The Markets
New York: Wall Street ended in the green, as oil prices rose after the International Energy Agency reported that prices may have 'bottomed out'. Moreover, investors cheered the European Central Bank (ECB)’s new stimulus package unveiled on Thursday. The S&P 500 advanced 1.6% on Friday, with the financial sector gaining the most. For the week, the markets closed 1.1% higher.
Asia: Equities are trading higher, tracking the global markets and led by aggressive stimulus measures undertaken by the ECB. Meanwhile, investors await policy decisions this week from the central banks of the US, Japan and the UK. The Nikkei 225 gained 1.7%, while the Hang Seng was trading 1.2% up at 7:00 am.
Continental Europe: Markets ended higher, led by banking stocks as investors expected the ECB’s measures to positively impact the financial sector. Furthermore, an improvement in oil prices resulted in gains for energy stocks. Germany’s DAX and France’s CAC 40 surged 3.5% and 3.3%, respectively.
Crude Oil: On Friday, WTI and Brent oil prices increased 1.7% and 0.8%, respectively. The spread between the two varieties stood at US$1.9 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.69% higher on Friday at 702.46.
Today's news
UK economy to grow at slower pace
The British Chambers of Commerce (BCC) expects the UK’s economy to expand 2.2% in 2016 from the earlier estimate of 2.5%. The downgrade was due to weaker growth in most areas of the economy, reflecting global slowdown. Moreover, the agency cut its growth forecast for 2017 to 2.3% from 2.5% and anticipates the economy to expand 2.4% in 2018.
Company News
Keras Resources (LON:KRS, 0.85p) - Speculative Buy
Keras Resources, a resource development company with projects in Africa and Australia, announced today a potential increase in its gold resource inventory after signing a binding profit-share agreement with KalNorth Gold Mines over the Lindsay's Project, located 60km NE of Keras' Grants Patch gold tribute project in Western Australia. Under terms of the agreement, Keras has an exclusive and irrevocable option to mine the Lindsay's Project in consideration for a share of the net revenues. Should Keras exercise the option, Keras and KalNorth will enter into a formal agreement containing full representations and warranties in respect of the Lindsay's project prior to commencement of mining. The Lindsay's Project comprises a combined open pit and underground resource of 215,100oz grading 1.7g/t Au. All permits are in place and Keras will revise the current mine proposal with production targeted for Q3 2016.
Our view: Although small, we are encouraged with the new agreement signed with KalNorth which may potentially add another 215,000oz of gold resources to Keras' tribute gold inventory. We see additional exploration upside from the Lindsay's Project within the high-grade Parrot Feathers deposit, containing 54,000oz grading 4.2g/t Au and remains open down-dip and along strike. Given the current favourable pricing environment for Australian gold, we note the high level of interest and activity in tribute mining agreements. We look forward to the commencement of gold production from the existing Grants Patch and Wycheproof tribute mining agreements as well as the revised mining proposal from the Lindsay's Project. In the meantime, we maintain our speculative buy on the stock.
Beaufort Securities acts as corporate broker to Keras Resources plc
Avanti Communications (LON:AVN, 100.75p) - Speculative Buy
On Friday, Avanti Communications informed that it has secured its first pre-launch contract for capacity on its HYLAS 4 satellite. As per the deal, the company would supply Bentley Walker, one of its key existing customers, with capacity on HYLAS 4 across sub-Saharan Africa for a consideration of more than US$1m. HYLAS 4 is on track to be launched in Q1 2017.
Our view: Avanti continues to witness strong demand for HYLAS 4 from both existing and new customers. HYLAS 4 is a planned high-throughput broadband communications satellite (28GHz) built by Orbital (OSC) for Avanti. The company expects to complete the launch in early 2017, which would complete Avanti’s coverage of Europe, Africa and the Middle East. This would materially enhance the company’s revenue-generation potential, largely within the existing fixed-cost base. Bentley has been one of Avanti’s main partners, known for delivering the best services across markets. Last month, Avanti won a contract with isNet, a subsidiary of Isbank, one of the largest banks in Turkey. As per the deal, isNet would provide Ka-band satellite connectivity to its enterprise customers in Turkey and Europe through Avanti's HYLAS 1 and 2 satellites. Moreover, the company remains fully funded for the launch of HYLAS 3 and 4 in 2017. We are encouraged by Avanti’s progress and look forward to further developments related to HYLAS 4. Therefore, we maintain a Speculative Buy rating on the stock.
Providence Resources (LON:PVR, 15.62p) - Speculative Buy
On Friday, Providence Resources provided an update on its assets in Porcupine Basin, offshore southern Ireland. The company continued farm-out discussions with third parties at the Spanish Point field, which it operates with 58% holding. The proposed drilling programme for the area is currently subject to regulatory approval. Providence continued subsurface evaluation of the exploration potential within the adjacent FEL’s 4/08 and 1/14 areas. In addition, the Irish government indicated that third-party licensing option applications have been received for the acreage around area. The company continued with post-well technical studies to gauge the potential of the Dunquin South prospect. Moreover, Providence is assessing Dunquin Ridge, which may be of pre-rift sedimentary origin. The company has started the farm-out process for the Druid/Drombeg prospects. The geo-mechanical analysis at these prospects has shown potential seal presence over the entire area. Detailed 3D seismic data analyses have shown Class II AVO anomalies at the Paleocene Druid and Lower Cretaceous Drombeg prospects. At the Newgrange prospect, Providence plans to start a 3D seismic programme in the later part of 2016. Moreover, geopressure analysis from newly acquired 2D seismic data, integrated with the Dunquin well data, has indicated the likely presence of top-seal at Newgrange. The Irish government recently offered awards of new licensing options in the nearby southern Porcupine/Goban Spur area. The notable licensees include ExxonMobil, Statoil, Nexen (CNOOC), Woodside and ENI (in conjunction with BP).
Our view: Providence has made good progress across its portfolio of assets in Porcupine Basin, despite the challenging operating conditions. The company continued development at the Spanish Point field, as it initiated farm-out discussions and carried on evaluation work to explore potential in the area. Providence’s petro physical evaluation of Dunquin prospect has shown the presence of residual oil saturations over the entire drilled North Lower Cretaceous carbonate reservoir. The company received positive results from the analysis at the Drombeg/Druid prospect. Providence is now opening up a partnering process for these prospects and has started the marketing activities. In addition, rock physics analysis at the Newgrange prospect has shown low acoustic impedance, which indicates a good-quality reservoir. Overall, all these prospects are estimated to hold significant volumes of oil. Recently, the company also reported substantial progress across its assets in the Celtic Sea basin. We are buoyed by the company’s progress and await future developments from the prospects. Therefore, we maintain a Speculative Buy rating on the stock.
Old Mutual (LON:OML, 182.0p) - Buy
On Friday, Old Mutual declared its preliminary results for the year ended 31st December 2015. Gross sales grew 21% to £31.8bn, with funds under management at £303.8bn (excluding Rogge), up 6% from the previous year. The company’s pre-tax adjusted operating profit (AOP) rose 11% on a constant currency basis to £1.7bn. Consequently, AOP earnings per share rose 15% to 19.3p. Profit after tax distributable to equity shareholders rose 5% to £614m. Return on equity increased 90 basis points to 14.2%. The company generated a net free cash surplus of £945m in 2015 compared to £897m in 2014. The company had a solvency II surplus of £1.6bn, representing a solvency II ratio of 135%. The net client cash flow, excluding Rogge, stood at £6.6bn, while the number of customers increased 8% to 18.9 million. On the operational front, Old Mutual informed that it would break the business into four different units: Old Mutual Emerging Markets, Old Mutual Wealth, Nedbank Group and OM Asset Management. The company expects to complete the separation by the end of 2018. Moreover, it agreed to sell Rogge to Allianz Global Investors. The company proposed a second interim dividend of 6.25p similar to the previous year, with a total dividend of 8.9p, 2% higher than 2014.
Our view: Old Mutual delivered an excellent performance in 2015, despite the ongoing volatility in the markets. The company’s business segments performed well, led by Old Mutual Emerging Markets (OMEM), which recorded a 9% increase in AOP. The division continues to lead the market position in the markets of South Africa, Namibia and Zimbabwe, which together produce 95% of the total OMEM profits. Meanwhile, Old Mutual’s return on equity remained well within its target range. The company’s cash position and solvency remained healthy 2015. Old Mutual’s decision to divide its four business units is a positive step. This would allow each of the units to work independently, and free them from the costs and constraints of the overall company. The new strategy would enable each business to have simpler access to capital markets, funding growth more easily and allowing markets to value them appropriately, with direct regulatory arrangements. The separation would also improve shareholder value in the long run. Old Mutual plans to invest in the South African business to strengthen its market hold. We are encouraged by the company’s results and decision to split into four units. In light of the above argument, we maintain a Buy rating on the stock.
JD Wetherspoon (LON:JWD, 696p) - Hold
JD Wetherspoon (Wetherspoon'), the UK pubs operator, on Friday announced its half yearly report for the 26 weeks ended 24 January 2016. During the period, revenues advanced +6.2% to £790.3m (H1 FY2015: £744.4m) with the like-for-like ('LFL') sales improved by +2.9%. The LFL bar and food sales were both up by +2.9%, while the fruit/slot machines dropped by -2.9%. Operating profit declined by -10.8% to £49.4m (H1 FY2015: £55.4m) and operating margin contracted to 6.3% (H1 FY2015: 7.4%) owing to lower gross margin and higher staff wages. Profit before tax and exceptional items narrowed to £36.0m from £37.5m in H1 2015, down by -3.9% which were partly offset by a property gain of £3.8m. Consequently, underlying EPS before exceptional items, the property gain and the benefits of a deferred tax credit fell by -16.6% to 19.1p per share (H1 FY2015: 22.9p per share). The Board declared an interim dividend of 4p per share, in line with H1 last year. On the operational front, the Group opened five new pubs and sold two pubs during the period, bringing the total number of pubs at the period end to 954. The Group is planning to open approximately 15 pubs in FY2016 and close some.
Our view: Friday's announcement was surrounded by a number of cautions, as Chairman, Tim Martin, warned of the possible impact resulting from the continuing tax disparity between supermarket and pubs along with April's national living wage legislation, along with his view in favour of withdrawal from the EU. Though partly offset by a property gain of £3.8m, the weaker gross margin and higher staff wages continued to exert pressure on the Group's profitability. Despite this, however, Wetherspoon still managed to delivered improved sales numbers and positive LFL sales growth for the period, although pubs and restaurants market remain highly competitive. Post the period, the Group has achieved total sales increased by +5.7% with LFL sales rose by +3.7% in the six weeks to 6 March 2016. The Group also stated that the sales comparisons in the H2 will be slightly more favourable and aiming for "a reasonable outcome for the financial year". Overall, Wetherspoon appears to offer a mixed bag of uncertainties and minor positives. In the absence of greater confidence from the Group, Beaufort maintain its Hold rating on the stock.