The Markets
Market opening: The FTSE-100 is expected to start this morning's session around 45-points lower.
New York: Wall Street ended higher, led by rising oil prices. As per a report by the IEA, US shale production is expected to fall in 2016 and 2017, and oil prices are anticipated to gradually increase. The S&P 500 added 1.5%, primarily driven by gains in the energy and consumer discretionary sectors.
Asia: Markets pared initial gains to trade lower, despite positive cues from global indices. A stronger yen continued to impact Japanese exporters. The Nikkei 225 fell 0.4%, while the Hang Seng was trading 0.2% down at 7:00 am.
Continental Europe: Markets ended in the green, led by improvement in commodity stocks. Furthermore, a rally in oil prices boosted investor sentiment. Germany’s DAX and France’s CAC 40 increased 2.0% and 1.8%, respectively.
Crude Oil: Yesterday, WTI and Brent oil prices surged 6.2% and 5.1%, respectively. The spread between the two varieties stood at US$3.2 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.42% higher yesterday at 686.67.
Today's news
IEA anticipates oil prices to recover from 2017
The International Energy Agency (IEA) expects oil prices to recover from 2017. The agency estimates global oil supply to increase 4.1 million barrels of oil per day between 2015 and 2021, down from a rise of 11 million barrels of oil per day between 2009 and 2015. Moreover, the IEA anticipates investments in oil exploration and production to fall 17% in 2016 after declining 24% in 2015.
Company News
Jubilee Platinum (LON:JLP, 3.30p) - Speculative Buy
Yesterday Jubilee published an update, which is essentially a recap of recent announcements and its 19 January webcast. New news is that construction of the ASA processing plant is complete, commissioning is targeted at the end of the month and full production expected in March. At the Hernic tailings project, progress is in-line with management’s expectations with first production still targeted for Q4 2016.
Our view: This update demonstrates clearly Jubilee’s transformation from smelting to tailings processing. The Tjate mine project (Merensky and UG2 resources) remains a valuable asset although the mining right application is taking some time to process. That said, according to the South Africa Department of Mineral Resources the mining right application is progressing. When issued, Jubilee can spend more time looking for a suitable development partner. We expect ASA’s commissioning, ramp-up and production numbers to provide newsflow over the coming months, as should progress at the Hernic tailings project. We retain our Speculative Buy recommendation.
Beaufort Securities acts as corporate broker to Jubilee Platinum plc
Savannah Resources (LON:SAV, 2.03p) - Speculative Buy
Savannah Resources, the diversified mining group focused on exploration and development of mineral sands in Mozambique and copper-gold projects in Oman, announced yesterday the remaining results from its latest drill programme on Blocks 4 and 5 in Oman. Savannah owns a 65% shareholding in Al Fairuz Mining, the owner of the Block 5 licence and is earning a 65% shareholding in Al Thuraya LLC, the owner of Block 4, both are prospective for copper and gold. In addition, the Company has completed a preliminary compilation of data on the Lasail deposit in Block 4, the largest historical mine in Oman, which highlighted high-grade open-pit and underground copper potential. A total of 16 drill holes totalling 1,766.85m were completed on 30 December 2015, targeting both exploration and resource expansion in Blocks 4 and 5. Of the remaining seven holes, highlights include 16m grading 0.85% Cu from 105m in borehole 15B5DD006 targeting the Mahab 4 prospect in Block 5 and a 9m intersection grading 0.5% Cu and 2g/t Au from 4m in drill hole 15B4RC009 targeting the Gaddamah prospect in Block 4. Based on the high-grade intersections to date Savannah is developing a strategy to achieve high-grade, low-cost copper (and potentially gold) concentration production by end of 2017.
Our view: We are encouraged with the results from the latest round of drilling returning a number of high-grade intersections. Additional copper and gold mineralisation has been confirmed in Block 4 and the high-grade copper envelope identified in Block 5 (Mahab 4 deposit) is likely to add to the existing resource of 1.5Mt grading 2.1% Cu. We look forward to a compilation of the resource estimate in Block 4 for the past producing Aarja, Bayda and Lasail mines as well as a feasibility study on the combined mine development of the deposits within Blocks 4 and 5. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Savannah Resources plc
Petra Diamonds (LON:PDK, 86.00p) - Hold
Petra Diamonds, an independent diamond mining group focused on Southern Africa, yesterday released its interim results for the six months ended 31 December 2015. During the period, Group's revenue fell 28% to US$154.0m (H1 2015: US$214.8m) due to less exceptional diamonds and seasonal timing of Petra's tenders where it held two tenders in H1 and will hold four tenders in H2. Reduction in revenue led adjusted EBITDA to contract by 43% to US$48.5m (H1 2015: US$84.9m). Adjusted net profit after tax decreased 85% to US$6.3m (H1 2015: US$42.8m) and consequently the basic loss per share were -0.72 cents from EPS of +5.94 cents same period last year. On the operational front, production improved 2% to 1.6 million carats ('Mcts') while operating costs remained well under control. Petra held US$42.1m cash (H1 2015: US$129.6m and US$177.1m undrawn debt facilities as of period end. The Group is on track to produce 3.3-3.4 Mcts for this year and 5 Mcts for FY2019. Post period end, the Group has completed an acquisition of 49.9% stake in Kimberley Mines. CEO, Johan Dippenaar commented "While our financial results have been impacted by the lower diamond prices…our operations maintained a healthy profit margin from mining activities of 36% due to the robust economics of our mines, as well as the favourable effect of the weaker ZAR on our cost base. Petra's production and sales are weighted to H2 and it is encouraging that we are currently experiencing stable diamond market conditions".
Our view: Petra announced results very much as anticipated for the period, against a backdrop of weaker overall market with continued fall in average rough diamond prices. Carats sold fell 7% to 1.3 Mcts (H1 2015: 1.4 Mcts) and were below total produced of 1.6 Mcts (H1 2015: 1.6 Mcts) due to the seasonal timing of the Group's sales that led to only two tenders held during the period. The favourable impact of a weaker South African Rand failed to lift the overall impact of the 9% fall in diamond pricing absorbed by Petra plus unrealised foreign exchange losses. The Group is currently on plan to deliver higher quality of carats by reducing reliance on diluted (or near-exhausted) mining areas and tailings production. We expect Group's operating margins to improve once it starts accessing the undiluted mining areas at Finsch and Cullinan. Even though the market conditions are expected to remain subdued in the short term, improving grade and product mix of the new mining areas should enhance operating margins and confidence in the future, without dependence on improved diamond prices. For now, in view of the slower Chinese economies and increased diamond inventories, we consider there will be limited opportunity for price recovery in the near term. Beaufort retain its Hold rating on the stock at this time.
Bovis Homes (LON:BVS, 874.50p) - Buy
Yesterday, Bovis Homes declared its results for the year ended 31st December 2015. During the period, the company’s revenue jumped 17% y-o-y to £946.5m, led by a 16% surge in housing revenue. The number of legal completions increased 8% to 3,934, while the average sales price rose 7% to £231,600. Pre-tax profit soared 20% to £160.1m, resulting in EPS of 95.4p, as against 78.6p in 2014. Return on capital employed increased 2.1 percentage points to 18.3%, in line with the guidance. Net cash at the end of the period stood at £30.0m compared with £5.2m in 2014. Forward sales and land bank at the end of the year stood at 2,003 and 19,814, respectively. On the operational front, the company added 35 sites, equivalent to 6,058 homes, to its land bank. These plots have an estimated future revenue value of about £1.7bn and an estimated profit potential of about £440m. Furthermore, Bovis Homes is in the final stages of securing planning consent for eight strategic sites, which would deliver approximately 5,000 consented plots. The company completed the sale of four parcels of land at strategically sourced sites. Bovis Homes proposed a final dividend of 26.3p, taking the total dividend for the year to 40p, up 14% from 2014.
Our view: Bovis Homes delivered an excellent performance in 2015, with improved revenues and higher margins. The company’s revenues were driven by a rise in the number of legal completions and an increase in the average sales price. Bovis Homes’ strategy of investing in land at high-quality locations continued to pay off, leading to growth in active sales outlets, thereby resulting in increased volumes. These results have translated into a stronger cash position, which has enabled Bovis Homes to distribute increased dividends to shareholders. The company benefitted from strong demand in the UK’s housing market and government policies aimed at attracting first-time buyers to the market, including the launch of the ‘Help to Buy’ scheme and introduction of a 20% discount as per the ‘Starter Homes’ scheme. Moreover, Bovis Homes is well prepared for 2016, buoyed by robust forward sales and a solid land bank. Considering the recent structural improvements in mortgage markets and a positive outlook for the housing sector in the UK, we believe the company has bright prospects. Therefore, we maintain our Buy rating on the stock.
HSBC Holdings (LON:HSBA, 445.60p) - Buy
Yesterday, HSBC Holdings announced its results for the year ended 31st December 2015. Adjusted revenues increased 1% y-o-y to US$57.8bn, driven by good performance in the Global Banking and Markets division. Pre-tax profit rose 1% to US$18.9bn, while EPS stood at US$0.65 per share compared with US$0.69 per share in 2014. The company recorded a 17% increase in loan impairment charges to US$3.7bn. HSBC reported a 5% jump in adjusted operating expenses to US$36.2bn, primarily due to wage inflation, business growth, and investment in regulatory programmes and compliance. Return on equity stood at 7.2% compared with 7.3% in 2014. On the operational front, the company reduced its risk-weighted assets (RWAs) by US$124bn in 2015, which is 45% of the target for 2017. HSBC signed an agreement to sell its operations in Brazil. The company proposed a fourth interim dividend of US$0.21 per share, taking the total dividend for the year to US$0.51 per share. Total dividends for 2015 amounted to US$10.0bn, US$0.4bn higher than 2014.
Our view: HSBC delivered a resilient performance in 2015 despite difficult market conditions. The slowdown in Asian and global markets hurt the company’s overall business. However, HSBC’s profits improved on lower fines and a drop in compensation paid to customers. The company remained focused on cash management and undertook several initiatives in this direction; for instance, it sold its business in Brazil. HSBC slashed remunerations and jobs to further reduce costs. Furthermore, the company remains on track to achieve its goal to reduce RWAs by 2017. HSBC enjoys a strong leverage ratio of 5.0% and a strong capital base, with a Capital Equity Tier (CET) 1 capital ratio of 11.9% compared with 11.1% on 31st December 2014. The company plans to tap into existing opportunities in untapped Asian markets as well as capitalise on rising disposable income in the UK and growing stability in the US economy. Overall, HSBC’s outlook remains strong owing to its plans to build a robust capital base and reorganise RWAs. In view of the above argument, we maintain a Buy rating on the stock.
Associated British Foods (LON:ABF, 3,289.0p) - Hold
Yesterday, Associated British Foods (ABF) released a pre-closing trading update for the six months to 27th February 2016. The company expects an increase in its operating profit, although adjusted EPS is expected to decline marginally. ABG expects operating cash flow for H1 2016 to be in line with its cyclical pattern of cash generation. Capital expenditure is likely to increase due to the expansion of the Primark division. Net debt is expected to be about £0.4bn, substantially lower than that in H1 2015. On a segmental basis, ABF expects revenue and profits from the grocery division in H1 2016 to be in line with last year at constant currency. Compared with the previous year, the agriculture division is expected to record a decline in revenue, mainly in its UK feed business, AB Connect. However, excellent trading at AB Vista would drive further margin improvement for the division as a whole. The sugar segment has performed steadily in the first half. In the ingredients segment, the company projects revenues for H1 2016 to exceed revenues recorded last year at constant currency, but marginally lower at actual exchange rates. In the retail segment, sales at Primark are expected to exceed last year’s sales by 7.5% (at constant currency), primarily due to an increase in selling space.
Our view: ABF performed strongly in H1 2016, with most divisions performing in line with the guidance. The trading outlook for 2016 remains unchanged, as the weakening of the sterling against the euro lowered the impact of currency translation on the year's results from £25m to £10m. Efficient cash management has resulted in lower debts. Furthermore, strong cash flows are expected in the second half. However, a substantial drop in sugar prices in the EU and globally has exerted pressure on the global sugar industry. In addition, we expect a higher impact of currency movements on its business in the coming period. Therefore, we would like to wait and watch the company’s performance in the near future. We maintain a Hold rating on the stock.
Economic News
Germany manufacturing PMI
As per the data released by Markit yesterday, the preliminary manufacturing PMI of Germany rose to 50.2 in February from 52.3 in January. This was better than the market expected reading of 51.9.
Eurozone manufacturing PMI
The preliminary manufacturing PMI for the Eurozone decreased to 51.0 in February, from 52.3 in January, as per data released by Markit yesterday. The markets expected a reading of 52.0.
US manufacturing PMI
The preliminary Markit PMI for the US stood at 51.0 in February, lagging the market expectations of a reading of 52.4. The final US PMI for the month of January was recorded as 52.4.