The Markets
Market opening: The FTSE-100 is expected to start this morning's session around 50-points higher.
New York: Wall Street ended in the green as robust data on ISM manufacturing and construction spending in the US lifted investor sentiment. Additionally, a rally in oil prices fuelled buying. The S&P 500 advanced 2.4%, led by the financial sector.
Asia: Equities are trading higher, tracking gains in global indices. A rally in oil prices and positive economic data from the US calmed the fear of global economic slowdown. The Nikkei 225 surged 4.1% as a weaker yen resulted in gains for export-driven stocks. The Hang Seng was trading 3.0% up at 7:00 am.
Continental Europe: Markets ended sharply higher as investors focused on individual corporate earnings releases. Investors largely ignored weak economic data from the region. Germany’s DAX and France’s CAC 40 gained 2.3% and 1.2%, respectively.
Crude Oil: Yesterday, Brent and WTI oil prices increased 2.3% and 1.9%, respectively. The spread between the two varieties stood at US$2.4 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.57% higher yesterday at 696.85.
Today's news
UK shop prices fall for 34th consecutive month: BRC
According to the British Retail Consortium, shop prices in the UK fell 2.0% y-o-y in February, compared with 1.8% in January, marking the 34th straight month of decline. The decrease was primarily due to a 0.4% drop in food prices in February and non-food deflation of 3% for the third consecutive month.
UK manufacturing slips to nearly three-year low
As per Markit, the UK purchasing managers’ index (PMI) decreased to 50.8 in February from 52.9 in January, the weakest in nearly three years. Furthermore, the manufacturing production growth rate fell to a seven-month low in February, and manufacturing employment declined for the second consecutive month.
Company News
Strat Aero (LON:AERO, 4.12p) - Speculative Buy
Strat Aero plc, the AIM quoted international aerospace company focused on the Unmanned Aerial Vehicle ('UAV') sector, yesterday announced its signing of a contract worth an estimated US$378,000 over a five-year period for its proprietary Digital Data Management software with ReadyJet, a leading service provider to the aviation sector. DDM, previously known as AIMS and based on proprietary software designed for the aviation industry, has been developed by Strat Aero to also present, store and analyse data gathered during operations undertaken by UAVs, such as flood defense surveys and wind turbine inspections. It is therefore an integral part of the Company's full service UAV offering to commercial and military customers. Given Strat Aero's aviation heritage and DDM's extensive data storage and analysis capability, the Company has continued to actively market it as a customised enterprise resource planning ('ERP') offering to the wider aviation industry. ReadyJet's requirements including tracking employees' time, calculating payroll, hosting and tracking required training that has been developed by ReadyJet; DDM will also track schedules, documents, employee titles and positions.
Our view: This contract win is highly encouraging. It represents a further large opportunity for Strat Aero, given that the market for this product at this price range is big and largely untapped. DDM software is a high margin business generating 80%+ gross margins and is also in on-going discussions with other potential customers operating outside the UAV sector. With this contract win and the extensive product development leading to it, management is developing a platform through which it can establish DDM as the industry standard, and in the process generate significant recurring revenues for the Group, which can further be reinvested into its core full service UAV offering to the commercial and military sectors. 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
Glencore (LON:GLEN, 129.05p) - Hold
Glencore reported its 2016 preliminary results yesterday, and like its peers (all of whom have reported) the numbers reflect much weaker commodity prices versus 2014 while the current strategy is also one of disposals and capex reductions. The main differentiating factor for Glencore is its marketing (trading) business which is less vulnerable to commodity price fluctuations. Although opaque, this provides some useful diversification. Glencore also has an agriculture business which gives some added diversification, albeit quite small. Headline numbers include revenues down 23% to US$170bn, adjusted EBITDA down 32% to $8.7bn, adjusted EPS of $0.10 (down 69%) and Total capex down 30% to c US$6.0bn. Note that the revenue number includes the turnover of the low margin trading operations. Perhaps the most important number is net debt (which is/was the market’s main concern) down 15% to US$25.9bn which results in a relatively healthy net debt to adjusted EBITDA ratio of 3.0x.
Our view: Although Glencore has a weaker balance sheet than some of its peers, it is not, in Beaufort’s opinion, under severe pressure. To demonstrate this, in 2015 it generated US $7.5bn of operating cashflow while its interest payments were $1.2bn. Industrial capex (mainly at mines) of US$5.3bn (not including acquisitions and exploration) was the main negative in the cashflow statement but some of this is discretionary spending and in 2016 Glencore hopes to reduce this number to US$3.5bn. Glencore is targeting net debt of US$17-US$18bn by the end of 2016 which, assuming a similar EBITDA number to FY15 (US$8.6bn), would result in a net debt to EBITDA ratio of c 2.0x. Other risks to Glencore include the value of its inventories. These are on the balance sheet at US$18bn, positively impacting net debt significantly, but some commentators rightly question their true market value. That said, Glencore is far from having to dump its inventories to shore up its balance sheet. Beaufort retains a HOLD recommendation for Glencore as our main concern is commodity price volatility.
Xtract Resources (LON:XTR, 0.18p) - Speculative Buy
Xtract Resources, the gold mining and development company, announced yesterday that it has received final approval under the Mozambican Mining Act for completion of the acquisition of the Manica gold project from Auroch Minerals. All of other conditions have now been fulfilled. Xtract and Auroch have revised the terms of the agreement as stated on 10 September 2015. Under the revised terms, a cash payment of US$3m and issuance of 1,137,258,065 new ordinary shares of Xtract (US$4.4m value) to Auroch. The disposal of shares is subject to an orderly market arrangement and will have no lock in period. Xtract will also pay Auroch US$2.5m three months after completion date of which US$1.3m will be in cash and remaining US$1.2m will, at Auroch’s discretion, be payable in ordinary shares issued at a 20% from the 10 day VWAP or in cash. In addition, Xtract have assumed the responsibility to settle the remaining portion of the US$1m relating to the Manica project creditors.
Our view: With the approval by the Mozambican authorities for the acquisition of the Manica project now completed, Xtract can now focus on finalising the DFS for the project. The revised terms also provide management with additional flexibility in terms of cash flow, with minimal additional dilution. This is an important milestone for Xtract as it transforms from a small-scale miner to a mid-tier gold producer. We look forward to continued developments relating to Manica gold project and formalisation of any potential project financing. In the meantime, we maintain our Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Xtract Resources plc
Taylor Wimpey (LON:TW, 187.20p) - Buy
Yesterday, Taylor Wimpey declared results for the year ended 31st December 2015. Revenue advanced 16.9% y-o-y to £3.1bn and operating profit rose 32.5% to £637m. As a result, pre-tax profit rose 34.1% to £603.8m, leading to EPS of 15.1p from 11.6p in 2014. Tangible net asset value per share increased 7.2% to 83.5p and net cash surged 98% to £223.3m. On the operational front, the company completed the construction of 13,219 homes (excluding joint ventures) across the UK, 7.5% higher than that in 2014. Total average selling price rose 8% to £230,000. Taylor Wimpey acquired 6,971 high-quality plots in the short-term land market. At the end of December 2015, the company had a short-term land bank of about 76,000 plots after converting over 8,600 plots from the strategic pipeline into a short-term land bank. Taylor Wimpey ended the year with 7,484 homes worth £1.8bn. The company completed the construction of 251 homes in Spain (2014: 164) at an average selling price of €315,000 (2014: €250,000). As on 31st December 2015, order book for Spain stood at 270 homes (31st December 2014: 233 homes). Taylor Wimpey has proposed a final dividend of 1.18p, making the Total pay out for the year to 1.67p (vis-à-vis 1.56p in the previous year). The company would pay a surplus cash of £300m (9.20p) in July 2016, subject to shareholders’ approval.
Our view: As expected, Taylor Wimpey registered a strong performance in 2015, led by a sharp rise in house completions and an increase in average selling prices. The Company ended the year with both a record order book and operating margin. Higher selling prices of homes led to an improved cash position for Taylor Wimpey at the end of 2015, paving the way for higher dividends and cash returns to shareholders. It also continued to make further progress in Spain, as demonstrated by improved order book and house completions. Reflecting this, Taylor Wimpey shares performed strongly during 2015, being the year’s best performer in the FTSE 100. Taylor Wimpey continues to bask in the glow of a highly supportive pro-homeownership government, a desperate housing shortage, a lending environment that squeezes out the smaller ‘jobbing’ builder and a more relaxed planning environment. Policy incentives include a ‘Help to Buy’ scheme (in place until at least 2021) and the introduction of a 20% discount as part of the ‘Starter Homes’ scheme. Going into 2016 the sun continues to shine, with Taylor Wimpey enjoying a solid order book, while holding a large land-bank against the background of an accommodating mortgage environment. Beaufort remains overweight of the housebuilding sector, amongst which it favours Taylor Wimpey for income investors; according to Beaufort forecasts, the shares are set to provide investors with almost an 8% yield in 2017E. Beaufort maintains its Buy rating on the shares.
Hutchison China Meditech (LON:HCM, 2,335.00p) - Buy
Hutchison China Meditech (‘Chi-Med’), the China-based healthcare group, yesterday announced its final results for the year ended 31 December 2015. During the period, revenue soared 104% to US$178.2m (FY2014: US$87.3m) mainly driven by a consolidation of Hutchison Sinopharm. Net profit from operations attributable to Chi-Med was US$8m (FY2014: net loss –US$7.3), including cost for proposed NASDAQ dual listing of US$3.1m. The Group’s Commercial Platform, the primary profit and cash source for Chi-Med, grew operating profit by 11% to US$28.2m (FY2014: US$25.5m) whereas the Innovation Platform reduced operating losses significantly, by 83%, to US$3.8m (FY2014: -US$22.2m). Cash and cash equivalents at the end of period were US$31.9m. On the operational front, the Group’s Innovation Platform has reported positive data in all five phase Ib/II proof-of-concept studies, taking Total of 19 clinical trials on 7 drug candidates including 3 phase III registration trials. Commercial Platform on the other hand focused on broadening scope and capacity of higher margin Prescription Drug business. CEO, Christian Hogg commented "2015 has been a record year, and in 2016 we expect multiple clinical catalysts and continued commercial performance to continue this momentum. Together with the intended Nasdaq dual listing, all the pieces are now in place to accelerate discovery work, expand clinical activities and ultimately commercialize our approved innovations”.
Our view: Chi-Med delivered great result for FY2015! It has continued to expand rapidly with revenues more than doubling, while also achieving a record net profit from operations attributable to Chi-Med which expanded by almost 210%. The Group made excellent progress in the Innovation Platform, publishing positive clinical outcomes on all five of the Phase Ib/II proof-of-concept studies that reported results during the year. Innovation Platform is well supported by its partners, AstraZeneca, Eli Lilly and Company, Nutrition Science Partners (JV with Nestlé Health Science S.A.) and Janssen Pharmaceuticals (part of the Johnson & Johnson group of companies) which help boosted its revenue by 156%. The Group’s Commercial Platform also witnessed strong growth in sales of prescription drugs that increased net profit attributable to Chi-Med from continuing operations by 10%. The Group has strong cash position with available cash, cash equivalent and unutilised bank facilities Totalled US$90m as at 31 December 2015. Chi-Med is committed to dual list on NASDAQ. A successful listing at NASDAQ will likely to boost its valuation, given that the US typically understand the risk entailed in early stage Biotech & Pharma investments better than the London market. In view of the significant achievements made by the Group and management’s confident outlook, we believe Chi-Med is capable of sustaining its momentum to grow both in China and globally. Beaufort maintains its Buy rating on the stock.
RSA Insurance Group (LON:RSA, 444.50p) - Buy
Yesterday, RSA Insurance Group announced that it had completed the sale of its operations in Brazil to Suramericana S.A., the insurance subsidiary of Grupo de Inversiones Suramericana. The group expects the completion of the remaining disposals of its Latin American operations across Chile, Argentina, Mexico, Colombia and Uruguay over the next six months.
Our view: The completion of the sale of operations in Brazil is beneficial for RSA’s restructuring programme, which is likely to complete in 2016. The group plans to complete the disposal of its remaining disposals in other Latin American countries. In 2015, RSA performed strongly despite challenging market conditions. The growth was led by solid contributions from the UK, Scandinavia and Canada divisions. The group reported healthy solvency and combined ratios, which are important parameters in the insurance industry. RSA remained focused on cash management and reported lower core controllable costs for 2015 than that in 2014. Moreover, the group raised its annual gross savings target to over £350m by 2018. In addition, a lot of initiatives, with a focus on technological advancements, to improve customer service and underwriting results are in progress. Solid performance during the year resulted in an ‘A’ rating from ratings agency S&P. RSA has recently signed an agreement with Nationwide Building Society to underwrite all of its home insurance products over five years, effective from the spring of 2017. We are buoyed by the group’s performance in 2015 and expect it to perform better once it completes the restructuring programme. Therefore, we maintain a Buy rating on the stock.
Wood Group (LON:WG, 634.0p) - Buy
Yesterday, Wood Group announced that it had won a five-year industrial services contract worth US$120m (with a five-year extension option) from Babcock International. The contract would be delivered by Wood Group PSN’s industrial service line business, Wood Group Industrial Services (WGIS). As a part of the contract, WGIS would deliver surface preparation, application of protective coatings, scaffolding, insulation, rope access, cleaning and fire sentry services.
Our view: Wood Group continues to build on its relationship with Babcock International, given it has received a contract from the latter to provide industrial services. The contract is testimony to the group’s solid record in the marine sector. This is the second contract that has been announced by WGIS in 2016 so far. In February, the company secured a new five-year framework agreement from Valero Energy, an international manufacturer and marketer of transportation fuels, petrochemical products and power, to provide services for the onshore Pembroke refinery in south-west Wales. In 2015, WGIS had secured contracts worth over US$300m. Of late, the group has made a lot of acquisitions and won contracts to mitigate the adverse impact of challenging market conditions. We believe Wood Group’s solid order book, along with a healthy balance sheet, would foster long-term growth. Therefore, we maintain a Buy rating on the stock.
Economic News
Germany unemployment change
The number of people without a job in Germany fell by 10,000 on a seasonally adjusted basis to 2.723 million in February, the Federal Labour Agency said yesterday. This was in line with the market expectations. The seasonally adjusted unemployment rate remained at 6.2%, in line with the market expectations.
Germany manufacturing PMI
As per the data released by Markit, the final manufacturing PMI of Germany for February dropped to 50.5 from 52.3 in January. The markets expected a reading of 50.2.
Eurozone manufacturing PMI
Manufacturing PMI for the Eurozone fell to 51.2 in February from 52.3 in January, final data from Markit showed yesterday. The markets expected a reading of 51.0.
US manufacturing PMI
The final Markit PMI for the US decreased to 51.3 in February from 52.4 in January. The markets expected a reading of 51.2.
US ISM manufacturing
US manufacturing PMI increased to 49.5 in February from 48.2 in January, as per the Institute of Supply Management (ISM). Economists had forecasted a reading of 48.5.