zone comprises a width of 3.58m grading 3.4g/t gold over a strike length of 75m. Whereas the Connie 2 zone has a width of 3.0m grading 3.06g/t gold over a strike length of 45m. On aggregate, these two zones represent 7,000t of ore on Level 5 (assuming a lift of 6m to be blasted in December). Furthermore, Xtract notes that the incline development to Level 4 has intersected mineralisation and development will commence in December. On top of this, the decline from level 5 to level 6 intersected mineralisation with development also expected to commence in December. During Q4 2015, a total of 5,770t of the planned 11,999t has been milled and an additional 6,480t of ore has been stocked piled. Resource drilling is on-going at the Colin prospect and an update is expected in Q1 2016.
Our view: We are encouraged with the progress being made at the Chepica Main mine as well as the on-going development at the Colin prospect. We look forward to recommencement of stoping operations at Chepica Main in the new year and are confident management will to meet its target of 11,999t milled during Q4 2015. We also look forward to results from the metallurgical tests on the copper tailings at Carolusburg and O’Kiep as well as completion of the Definitive Feasibility Study (DFS) on the Manica gold project. In the meantime, we reiterate a Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Xtract Resources plc
On Friday, Rio Tinto (Rio) informed that it has received approval for its US$1.9bn Amrun project. The project is related to the construction of bauxite mine and processing and port facilities on the Cape York Peninsula in north Queensland. The company aims to increase the output from the deposits, with a planned initial output of 22.8 million tonnes a year. Production and shipping are expected to start in first half of 2019, while the capital expenditure on the project would occur in 2017 and 2018.
Our view: The approval to expand output from the Amrun project is a positive development for Rio. The company holds 1.49 billion tonnes of bauxite reserves and 1.91 billion tonnes of resources in the Cape York area. Amrun project involves one of the world’s highest quality bauxite deposits, which is expected to generate lucrative returns for Rio. The project is designed in such a way that production can reach up to 50 million tonnes a year in the near future. It would create additional employment opportunities and accelerate Cape York’s economic growth. Moreover, Rio reported excellent performance in the third quarter of 2015 despite adverse market conditions. The company undertook various measures to reduce costs and achieve operational efficiency. These efforts turned fruitful as Rio reported a jump in iron production and remains on track to deliver shipments for the full year as per the guidance. The company maintained its strong performance in bauxite, with record production at Weipa. Divestment of its interest in the Bengalla thermal coal Joint Venture JV is in line with Rio’s plan to have a balanced portfolio of assets. Going forward, the company plans to decrease its capital spending over the next two years. We believe Rio is well placed with adequate resources and assets to face the tough situations ahead and maintain its market position. In view of the overall optimism surrounding Rio, we maintain a Buy rating on the stock.
Pennon Group (LON:PNN) – Buy
On Friday, Pennon Group (Pennon) declared its results for the half year ended 30th September 2015. Revenues remained broadly flat at £689.1m in H1 2015 (H1 2014: £692.3m). EBITDA increased 15.9% to £231.7m. Pre-tax profit rose 6.8% to £106.8m resulting in an EPS of 23.2p against 22.1p in H1 2014. Net debt at the end of period stood at £2,345m (31st March 2015: £2,197m). While, cash resources amounted to £1,816m including cash balances of £806m and undrawn committed facilities of £1,010m. On the operational front, the company acquired Bournemouth Water in April this year. The company also initiated the integration of Bournemouth Water into South West Water. Pennon continued to deliver on its Energy Recovery Facilities (ERF) programme with seven ERFs now on-stream. The company has realized £20m on capital investment for operational ERFs. South West Water has made a good start to K6 programme. Pennon declared an interim dividend of 10.46p, 4.8% higher than the last year, to be paid on 1st April 2016.
Our view: Pennon delivered excellent performance in the first half of 2015 as all of its business segments reported strong results. The company’s water business lines (including South West Water and Bournemouth Water) led the growth with maximum contribution to the earnings. Merger of South West Water and Bournemouth Water businesses is expected to generate cost savings of around £27m over the K6 period (2015-2020). The combined water business is expected to set the efficiency frontier at the 2019 Price Review. Additionally, the Viridor business is making good progress in building a solid asset base of ERFs, with seven plants already operational, and expects 80% of the portfolio to be operational by the end of 2016. The company’s strong cash position paved the way for higher dividend payments. We believe the company is well placed both financially and operationally to deliver long-term growth. Therefore, we maintain our Buy rating on the stock.
Patisserie Holdings (LON:CAKE) – Buy
On Friday, Patisserie Holdings (Patisserie) declared its results for the year ended 30th September 2015. Revenues advanced 20% to £91.9m in 2015 (2014: £76.6m). EBITDA rose 22.9% to £18.8. Consequently, pre-tax profit jumped 29.2% to £14.6p, resulting in an EPS of 11.4p against 10.4p in 2014. Operating cash flows increased 118% to £18.3m, with net cash of £6.1m at the end of period. On the operational front, the company launched create-a-cake and afternoon tea. Patisserie opened 26 new stores in the past 14 months, with the total stores at the end of the period totalling to 166. In February 2015, the company acquired Philpotts, a 23 store premium sandwich retailer, for a consideration of £6.3m, which is fully integrated into the company now. The company proposed its first final dividend of 1.67p, to be paid on 12th February 2016.
Our view: Patisserie delivered solid operational as well as financial performance during the financial year 2015, continuing the strong performance reported in the earlier eight consecutive years. Patisserie reported a jump in revenues led by its core brand Patisserie Valerie. The company’s acquisition of Philpotts has turned fruitful as it contributed £3.6m to the revenues. Additionally, Patisserie’s latest offering afternoon tea is well received in the market as it added £1.2m to sales since its launch. The company enjoys a healthy balance sheet with solid assets and good cash position, which has paved way for its maiden dividend to shareholders. Patisserie has started the new fiscal year on a positive note with 8 new stores opened till date. Going forward, the company plans to focus primarily on organic growth along with seeking strategic acquisition opportunities. In view of the above argument, we recommend a Buy rating on the stock.
Economic News
UK House Prices
As per Nationwide’s latest report, house prices in the UK increased 0.1% m-o-m in November, after a 0.5% rise in the previous month. The markets expected a 0.5% increase in prices. On y-o-y basis, the prices increased 3.7% in November, after a 3.9% rise in October.
Eurozone consumer confidence
The gauge of Eurozone consumer confidence improved to -5.9 in November, as compared to -6.0 in October, the European Commission said on Friday. The economic confidence remained same at 106.1 in November, and the measure of industry confidence declined to -3.2 from -2.0.