The Markets
Market opening: The FTSE-100 is expected to start this morning's session around 38-points higher.
New York: Wall Street extended gains for the second consecutive day, primarily driven by the rise in the oil prices that jumped after a meeting confirmation between major oil producers next month. The S&P 500 advanced 1.1%, with the financial sector gaining the most.
Asia: Equities are trading higher, tracking gains in global indices. An improvement in oil and commodity prices led to optimism in the market. Meanwhile, investors focused on a two-day meeting of G20 finance ministers to discuss concerns over global growth. The Nikkei 225 rose 0.3%, while the Hang Seng was trading 1.4% up at 7:00 am.
Continental Europe: Markets ended in the green, as positive corporate earnings released lifted investor sentiment. Moreover, a rally in banking and commodity stocks cheered investors. France’s CAC 40 and Germany’s DAX gained 2.2% and 1.8%, respectively.
Crude Oil: Yesterday, WTI and Brent oil prices increased 2.9% and 2.6%, respectively. The spread between the two varieties stood at US$2.2 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.26% higher yesterday at 688.98.
Today's news
UK’s GDP growth accelerates in Q4 2015
As per the data from the Office for National Statistics, the UK’s GDP expanded 0.5% q-o-q in Q4 2015 after 0.4% growth in Q3 2015, marking the 12th consecutive quarter of growth. On a y-o-y basis, GDP expanded 1.9% in Q4 2015, in line with initial estimates. The expansion in GDP was led by a 0.7% q-o-q increase in household spending and a similar growth in the services sector. In 2015, the UK’s economy expanded 2.2% compared with 2.9% in 2014.
Company News
Red Leopard Holdings (LON:RLH, 0.05p) - Speculative Buy
Red Leopard Holdings, the mineral exploration and development company focused on precious metals, announced yesterday an operational update on its highly prospective silver holdings in the Coeur d'Alene mining district in northern Idaho, USA. Management believes that market conditions have begun to show signs of recovery and now is the time to continue with their plans for development of the Idora Tunnel. The Company is in discussions with mining engineers to evaluate repair costs of fall of ground (as previously announced) within the re-opened audit. The Idora Tunnel is over 600m long and will be used to evaluate seven mineralised veins, which have been detailed in historic reports. Management also plans to conduct soil samples along the surface of the various veins crossed by the Idora Tunnel.
Our view: Whilst the company has had a difficult year against a back drop of poor market conditions and difficulties with accessing the Idora tunnel, we are encouraged with the recent rally in precious metal prices as well as management's commitment to reopen the tunnel within a key silver district. As such, we reiterate a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Red Leopard Holdings plc
Lloyds Banking Group (LON:LLOY, 70.64p) - Buy
Yesterday, Lloyds Banking Group announced its results for the year ended 31st December 2015. During the period, the group’s total income rose 1% to £17.6bn, with net interest income increasing 5% to £11.5bn. However, other income fell 5% to £6.2bn, mainly due to disposals and reduction in run-off business. Underlying profit increased 5% to £8.1bn driven by net interest income. Statutory pre-tax profit decreased 7% to £1.6bn leading to EPS of 0.8p compared with 1.7p in 2014. The fall is mainly attributable to increased PPI charge. The common equity tier 1 (CET1) ratio increased 0.2 percentage points to 13%, while the pro forma leverage ratio stood at 4.8% against 4.9% in 2014. Impairment charge was down 48% to £568m and the asset quality ratio improved nine basis points to 0.14%. On the operational front, Lloyds sold a 9.99% interest in TSB Banking Group to Banco de Sabadell, reducing its holding in TSB to 40.01%. Lloyds recommended a final dividend of 1.5p, taking the total dividend to 2.25p, from 0.75p in 2014. In addition, the board recommended capital distribution in the form of a special dividend of 0.5p.
Our view: The year 2015 was successful for Lloyds despite the difficult environment in the banking sector. The group’s underlying profit improved due to an increase in income, low operating costs and a fall in impairments. Lloyds’ retail division led the growth story with a 9% increase in underlying profit to £3.5bn. The segment continues to be a leading supporter of the UK government's ‘Help to Buy’ scheme. The division’s risk-weighted assets decreased, net interest income increased and online user base reached more than 11.5 million customers. The commercial banking segment progressed well with increased lending and deposits to SMEs and a rise in net interest margin. Overall, Lloyds remained focussed on reducing costs and took a lot of initiatives to enhance efficiencies. The group has a healthy balance sheet with a good CET1 ratio and a solid cash position. Moreover, Lloyds remains committed to shareholders as it declared high dividends and special dividends. Going ahead, the group plans to improve its asset quality ratio and net interest margin in 2016. We are encouraged by Lloyds’ progress in 2015 and maintain a Buy rating on the stock.
Merlin Entertainments (LON:MERL, 453.30p) - Buy
Merlin Entertainments (‘Merlin’), the European entertainments company operating the world’s second-largest visitor attractions, yesterday released preliminary results for the year ended 26 December 2015. During the period, the Group saw number of visitors remained flat at 62.9m visitors compared to 62.8m in 2014. Group’s revenue in actual currency basis has increased by +2.3% to £1,278m (FY2014: £1,249m) driven by continued strong performance from LEGOLAND Parks Operating Group. On the other hand, the Group’s like-for-like (LFL) revenue only grew by 0.4% as visitation at Alton Towers fallen significantly following the accident on 2 June 2015, which dragged -12.4% in LFL revenue for Resort Theme Park Operating Group. EBITDA has fallen by -2.1% to £402m (FY2014: £411m) and operating profit also declined by -6.2% to £291m (FY2014: £311m). Meanwhile, profit fit before tax rose by 0.3% to £250m (FY2014: £249m), consequently, adjusted EPS and dividend per share rose by 0.4% to 17.8p per share and 4.8% to 6.5p per share respectively. On the operational front, the Group has opened seven new Midway attractions and the addition of 277 new rooms across the theme Park estate. Further progress has also been made towards the opening of LEGOLAND Dubai this year, Japan in 2017 and South Korea in 2018. The Group has set out milestone target for 2020 and recommended a final dividend of 4.4p per share, taking full year dividend up +4.8% to 6.5p per share. In a separate announcement, Merlin has announced that it has invested US$34.4m (c.15% stake) in Big Bus Tours, the leading global owner-operator of Hop On Hop Off city tours. The two companies has formed strategic partnership which will provide opportunities for cross selling, promotions and joint sales and marketing activity.
Our view: Merlin delivered a resilient performance for the FY2015 despite a challenging H2 caused by an accident at Alton Towers in June that resulted in a temporary visitor decline. The new attractions and accommodation opened last year have performed well, however, contributing higher total revenue for the Group. LEGOLAND has continued to perform strongly with LFL revenue expansion of +8.2%, with the Group remaining on track to open three more LEGOLAND in Dubai, Japan and in South Korea over the next three years. The Group has also undertaken significant expansion in China, recently formed a Joint Venture with China-based Media Capital to develop a LEGOLAND Park in Shanghai plus other Midway attractions in China. Post the fiscal period, current trading is in line with expectations, with planned investments and new developments on track, according to management. Looking ahead, Merlin has set new milestones targets includes 2,000 new rooms, 40 new Midway Attractions and four new LEGOLAND Parks by the end of 2020. Formation of a strategic partnership and US$34.4m investment in Big Bus Tours is encouraging. Beaufort believes this will provide Merlin with revenue and marketing synergies and further cross selling opportunities. Considering its long-term growth potential, Beaufort maintains its Buy recommendation on the stock.
RSA Insurance Group (LON:RSA, 433.20p) - Buy
Yesterday, RSA Insurance Group declared its preliminary results for the year ended 31st December 2015. During the period, net written premiums fell 3% y-o-y to £6.8bn, mainly due to disposal programme. Operating profit jumped 43% to £523m, and underwriting profit increased to £220m from £41m in 2014. The core group’s combined ratio stood at 96.0% compared with 98.8% in 2014, while the solvency coverage ratio stood at 143%. Pre-tax profit rose to £323m from £275m, leading to EPS of 22.3p against 6.2p in 2014. Tangible equity stood at £2.8bn and the tangible equity to premiums ratio increased to 42% from 39%. On the operational front, RSA completed disposals in Hong Kong, Singapore, China, India, Italy and UK Engineering. While the disposal of Russia operations were completed after the year end. In September, the group announced the sale of Latin America’s operations, which is expected to complete in the next six months. RSA proposed a final dividend of 7p, taking the full year dividend to 10.5p, 425% higher than 2014.
Our view: RSA performed robustly in 2015 despite the challenging market conditions. Growth was led by solid contributions from the UK, Scandinavia and Canada divisions. Also, the Canada segment witnessed a record underwriting profit of £116m and a combined operating ratio of 91.7%. RSA continued its restructuring programme with asset disposal across geographies and expects to complete it in 2016. Moreover, the group enjoys a healthy solvency and combined ratio, which are important parameters in the insurance industry. RSA remained focussed on cash management and registered lower core controllable costs than in 2014. Also, the group raised its annual gross savings target to more than £350m by 2018. In addition, a lot of initiatives to improve customer service and underwriting results are in progress, with technology advances as an important element. Strong performance during the year resulted in an ‘A’ rating from the rating agency S&P. RSA recently inked an important agreement with Nationwide Building Society to underwrite all of Nationwide’s home insurance products for five years starting from the spring of 2017. We are buoyed by the group’s performance in 2015 and expect it to perform better once it completes restructuring. In view of the overall developments surrounding RSA, we upgrade the rating to a Buy from Hold.
Howden Joinery Group (LON:HWDN, 497.0p) - Buy
Yesterday, Howden Joinery announced its results for the year ended 26th December 2015. During the period, revenue increased to £1,220.2m from £1,090.8m, led by an 11.9% increase in revenue from the UK depot. Operating profit rose to £221.9m from £189.8m resulting in a pre-tax profit of £219.6m compared with £188.8m in 2014. As a result, EPS increased to 27.3p from 23.2p. Net cash at the end of period stood at £226.1m, after returning £45.3m to shareholders through share repurchases. On the operational front, the company opened 30 depots in the UK, taking the total to 619. Howden extended its trial in the market in France by opening five depots. The company also opened an outlet in the Netherlands during the year. Howden incurred capital expenditure of £45.9m as investment in supply operations. The company recommended a final dividend of 7.1p, bringing the total dividend for the year to 9.9p, 17.9% higher than 2014. Howden has decided to return an additional £55m of cash to shareholders through share repurchases. After the financial year, the company’s UK depot revenue in the first two periods of 2016 rose 7.1%.
Our view: Howden delivered excellent performance in 2015 with high revenue and enhanced margins. The company’s growth was primarily driven by its UK depot business. Howden invested to improve all aspects of the business to increase its future growth opportunities. The company opened depots in the UK and expanded by opening depots in other European countries. Howden’s account base continued to grow with 35,000 new accounts in 2015. The company enhanced its product offering and introduced a number of new products during the year across product categories. Howden remains fully funded as it extended its existing £140m committed bank facility until July 2019. The company’s solid cash position paved the way for increased dividends along with cash return to shareholders. Moreover, Howden started 2016 on a positive note with solid revenues. We believe the company is well placed both financially and operationally to deliver long-term growth. Therefore, we reiterate a Buy rating on the stock.
Economic News
Eurozone M3 money supply
Eurozone’s M3 money supply expanded at an annual pace of 5.0% y-o-y in January 2016, after rising 4.7% in the previous month, beating the market forecast of a reading of 4.7%, the European Central Bank said yesterday.
Eurozone CPI
Consumer price inflation (CPI) in the Eurozone fell 1.4% m-o-m in January 2015, after a flat reading in December, as per the data released by Eurostat yesterday. On y-o-y basis, CPI edged up 0.3% in January, following a 0.2% increase in December. Core prices, excluding energy, food, and tobacco, grew 1.0% y-o-y in January.
US initial jobless claims
Initial jobless claims in the US increased 10,000 to a seasonally adjusted 272,000 in the week ended 20th February, the Labor Department reported yesterday. Economists expected the claims to increase to 270,000. The four-week moving average decreased to 272,000 last week.
US durable goods orders
As per the US Commerce Department, US durable goods orders increased 4.9% m-o-m in January, after a 4.6% decline in December 2015. The reading beat the economists’ forecast of an increase of 2.9% for the month.