The Markets
Market opening: The FTSE-100 is expected to start this morning's session around 43-points higher.
New York: Wall Street ended mixed on Friday despite a decline in oil prices. Investors cheered positive economic data released in the US. The S&P 500 closed flat with the material sector leading the gainers. For the week, the markets closed 2.0% higher, marking the highest weekly rise for 2016.
Asia: Equities are trading higher, as the yen’s depreciation led to an improvement in Japanese shares. China’s decision to remove the head of securities regulator and replace him with Liu Shiyu led to optimism among investors. The Nikkei 225 advanced 0.9%, while the Hang Seng was trading 0.8% up at 7:00 am.
Continental Europe: Markets ended in the red due to losses in banking stocks. Furthermore, a renewed decline in oil prices hurt investor sentiment. Germany’s DAX and France’s CAC 40 dropped 0.8% and 0.4%, respectively.
Crude Oil: On Friday, Brent and WTI prices fell 3.7% each. The spread between the two varieties stood at US$3.4 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.18% higher on Friday at 683.77.
Today's news
Retail sales in UK rise in January
As per the Office for National Statistics, retail sales in the UK increased 2.3% m-o-m in January 2016, the highest monthly gain since December 2013, after a 1.3% decrease in December 2015. On a y-o-y basis, sales rose 5.0% following a 1.8% surge in December 2015. The improvement was ascribed to price cuts after Christmas, which led to higher demand for clothing and computers.
Company News
Strat Aero (LON:AERO, 3.75p) - Speculative Buy
Strat Aero plc, the AIM quoted international aerospace company focused on the Unmanned Aerial Vehicle sector, on Friday announced that it has been awarded a wind turbine inspection contract with Westar Energy, the largest electricity provider in the state of Kansas, USA. This is the Group's first wind inspection and data analysis contract utilising its UAVs and proprietary software, and as a result it represents a significant milestone in Strat Aero's positioning as a full service UAV provider to the commercial and military sectors. Under the terms of the contract, Strat Aero will initially inspect 53 turbines in two of five fields operated by Westar at a rate of six turbines per day. The initial value of the contract is US$26,000 but with a total of 312 turbines on site there is scope for the initial contract announced today to be extended to cover the remaining 259 turbines across Westar's five fields, as well as others operated by Westar. The Directors view this initial contract with Westar as proof of concept, and intend to use it as a springboard to secure additional contracts with Westar and other major operators in the US. Work has already commenced with the team managing to inspect eight turbines per day using its UAVs, compared to the two turbines per day typically handled by manual-led techniques traditionally employed by operators. By enabling far less downtime and lost production, Strat Aero's UAV based solution therefore offers major savings in terms of time and costs for turbine operators. In addition to the significant savings offered, the data gathered by the UAVs will be analysed and stored using Strat Aero's proprietary Digital Data Management software ('DDM'), which will be available to the customer at any time.
Our view: An important breakthrough! This agreement follows an extended trialing process and signals the Group’s first important contract in this potentially lucrative market. The scope and scale of the wind farm industry in the US is enormous and its champion, Westar Energy, is a preeminent player in this market, generating over 7,000 MW of electricity and serving nearly 700,000 customers in much of east and east-central Kansas. The initial phase of this relationship will see Strat overseeing the inspection of 53 turbines, which provides an ideal test model in which the efficiency, reliability and functionality of drones will be clearly demonstrated. As such, it places the Group in a strong position to roll out this service to cover Westar's full portfolio of wind turbines across its five fields, in addition to providing a springboard into the larger wind turbine drone inspection market, of which industry consultant Navigant Research estimated will expand to a value of US$6 billion by 2024. Indeed, as Beaufort has previously pointed out when putting the future scale of this opportunity into perspective, the Unmanned Aerial Systems market is expected to grow exponentially over the next decade and beyond. In the US alone, for example, civilian, law enforcement and military applications in UASs are expected to be the most dynamic sector in the aerospace industry, with the overall market forecast to grow more than US$82.1bn between 2015 and 2025 (AUVSI Economic Report 2013), while the global airborne Intelligence, Surveillance and Reconnaissance (‘ISR’) market estimated to grow to US$19.23bn by 2023. Yet, to date, Strat Aero remains one of a very small handful of quoted direct investments dedicated to capturing this specific opportunity. Beaufort retains its Speculative Buy recommendation on Strat Aero.
Beaufort Securities acts as corporate broker to Strat Aero plc
NU-Oil and Gas (LON:NUOG, 0.20p) - Speculative Buy
On Friday, NU-Oil and Gas (NUOG) provided an update on Marginal Field Development Company Ltd (MFDevCo), in which it has a 50% interest, and its farm-in to the Helvick and Dunmore oil discoveries. NUOG has been granted a two-year lease undertaking for both discoveries by the Minister of State at the Department of Communications, Energy and Natural Resources of Ireland, effective from 1st March 2016. The award of the undertaking prompts a staged 50% farm-in by MFDevCo, with an agreed work programme for staged equity participation. This would give MFDevCo a 10% initial working interest assignment and further equity assignment of up to 40%.
Our view: NUOG receiving a two-year lease undertaking for Helvick and Dunmore oil discoveries is a positive development. Both wells are located in the North Celtic Sea Basin and are estimated to hold substantial resources. The company plans to evaluate low-cost development options at these prospects. Initial work at these reservoirs has shown positive results. Therefore, MFDevCo and the MFD Consortium plan to convert the wells into potentially large commercial reservoirs. This plan goes well with NUOG’s strategy to commercialise stranded and marginal fields based on solutions and core expertise delivered by MFDevCo and the MFD Consortium. This would help them build a portfolio of projects and opportunities that do not expose them to exploration and appraisal risk. We are encouraged by the company’s plans and look forward to further developments on its prospects. Therefore, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to NU-Oil and Gas plc
AFC Energy (LON:AFC, 21.25p) - Speculative Buy
On Friday, AFC Energy signed a strategic engineering partnership and services agreement with PlantIng GmbH, a Germany-based engineering consultancy, to support the optimisation and rollout of AFC’s alkaline fuel cell system. PlantIng has more than 300 engineers and technicians, and is one of the largest independent providers of engineering projects in the chemical and petrochemical industries in Germany. As per the agreement, PlantIng would assist AFC with the fuel cell Balance of Plant (BoP) to generate product/package/costed solutions for optimised designs. PlantIng would undertake feasibility studies with AFC for commercial duel cells globally. In addition, it would provide a basic engineering design package for a template fuel cell plant project containing AFC’s fuel cell cartridges, along with all the requisite infrastructure, utilities and building services.
Our view: The aforementioned agreement with PlantIng is an important step for AFC. The company’s partners would help in optimisation of its fuel cell system design, readying it for commercialisation. The agreement marks the beginning of a long-term partnership with PlantIng, as AFC would benefit from the expertise of one of the best engineering firms in Germany. Moreover, PlantIng was previously associated with AFC for over a year at its POWER-UP project at Stade. Recently, AFC raised up to £1.13m through a shareholder offer. These funds would be used by the company to complete pre-commissioning activities and meet working capital requirements for the KORE system facility at Stade. Once this fuel system is fully operational, it would be the world’s largest alkaline fuel cell system, functioning at an industrial facility, selling power to the national electricity grid. We are buoyed by the company’s progress at the KORE system and await future updates on it. In light of the above argument, we maintain a Speculative Buy rating on the stock.
Millennium & Copthorne (LON:MLC, 379.0p) - Hold
Millennium & Copthorne (‘Millennium’), the multinational hotel group, on Friday announced final results for the year ended 31 December 2015. During the year, the Group’s revenue per available room (‘RevPAR’) remained relatively flat, increased by +0.6% to £72.0 (FY2014: £71.6). In constant currency, RevPAR fell by -1.3% which Millennium blame poor performance in the Group’s Asian hotels. Revenue increased +2.5% to £847m (FY2014: £826m) driven by acquisitions and opening of Millennium Mitsui Garden Hotel Tokyo, together with foreign currency tailwinds. Whereas like-for-like revenue fell by 0.4%. Millennium’s profit before tax declined by -42% to £109m compared to £188m in FY2014 largely due to impairment losses. Consequently, basic earnings per share dropped by 41.5% to 19.9p per share (FY2014: 34.0p). The Group has recommended a final dividend of 4.34p per share (2014: 11.51p) which taking total ordinary dividend for FY2015 to 6.42p per share, a -53% decline from FY2014, about a half of the consensus estimate. On the operational front, Millennium completed refurbishment of all guest rooms at Millennium Bailey's Hotel London, Millennium Hotel Buffalo and the remaining rooms at Millennium Seoul Hilton. Chairman, Kwek Leng Beng commented “In 2015, global hospitality markets were impacted by falling commodity prices, mounting concern with regard to terrorism, health advisory travel alerts and uncertainty regarding growth of the Chinese market…which negatively affected the year's performance, (and this is) expected to continue in the current year”.
Our view: Millennium delivered disappointing result for the full year largely impacted both by macroeconomic factors and international issues. These includes falling commodity prices which largely affected Copthorne Hotel Aberdeen's oil and gas customer, concern with terrorism (which, for example, led to -7.4% occupancy drop in its Paris hotel after the terrorist attack), health advisory travel alerts and uncertainty regarding Chinese growth. The Group’s hotels have also been significantly affected by renovation and refurbishment works. In the US, RevPAR for New York hotels declined due to weak Euro that dented number of European travellers to the city. In Asia, poor performance widened as room occupancy continued to fall due to reduced consumer spending and lower corporate travel demand against a backdrop of economic slowdown combined with increased price competition from new and refurbished hotels. More positively, Australia has witnessed +12.6% growth in RevPAR driven by increased visitor numbers, while most of the Group’s European hotels outside London performed better than last year boosted by successful acquisitions. Looking ahead, the Group remains cautious, warning that the difficult macroeconomic environment will continue to affect its performance. Hindering it further, Millennium is scheduled to commence refurbishment of two key hotels in London, one in the US and one in the Singapore in 2016, while two hotels in the US one in Singapore are scheduled to complete during 2016. Although Millennium has a long term perspective to create long term value through asset ownership, in light of uncertainty surrounding the Group, Beaufort downgrade the stock to Hold.
Economic News
US CPI
US consumer price index (CPI) remained flat in January 2016, after a 0.1% decline in December, the US Bureau of Labour Statistics stated on Friday. The markets expected a 0.1% decrease in prices. Core consumer prices, excluding food and energy, rose 0.3% m-o-m in January, after a 0.2% rise in December.
Eurozone consumer confidence
The gauge of Eurozone consumer confidence fell to -8.8 in February from -6.3 in January, the European Commission said on Friday.