The Markets
Market opening: The FTSE-100 is expected to start this morning's session around 24-points lower.
New York: Wall Street ended in the red in a volatile trading session, despite a rally in oil prices. Weak economic data released in the US revived concerns over the health of the economy. The S&P 500 fell 0.8% due to losses in the healthcare sector.
Asia: Equities are trading higher, as investors cheered China’s decision to cut the reserve requirements for banks to boost the economy, ignoring weak manufacturing data released in China. The Nikkei 225 added 0.4%, and the Hang Seng was trading 0.6% up at 7:00 am.
Continental Europe: Markets ended mixed, as investor sentiment was buoyed by China’s initiatives to propel the economy. However, the failure of G20 nations to agree on new measures to boost the global economy disappointed investors. France’s CAC 40 gained 0.9%, whereas Germany’s DAX declined 0.2%.
Crude Oil: Yesterday, WTI and Brent oil prices increased 3.0% and 2.5%, respectively. The spread between the two varieties stood at US$2.2 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.08% higher yesterday at 692.87.
Today's news
Eurozone enters into deflation in February
As per the data from Eurostat, consumer prices in the Eurozone fell to -0.2% in February after rising to 0.3% in January. The decline was largely due to an 8% drop in energy prices in February compared with a 5.4% decrease in the last month. This deflationary situation exerts substantial pressure on the European Central Bank to improve prices and meet its target of 2% inflation.
Manufacturing activity in China contracts for seventh straight month
As per the data from the National Bureau of Statistics, China’s Purchasing Managers’ Index (PMI) fell to 49.0 in February from 49.4 in January, declining for the seventh consecutive month. The drop was primarily due to sharp decrease in new orders and the employment index.
Company News
Alecto Minerals (LON:ALO, 0.07p) - Speculative Buy
Alecto Minerals, the African-focused gold and base metal exploration and development company, announced yesterday that it has received formal confirmation from Rangold Resources that all conditions precedent in the joint venture agreement as announced on 8 February 2016 have been satisfied. The JV agreement entails the exploration and development of Alecto's 137km2 Koassnato West gold project in western Mali. Under terms of the JV agreement, Randgold will hold a 65% participating interest in the project with Alecto holding the remaining 35% with Randgold funding all costs up to completion of a pre-feasibility study (PFS). After which, all costs will be split between the JV partners in accordance with their participating interest. The Kossanto East project, where Alecto has a collaboration agreement with Desert Gold and has reported positive economics from an internal scoping study, is not part of the JV agreement and remains wholly owned by Alecto.
Our view: The formal confirmation of the JV agreement with Randgold is an important milestone for Alecto and demonstrates the potential for gold mineralisation at Kossanto West project. With Randgold's expertise and exploration dollars at work we look forward to updates on the initial work programme. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Alecto Minerals plc
Eurasia Mining (LON:EUA, 0.65p) - Speculative Buy
Eurasia Mining, the Russian focused PGM exploration and development company, announced yesterday an update on its West Kytlim alluvial platinum project. The Technical Design Report for the diesel operation at Malaya Sosnovka has been submitted to the Ministry for Subsoil use and contractors have completed the necessary field work for the proposed power line to West Kytlim including land surveying, ecological samples and shallow geotechnical drilling. Eurasia has also received a topographical survey from contractors for the next area to be mined in the Kluchiki area. As previously noted, the Company has secured all necessary permits and licences to commence platinum production at West Kytlim. As such, management is focused on its first platinum production in 2016 from a diesel start-up phase targeting high-grade surface reserves in the Malaya Sosnovka area. Separately, a mine plan is being developed for the entire licence area using electrically powered draglines.
Our view: Whilst the proposed diesel operation at Malaya Sosnovka is a smaller scale and more expensive on a per tonne basis compared with the electrical power option for the rest of the West Kytlim area, it does allow management to begin initial development and production of alluvial platinum. We look forward to approval of the mine development plan prior to commencement of operations. In the meantime, we reiterate our Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Eurasia Mining plc
KEFI Minerals (LON:KEFI, 0.33p) - Speculative Buy
KEFI Minerals published a Tulu Kapi update yesterday with news about operations (project development) and financing. On the operations front, front-end engineering and design has been completed on schedule by the preferred contractor, via a fixed-price arrangement. The Social Performance Team has been refining plans for "livelihood restoration of community members" and the exploration team is planning to start exploration activity near the proposed pit to extend mine life. On the financing front there appear to be no major changes. The loan provider(s) are stress testing the financial projections in more detail, and an independent review of cost overrun facilities has been commissioned.
Our view: KEFI Minerals looks to be progressing Tulu Kapi in-line with management's plan with "formal syndicate commitment scheduled for mid-2016 and debt drawdown end 2016". Subject to final due diligence, the senior lender(s) appear to be more or less in place (for $60m), as does the Ethiopian government ($20m). The balance of $50m is likely to be dominated by a gold streaming type loan, although there may be some additional equity, hopefully at the project level. The RNS states that KEFI "maintains dialogue with parties interested in equity investment at the project level as well as with the Company's major shareholders". It still appears that KEFI could build this mine with little or no recourse to new KEFI Minerals equity. This is certainly management's strong desire. Over the coming weeks and months, finding the remaining $50m will be the focus and most important news flow. We maintain our Speculative BUY recommendation.
Beaufort Securities acts as corporate broker to KEFI Minerals plc
Ortac Resources (LON:OTC, 0.03p) - Speculative Buy
Ortac Resources, the diversified mineral exploration and mine development company, announced yesterday that it has participated in a private placing with Casa Mining Limited, a private company that holds prospective ground in the DRC. Ortac is investing US$62,500 for a 12% interest in Casa Mining which holds the rights to three mining licences within the Misisi corridor located in the South Kivu province of the DRC. Since 2009, over US$30m has been spent identifying the 60km long gold corridor with multiple prospects having been drill and trench tested returning significant gold intercepts. An initial near surface inferred resource of 1.2Moz grading 1.7g/t Au has been defined on the Akyanga deposit and remains open long strike and down dip. A scoping study was done on Akyanga confirming the viability if a 100koz pa heap leach gold operation with total operating costs of under US$650/oz. Casa Mining is focused on commercial production at Akyanga with an initial gravity plant for a modest capital outlay.
Our view: We are encouraged with Ortac's deal with Casa Mining securing exposure to a potential near term gold producer. We also note the potential for larger scale gold production within Casa Mining's the highly prospective Misisi corridor located c 150km south of Banro's 1.6Moz Twangiza gold mine. As such, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Ortac Resources plc
Bunzl (LON:BNZL, 1,933.0p) - Buy
Bunzl, the international distribution and outsourcing Group, yesterday announced its annual results for the year ended 31 December 2015. During the period, the revenues increased 5% to £6,489.7m from £6,156.5m in FY2014 due to the positive impact of acquisitions. Adjusted operating profit rose 6% to £455.0m (FY2014: £429.8m) and adjusted pre-tax profit advanced 6% to £411.2m. Consequently, adjusted EPS improved 6% to 91.0p per share from 86.2p a year ago. On the operational front, the Group spent record amount on acquisition completed 22 acquisitions at £327m to enhance its portfolio as well as entered into two new countries, Turkey and Austria taking total to 29 countries. Its North American segment's revenue grew 5% at constant exchange rate as a result of acquisitions. Continental Europe grew its revenue by 7% and UK & Ireland grew 3% due to organic revenue growth and the impact of acquisitions. The rest of the World's revenue grew by 6% but profit margins were affected due to the challenging macroeconomic conditions and some negative foreign exchange transaction resulting operating profit declined by 11%. Bunzl recommended a final dividend of 26.25p per share, bringing a full year dividend to 38.0p per share, up 7%. In a separate announcement, the Group reported that it has completed two further acquisitions in Brazil and the US and has entered into an agreement to acquire a business in Turkey.
Our view: Bunzl delivered good full year results despite challenging macroeconomic environment across the countries in which it operates. Although majority of the revenue growth was led by acquisitions, higher margin acquisitions boosted operating profits more than the like-for-like revenues. Organic revenue growth for the full year improved by only 1%. Post the year end, the Group has agreed to acquire two further businesses, the Californian Earthwise Bag Company, a distributor of reusable bags to supermarkets, and another US retailer which has yet to be named, but is said to further expand its offering of environmentally friendly products to the grocery and retail sectors. The management expects continued growth in FY2016, helped by recent acquisitions, in most of its global territories, other than UK & Ireland which are expected to be held back by a competitive and challenging grocery and retail environment. Although there is some concern over the Group's future direction following the proposed retirement of its CEO, Michael Roney, who will have been in a role for over 10 years in April 2016, we remain confident that this will not result on Bunzl's business planning undergoing significantly changed or adopt riskier operating strategy. As such, the Group remains well placed with strong pipeline of opportunities while being well supported by its broad portfolio of businesses together with a strong cash position. Beaufort reiterates its Buy rating on the stock.
WM Morrisons (LON:MRW, 199.0p) - Hold
Yesterday, WM Morrison Supermarkets signed a supply agreement with Amazon. As per the agreement, Amazon customers would be able to buy groceries, including fresh and frozen products, from WM Morrison's website. The company said several products would be available to Amazon Pantry and Amazon Prime customers, who pay an annual subscription fee. Separately, WM Morrison has reached an agreement in principle with Ocado to expand its online business (Morrisons.com) by acquiring space in Ocado's new customer fulfilment centre (CFC) in Erith, London. The move would allow Morrisons.com to cater to customers across Britain.
Our view: The agreement with Amazon is a strategic move by WM Morrison. Amazon, which is among the world's largest online retailers, would provide the company access to a wide customer base. The agreement would bring together WM Morrison's fresh food expertise and Amazon's robust online and logistics abilities. In addition, the agreement with Ocado would help WM Morrison expand its online delivery service. Nonetheless, the market remains very competitive due to the presence of several discount retailers, including Aldi and Lidl. Furthermore, WM Morrison's financial and operational performance in the third quarter was not satisfactory, with dismal sales and like-for-like sales growth. We will monitor the company's performance in the near future and, therefore, maintain a Hold rating.
Victoria Oil & Gas (LON:VOG, 45.50p) - Speculative Buy
Yesterday, Victoria Oil & Gas (VOG) declared its unaudited interim results for the half year ended 30th November 2015. During the period, revenue advanced to US$18.9m from US$11.6m, led by an increase in gas and condensate sales. Adjusted EBITDA rose to US$9.0m from US$1.7m. Profit before tax stood at US$215,000 compared with a loss of US$51.7m in 2014. Consequently, loss per share narrowed to 0.85 cents from 50.73 cents in H1 2015. Net cash at the end of this period totalled US$6.3m (31st May 2015: US$5.1m). On the operational front, the average amount of gas sold increased to 8.85 million standard cubic feet per day (mmscf/d) in H1 2016 from 3.91mmscf/d in H1 2015. Condensate sales nearly doubled to 23,110 billion barrels and total gas sold stood at 1,530mmscf (H1 2015: 719mmscf). The company secured a 75% participating interest in the Matanda Block in Cameroon, subject to regulatory approval. VOG appointed Ahmet Dik as director of the company and CEO of Gaz du Cameroun S.A (GDC). Iain Patrick was appointed independent non-executive director of VOF. The company changed the accounting reference date from 31st May to 31st December.
Our view: VOG showed a robust performance in H1 2016, both on the financial and operational fronts. The company’s revenue and margins improved, supported by an increase in condensate and gas sales. The rise in gas sales was due to the addition of new thermal customers and connection of two regional power stations with gas for electricity generation. The company remains a fully integrated gas utility, as oil is neither a primary product nor a potential exploration target for the resource. VOG has restricted its customers within US$9–16 per mmbtu. Moreover, the company enjoys a healthy balance sheet with a solid cash position. In 2016, VOG plans to exceed the record production level achieved last year. It plans to drill two wells and expand the capacity of its gas treatment plant. The company aims to expand and enhance customer experience by expanding its pipeline network and marketing new products, such as compressed natural gas. GDC is progressing rapidly after it successfully developed the first industrial gas for sale in the energy market in Cameroon. It is currently supplying to various customers. The company plans to expand its market beyond Cameroon and become a key energy provider in other parts of Africa. In light of these developments, we maintain a Speculative Buy rating on the stock.
WPP (LON:WPP, 1,523.0p) - Buy
Yesterday, WPP informed that Burson-Marsteller, its global strategic communications and public relations firm, has acquired a majority stake in TSE Consulting SA, an international sports consultancy. TSE Consulting, headquartered in Switzerland, provides strategic advice to the public sector and sports organisations on events, performance, participation and facilities. Separately, WPP said that its operating network, Millward Brown, would acquire the business of Analytics Quotient (AQ), an India-based marketing analytics firm that helps clients define their marketing strategies.
Our view: WPP is the world’s largest advertising company and the owner of renowned brands such as JWT, Grey and Ogilvy & Mather. The acquisitions mentioned above bode well for the company’s strategy of investing in important markets and sectors and strengthening its capabilities in the digital and data investment management businesses. The acquisition of TSE would allow WPP to expand in the sports consulting domain, with partners across the globe. In addition, AQ would support its data investment division, provide better insights and facilitate decision-making. In the past few months, WPP made numerous strategic acquisitions, including the purchase of a majority stake in Conrad Caine GmbH, a full-service digital agency headquartered in Munich. Kantar, WPP’s data investment management division, acquired a majority stake in its partner in Denmark and Sweden, Millward Brown Denmark ApS. Overall, the company is performing well, driven by strong presence in different markets. Hence, we maintain a Buy rating on the stock.
Economic News
UK mortgage approvals
As per data from the Bank of England, mortgage approvals for house purchases rose to 74,581 in January 2016 from 71,335 in December 2015, which is the highest in two years. The markets expected the approvals to increase to 74,000.
US Chicago purchasing manager index
The Chicago purchasing managers’ index (PMI) fell to 47.6 in February from 55.6 in January, data from MNI indicators suggested yesterday. The markets expected a reading of 52.5.