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 third consecutive day, as investors await the jobs report, due to be released today. Positive economic data released in the US and stabilising commodity prices fuelled buying. The S&P 500 advanced 0.4%, with the energy sector gaining the most.
Asia: Equities are trading higher amid a volatile trading session. Improving oil prices and solid US data boosted investor sentiment. Meanwhile, investors focused on the meeting of Chinese leaders who would set the 2016 growth and fiscal deficit target. The Nikkei 225 added 0.3%, and the Hang Seng was trading 0.6% up at 7:00 am.
Continental Europe: Markets ended in the red dragged down by losses in healthcare stocks, as Moody’s cut its outlook on the global pharmaceuticals industry from positive to stable. Investors largely ignored the gains in energy stocks. Germany’s DAX and France’s CAC 40 shed 0.3% and 0.2%, respectively.
Crude Oil: Yesterday, Brent oil prices increased 0.4%, whereas WTI fell 0.3%. The spread between the two varieties stood at US$2.5 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.01% lower yesterday at 696.61.
Today's news
UK services sector hits three-year low
As per data released by Markit, the UK services purchasing managers’ index fell to 52.7 in February from 55.6 in January, the lowest level since 2013. The decline was ascribed to the prospect of Britain voting to leave the European Union and a slowdown in the global economy. In addition, the new orders received by UK service providers rose at the slowest pace since March 2013.
Company News
BHP Billiton (LON:BLT, 790.00p) - Hold
Samarco, BHP Billiton and Vale yesterday announced a settlement agreement between Samarco and various Brazilian authorities. The agreement lays out how much money Samarco will provide to the affected area in the form of environmental reparations and compensation, where environmental remediation is not possible. On the compensation front there is also a goodwill element which sounds like a solution to ensure there a sufficient number of projects to soak up the funds. Payments will be approximately US$1.2bn over the first 3 years and then circa US$300m per annum thereafter. The funds will flow for 15 years and it appears it could cost Samarco approximately US$5.0bn over that period, or US$2.5bn to BHP.
Our view: This seems like a huge cost but spread over 15 years the impact will be modest on BHP as a whole. US$150m per annum versus for example BHP's EBITDA of over US$20bn in FY 2015 to June. Nevertheless, these are large numbers and severe punishment for a serious mistake. At least the financial cost is now understood thereby removing the uncertainty. We maintain our Hold recommendation.
Frontier Resources (LON:FRI, 0.07p) - Speculative Buy
The Board of Frontier yesterday announced its conditional agreement to dispose of Frontier Oman (which holds the Group's oil exploration interests in Oman) and its entire interest in FRII, which provides administrative and technical support to the Group's oil projects. The proposed asset sale will be to Mr. M (‘Jack’) Keyes, the former chief executive officer of the Company for a consideration of £1 plus the rights to a carried interest of 20%. In accordance with AIM Rule 15, the Oman Disposal and the FRII Disposal are conditional on Shareholder approval at the General Meeting of the Company. The effect of the Oman Disposal, should the Resolution be approved at the General Meeting, would be that on completion the Company will cease to own, control or conduct all, or substantially all, of its existing trading business, activities or assets and would therefore become an AIM Rule 15 cash shell, pursuant to which it must make an acquisition or acquisitions which constitute a reverse takeover under AIM Rule 14 (including seeking re-admission as an Investing Company (as defined under the AIM Rules)) within six months, failing which the Exchange will suspend trading in the Ordinary Shares pursuant to AIM Rule 40. The General Meeting will be held at the Company's Registered Office at 11 Staple Inn, London WC1V 7QH at 10.00 a.m. on 22nd March 2016.
Our view: Given that FRI’s new management saw little or no opportunity to secure a farm-out for the Company’s Oman interests, whose financial obligations are now looming, the only real option was for outright disposal in exchange for a carried interest. The elimination of these commitments will provide relief for a balance sheet that otherwise would have found itself stretched to breaking point. The transfer of US$378k of outstanding debt together with Jack Keyes’ continuing belief in this asset, at least awards some value to the carried interest secured by FRI in exchange. In accordance with AIM Rule 15, the effect of the Oman Disposal (together with the FRII Disposal) would become an AIM Rule 15 cash shell. Accordingly, the Board's strategy is now to identify a suitable acquisition or acquisitions in a new sector, which will satisfy AIM requirements. So FRI is now a management story. Given the new Board’s sector experience together with the acquisition and joint venture opportunities being thrown up right across the energy and fossil fuels sectors due to the sharp decline in oil prices, Beaufort retains its Speculative Buy recommendation on the shares.
Beaufort Securities acts as corporate broker to Frontier Resources
Travis Perkins (LON:TPK, 1,849.0p) - Buy
Travis Perkins, the leading UK company in the builders’ merchant, home improvement and the product supplier to the building and construction market, yesterday announced its full year results ended 31 December 2015. During the period, revenue rose 6.5% to £5,942m (FY2014: 5,581m) with like-for-like (‘LFL’) revenue up 3.8% owing to good performance across all divisions (LFL except Plumbing & Heating), opening of new branches and the inclusion of Primaflow and Rudridge into the results. Adjusted operating profit, excluding the impact of property profits, stood at £413m, up by 7.6% over same period last year. Adjusted profit after tax were £307m (FY2014: £291m), up by 5.5% and, free cashflow improved by 24.3% to £317m. Consequently, adjusted EPS improved 4.3% to 124.1p per share compared to 119p per share a year ago. On the operational front, the Group continue to expand its network with 53 new branches and stores opened, including implants. The Group has made a significant progress on major strategic fronts, including supply chain investments in General Merchanting and completion of the re-segmentation in Plumbing & Heating. Travis Perkins hiked the full year dividend to 44.0p per share, up 15.8%, signifying favourable future growth prospects. CEO, John Carter commented “We believe that the growth drivers in our markets remain strong and welcome the return to growth of mortgage approvals and secondary housing transactions in the second half of 2015. This has supported good growth in RMI sales for the Group in January and February 2016. This gives us further confidence that through our strategy we will successfully deliver against our medium-term targets of sales outperformance, low double-digit profit growth and improving returns.”
Our view: Given the headwinds of 2015, LFL revenue growth of +3.8% in fact was a highly commendable performance. It might now be all but forgotten, but preceding last May’s General Election, polls were confidently predicting the election of a labour-party controlled administration. Anticipating such an event was likely to result in at least a temporary house price volatility shock, a large number of planners, developers and jobbing builders either stalled projects or experienced a sharp decline in incoming work. Of course, such projects cannot be just ‘switched back on’, meaning that work levels only really regained their previous momentum during Q4’2015. This period was then, of course, hindered from mid-November to the year-end by the six wettest weeks on record, which brought all external works to a virtual standstill. Entering 2016, as CEO John Carter mentions “…. the return to growth of mortgage approvals and secondary housing transactions in the second half of 2015….. has supported good growth in RMI sales for the Group in January and February 2016.” Indeed, with the additional rush to complete projects ahead of the buy-to-let Stamp Duty hike on 1st April, momentum is likely to build further in March. Against a background of exceptionally low interest rates, sustained buoyancy throughout the new housebuilding sector, a dramatic nationwide shortage of accommodation and a public who likes nothing more than adding RMI value to their properties while prices spiral ever upwards, the Group’s anticipation it achieving a medium-term ‘low double digit profit growth’ appears prudent. Indeed, given the fact that the Group’s Board approved a 16% hike in its full year dividend payment, they also seem to agree with this sentiment. The bottom line is that Travis is a high quality distributor with a valued brand, which will benefit further from supply chain improvements and higher levels of e-commerce. On this basis, a 2016E P/E of 12.2x together with a 3.2% yield looks too cheap. Beaufort retains its Buy recommendation on the shares.
Admiral Group (ADM.L, 1,919.0p) - Buy
Yesterday, Admiral Group declared its preliminary results for the year ended 31st December 2015. During the period, the group’s turnover rose 8% to £2.12bn, supported by a 9% increase in customers to 4.43 million. The UK car insurance segment’s profit increased 11% to £443m, along with a 5% rise in customers to 3.3 million. The international car insurance division reported losses of £22.2m (2014: loss £19.9m). The combined price comparison business incurred losses of £7.2m (2014: profit £3.6m), mainly due to the investment in compare.com. The group’s pre-tax profit surged 6% to £377m, leading to EPS of 107.3p against 103p in 2014. Return on equity fell to 49% from 52% in 2014, and the combined ratio strengthened to 85.6% from 86.5%. Admiral proposed a final dividend of 63.4p, taking the full-year dividend to 114.4p, 16% higher than in 2014.
Our view: Admiral Group delivered excellent performance in 2015. The group’s growth was led by the UK car insurance segment, which posted higher turnover and increased margins. This division’s performance was boosted by higher average premiums in the competitive UK market. In addition, the segment’s combined ratio improved to 78.2% (2014: 79.5%). Admiral’s losses in the international business were mainly due to investment in France and the US. The group generated profit from its Italian business ConTe and achieved breakeven in its Spanish operations Seguros. Moreover, Admiral’s balance sheet continues to strengthen, translating into higher dividends for shareholders. We are optimistic about the group’s prospects due to its large customer base and fundamentally strong position. Therefore, we maintain a Buy rating on the stock.
Whitbread (LON:WTB, 3,800.0p) - Buy
Yesterday, Whitbread released a trading update for the 11 weeks and 50 weeks ended 11th February 2016, which are part of the 53-week year ending on 3rd March 2016. Sales for 11 weeks increased 7.7% y-o-y, with like-for-like (LFL) sales growth of 1.7%. Sales for the 50 weeks of FY 2016 have grown 10.4% y-o-y, with LFL sales growth of 3.2%. During the 50 weeks of FY 2016, sales from the company’s Costa division jumped 14.2%, with 3.0% growth in LFL sales. Year to date, Costa’s worldwide system sales grew 13.1% to £1,516m (13.4% at constant currency). Within this, franchise system sales rose 10.6% to £572m. The Premier Inn segment witnessed an 11.1% rise in sales, with LFL sales improvement of 4.4%. Sales from the Hotels and Restaurants arm advanced 8.2%, with a 3.3% increase in LFL sales. On the operational front, Costa Express installed 921 Costa Express machines, taking the total to 5,213. The company plans to open around 5,500 new UK Premier Inn rooms, including 1,500 rooms from extensions, and another 5,000 new UK rooms. The Costa segment plans to open around 230 stores worldwide and install around 1,000 Costa Express machines next year.
Our view: Whitbread’s year-to-date performance has been robust, led by its major brands Costa and Premier Inn. Moreover, all business lines have reported a y-o-y increase in sales and LFL sales. The growing number of stores amid strong demand helped Whitbread improve performance. Furthermore, Whitbread plans to marginally increase prices and reduce costs by enhancing productivity. The company has set growth milestones for 2020 including an increase in the Premier Inn UK rooms to around 85,000 and global system sales of nearly £2.5bn for Costa. The attainment of these milestones would create more than 15,000 new jobs in the UK over the next five years. Whitbread plans to make a capital investment of £700m to drive organic growth and enhance customer experience. Given, the strong growth potential of the various segments and the company’s expansion plans, we maintain a Buy rating on the stock.
Domino’s Pizza Group (LON:DOM, 1,038.0p) - Buy
Yesterday, Domino’s Pizza Group (Domino’s) announced its results for the year ended 27th December 2015. During the period, system sales rose 15.8% £877.2m, while UK LFL system sales growth of 11.7% as compared to 11.3% in 2014. In the UK, sales advanced 10.1% to £283.7m; while in Ireland, sales remained flat at £21.4m and in Switzerland sales increased 21.9% to £11.7m. Domino’s underlying profit increased 16.6% to £73.2m, and EPS rose 19.4% to 35.7p. On a statutory basis, revenue from continuing operations increased 9.7% to £316.8m, and profit after tax surged 20% to £59.3m. Net cash at the end of the period stood at £40.4m (2014: £11.0m). On the operational front, the company opened 61 stores in the UK, taking the portfolio count to 869 (2014: 813). Domino’s entered into a joint venture with Domino's Pizza Enterprises in order to acquire Joey's Pizza, Germany's largest pizza delivery chain. The board recommended a final dividend of 11.75p, bringing the full-year dividend to 20.75p, 18.6% higher than in 2014.
Our view: Domino’s reported excellent performance in the third quarter, showcasing the success of its strategic and marketing initiatives. The group’s UK business continued to outperform, as it recorded the ninth consecutive quarter of double-digit LFL sales growth. Domino’s revenues from digital channels increased, with e-commerce representing 77.7% of delivered sales in the UK and app-based sales accounting for 48.6% of online sales. In addition, the UK and Ireland businesses continue to set sales records, as the group sold 84.2 million pizzas in the year, averaging over 230,000 per day. Domino’s continued to innovate and improve its product range to meet the changes in consumer demand. The group launched a feature ‘saved favourite baskets’ to reduce the time on taking an order and enhance customer experience. Moreover, Domino’s franchisees improved profitability with store EBITDA performance up to 15.5% from 13.6%, driven by lower food prices. The group plans to open around 65 stores and make investments for additional supply chain centres in the UK and Ireland. Overall, Domino’s is well placed with a healthy balance sheet and solid operations to deliver long-term growth. Therefore, we maintain a Buy rating on the stock.
Petards Group (LON:PEG, 12.62p) - Speculative Buy
Petards announced that it has been awarded a £0.8 million contract from the UK Ministry of Defence for the provision of communications equipment and related services. Petards has a long established reputation as a supplier of radio communications equipment together with related engineering services to the MOD and the award of this new £0.8 million project covers the delivery of radio equipment and engineering support services, a good proportion which is expected to be delivered during the first half of 2016. Petards expects to announce its preliminary results for the year ended 31 December 2015 on 15 March 2016.
Our view: This new contract with the MOD is evidence and validation of Petards long-established relationship with and provision of consistently high levels of customer service to the MOD. Together with Petards longstanding accreditations and expertise in supporting the MOD has resulted in the award of this contract. We continue to recommend as a Speculative Buy.
IP Group (LON:IPO, 178.20p) - Buy
The Company- the developer of intellectual property-based businesses -announced its annual financial results for the year ended 31 December 2015, on 1st March 2016. Net assets excluding intangibles increased to £714.3m (2014: £451.3m) and adjusted profit before tax of £82.4m (2014: £16.2m), excluding amortisation of intangible assets and reduction in fair value of Oxford Equity Rights asset of £7.3m (2014: £6.7m). Net cash and deposits at 31 Dec 2015 was £178.8m (FY14: £97.). In addition IP Group negotiated a new 8-year £30m debt facility negotiated with European Investment Bank. Moving from the financial highlights to the underlying portfolio highlights, the Fair value of portfolio rose to £552.2m (2014: £349.9m). The net increase in fair value of portfolio, excluding net investment, was £86.2m (2014: £22.3m). Capital provided to portfolio companies and projects was £75.9m (2014: £46.8m). This was in addition to the acquisition of £40.0m strategic holding in Oxford Sciences Innovation plc. Portfolio realisations amounted to £0.6m (2014: £9.7m). The Group's portfolio companies raised approximately £300m of new capital in 2015 and Oxford Nanopore completed a £70m private financing and its MinION product became fully commercially available. Finally, Diurnal Group plc completed £30m AIM admission and began Phase 3 trials for its Infacort product.
Our view: 2015 saw the Group's strongest financial performance since its formation. During the year, IP Group completed a number of key corporate transactions and secured its financial position for growth with successful equity and debt raisings. Indeed, circa £178m raised (c. £55m at £2.08, and c. £125m at 225p). These funds will be used to grow both the UK and US operations as the Group continue to internationalise the business. It was also an extremely productive year for the Company’s portfolio companies who recorded some impressive achievements which included raising approximately £300m of new capital. In addition, the Group took a strategic stake in Oxford Sciences Innovation plc, providing access to a much wider range of scientific research from the University of Oxford and broadening its exposure to future Oxford spin-out companies. The Group remain “cautiously optimistic about the prospects for the current year and beyond and believe we are well-positioned for future growth." The shares are at a large discount to 2015’s placing prices and over 35% below the high in 2015 of 276p. This represents an excellent opportunity with significant upside and we reiterate our BUY recommendation.
Economic News
UK House Prices
As per Nationwide’s latest report, house prices in the UK increased 0.3% m-o-m in February, after a similar rise in the previous month. The markets expected a 0.4% increase in prices. On y-o-y basis, the prices increased 4.8% in February, after a 4.4% rise in January.
US initial jobless claims
Initial jobless claims in the US increased 6,000 to a seasonally adjusted 278,000 in the week ended 27th February, the Labor Department reported yesterday. Economists expected the claims to increase to 270,000. The four-week moving average fell 1,750 to 270,250 last week.
US factory orders
US factory orders rose 1.6% m-o-m in January after a decline of 2.9% in February, the US Department of Commerce said yesterday. The markets expected a 2.1% rise in orders.
US durable goods orders
As per the Commerce Department, US durable goods orders increased 4.7% m-o-m in January, lower than the preliminary estimate of an increase of 4.9%.