The Markets
Market opening: The FTSE-100 is expected to start this morning's session around 18-points higher.
New York: Wall Street ended lower amid a fall in oil prices and weak economic data released in the US. Meanwhile, investors await the outcome of the Fed's policy meeting due later today. The S&P 500 fell 0.2%, with the healthcare sector losing the most.
Asia: Equities are trading lower, taking negative cues from global indices. The markets are anxiously awaiting Fed’s policy meeting and its long-term outlook on interest rates. The Nikkei 225 dropped 0.8%, while the Hang Seng was trading 0.2% lower at 7:00 am.
Continental Europe: Markets ended in the red, dragged down by sharp declines in the mining and energy stocks. Moreover, weak corporate earnings weighed heavily on investor sentiment. France’s CAC 40 and Germany’s DAX shed 0.8% and 0.6%, respectively.
Crude Oil: Yesterday, WTI and Brent oil prices decreased 2.3% and 2.0%, respectively. The spread between the two varieties stood at US$2.4 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.28% lower yesterday at 710.99.
Today's news
Eurozone employment rises in Q4 2015
As per data from Eurostat, employment in the Eurozone increased 1.2% y-o-y in Q4 2015 after rising 1.1% in the previous quarter. Employment in manufacturing increased 0.2%, while it fell 0.2% each in construction and agriculture and fishing sectors. Also, trade and services activity employment grew 0.4%.
Company News
Antofagasta (LON:ANTO, 480.50p) - Hold
Yesterday, Antofagasta released its preliminary results for the period ended 31 December 2015. Group revenues fell 34% to US$3,394.6m driven by reduced copper prices and decline in sales volume. EBITDA dropped 58.4% y-o-y to US$890.7m and the pre-tax profit decreased to US$259.4m from US$1,515.6m. Consequently, basic EPS from continuing operations was USc0.6, a decrease of 98.6% from FY 2014. Net cash costs for FY 2015 were US$1.50 per pound, 4.9% higher than the previous period. During the period, copper sales slipped 9.5% to 635.9kt, similarly gold sales fell 18% to 219.2koz however, molybdenum sales increased 20.7% to 9.9kt. Meanwhile, copper production declined 10.5% to 630.3kt, largely due to lower grades at Centinela and Los Pelambres mined harder oer. Group gold production was 51.4koz 22.7% lower y-o-y, molybdenum production was, however, 27.8% higher at 10.1kt compared with FY 2014 on the back of higher grades. Among the growth projects, Antucoya’s first production was delayed to Q3 2015 and is ramping up to full capacity of 85ktpa by H1 2016. Construction is 53% complete at the Encuentro Oxides project, with production now delayed to H2 2016 to preserve cash flow. During the period Antofagasta acquired a 50% interest in the Zaldivar copper mine in Chile from Barrick Gold for a Total consideration of US$1.0bn in cash and is expected to be accretive to Antofagasta’s earnings and cash flow per share. Although the Group declared a H1 2015 dividend of USc3.1 per share, representing a 35% pay-out ratio of H1 2015 net earnings, the Board is not recommending a final dividend.
Our view: During FY 2015, Antofagasta experienced a significant decline in revenue that severely limited the company’s ability to generate higher profits on the back of depressed copper prices that marred the company’s overall growth prospects. On the other hand, the company has made efforts to improve its operational efficiency and is targeting US$160m of savings in 2016 to enhance profitability. Despite the poor performance for the period and cancellation of the final dividend, the Group continues to hold world class assets that underpin its long term growth potential. Thus in view of a current weak global demand for copper, we maintain a Hold on the stock.
Hastings Group Holdings (LON:HSTG, 169.70p) - Buy
Hastings Group Holdings (‘Hastings’), the UK insurance provider focused on private car, Bike, Van and Home, yesterday announced its preliminary results for the year ended 31 December 2015. During the period, net revenue advanced +20% to £481.0m (FY2014: £400.9m) and operating profit increased by +19% to £126.1m (FY2014: £105.7m). Gross written premiums rose +27% to £614.9m (FY2014: £483.4m) and the Group remain strong at its financial position with Solvency I coverage of 373% and Solvency II coverage of 156%. The calendar year loss ratio were 75.4%, maintained at lower end of the target range. Pre-tax profit were £5.0m compared to a loss of -£1.4m a year ago, consequently, basic and diluted EPS were 0.5p per share (FY2014: loss of -2.2p per share). The Board proposed a final dividend of 2.2p per share, the Group’s first dividend since listing, to be paid on 31 May 2016. On the operational front, the Group successfully listed on the London Stock Exchange in October 2015 (now constituent of FTSE250) and achieved a milestone exceeding 2 million live customer policies (‘LCPs’), up by +19%. The Group now has 5.8% market share of UK Private car (FY2014: 5.1%), which account for 95.6% of the Group’s Total gross written premiums. The Group has made significant investment in two new major systems for its Broking and Claims platforms. Implementation of the Claims platform was successfully launched in November and the Broking platform is on track to be launched later this year. In May 2015, the Group opened its third UK site in Leicester which now has 300 staffs to meet the needs of a growing business. Its CEO, Gary Hoffman commented “2015 was a year of significant achievement for Hastings. Our business goes from strength to strength. Building on this momentum, we have had a positive start to the current year and remain well positioned to continue to deliver profitable growth in 2016. We remain on track to meet or beat the four targets we set at our IPO”.
Our view: Hastings has announced strong result for the FY2015 delivering on the promises it set at the time of its IPO. Group loss ratio of 75.4% was at the lower-end of its targeted 75%-79% range, while the dividend pay-out ratio of 56.5% was toward the upper-end of its 50%-60% target. The Group remain on schedule to profitably achieve over 2.5m customers by the end of 2017 (2.04m as at end FY2015), with a net debt to Group operating profit ratio of around 1.5x by 2017 (2.1x as at end FY2015, reduced from 3.6x a year ago). While the motor insurance market remains highly competitive with increasing pricing pressure and claims inflation, the Group has performed well expanding its operating profit by +19%, or +2.4% ahead of the consensus along with a maiden dividend of 2.2p, a +10% above consensus estimate. Hastings has seized advantage from its competitive operating environment by having agile, data-driven business model that distribute their products through price comparison website (‘PCW’), which account for c.90% of their new business sales. Its innovative use of data enables the Group to respond quickly to changing market conditions, averaging 49 changes to pricing strategies per month which provides significant advantage over its competitors. The Group reiterated its ambition to profitably insure 1 in 10 of all UK drivers by 2020. The Group also further expanded its cover into home insurance, whose premiums grew by 87% during the FY2015 as more customers adopted PCW to buy their policies, forsaking the traditional mortgage lender or bank route. The Group will enhance customer service and operational efficiency by investing in additional infrastructure and systems, including a new broking platform within Retail in order to maintain its good retention rates. Looking ahead into 2016, according to the management, the pricing cycle with further rate rises will likely to encourage consumers to shop around through PCWs. We believe the Group is well placed to continue its growth momentum for the immediate future while servicing generous shareholder dividends. The technological evolution of driverless cars presents a potential revolutionary scenario for the western motor car insurance sector, which is something Hastings will almost certainly be required to face up to within two or less short decades. Notwithstanding the latter, Beaufort issues a Buy recommendation rating on Hastings Group.
Fox Marble Holdings (LON:FOX, 12.25p) - Speculative Buy
Fox Marble, the AIM-quoted company focused on marble quarrying and finishing in Kosovo and the Balkans region, yesterday provided an update to investors regarding its Lipjan, Kosovo factory. The Italian supplier of the equipment needed to complete the slab processing and resining production lines at the Company's factory has confirmed delivery of the lines within the next two months. The purchase agreement has been amended to reflect the delays in 2015. The Total discounted cost of this equipment is €900,000. Of this, €400,000 will be a cash payment of which €112,500 has already been paid. The balance of €500,000 will be satisfied by the sale of a range of marble blocks from the Company's quarries to the supplier, upon completion of delivery and installation of the equipment. The Company further confirmed the overall factory project and site preparation is progressing well and as has been previously announced, commissioning and opening of the factory is anticipated by mid-2016. Both internal and external gantry cranes have been delivered to the site, with the five tonne internal gantry crane now fully installed and tested. The thirty-five tonne external gantry crane is expected to be installed shortly.
Our view: Getting the factory fully operational, after the various teething problems of 2015, will be a key milestone for investors. The Company expects to be able to produce cut and polished marble slabs in Kosovo by the middle of the year and in so doing significantly reduce operational costs. With country facilities already in place, management also expects to open up additional sales channels to local Balkan markets for finished stone, as well as allowing the Company to make more efficient use of all of its production and improve yields within its quarries. This should herald a much more exciting phase of much improved visibility in processing and revenue generation for Fox Marble. Indeed, its business opportunity, with what must rate as one of the world’s most exciting portfolios of high grade on-surface dimensional stone, to supply a giant and highly fragmented international customer base is enormous. Its management is capable and the business remains cash rich, while most capital costs have already been committed. Beaufort anticipates little further significant expenditure going forward into 2017. Labour and transportation costs are low, yet even amid global economic concerns, demand for premium marble continues to increase while pricing remains firm and rising. The putting in place a comprehensive distribution network covering the key international markets (like North America, Middle East, China, India etc.), possibly remains the final piece to complete the overall jigsaw. Assuming management is making such arrangement, however, there should be little to stand in the way of the Company continuing a quite dramatic improvement in visibility and depth of its order book in coming years. These earnings, in turn, should be capable of dropping rapidly to the bottom line, of which the management has already indicated its willingness to distribute in the form of dividends. Beaufort retains its Speculative Buy rating on Fox Marble.
Legal & General Group (LON:LGEN, 228.10p) - Buy
Yesterday, Legal & General Group (L&G) declared its results for the year ended 31st December 2015. Operating profit rose 14% to £1.5bn, driven by the L&G Retirement (LGR) division, which grew 49% to £639m. Pre-tax profit increased 9% to £1.4bn, leading to adjusted EPS of 18.58p, up 11% from 2014. The group’s solvency II ratio (a measure of capital strength) was 169%, based on a surplus of £5.5bn. As on 31st December 2015, L&G had an economic capital surplus of £7.6bn, representing an economic capital coverage of 230% (2014: 229%). Net cash generation stood at £1.3bn, up 14% from 2014. L&G Investment Management (LGIM)’s assets under management (AUM) rose 8% to £746.1bn, while LGIM’s external net AUM flows Totalled £37.7bn vis-à-vis £7.5bn in 2014. Total investment during the period increased 22% to £7.0bn. UK retail protection premiums rose 5% to £1.1bn, while L&G America’s premiums improved 6% to US$1.2bn. L&G has proposed a final dividend of 9.95p, bringing the full-year dividend to 13.40p, up 19% over 2014.
Our view: Legal & General showed excellent performance in 2015, reporting strong growth across most divisions. The LGR segment continued to grow, benefitting from the introduction of lifetime mortgages and direct investments. The division internationalized its business in 2015, as it entered the US and European pension risk transfer markets, which would offer substantial growth opportunities. The LGIM division took steps to diversify the business by providing a range of solutions across client segments and markets, such as fiduciary management and pathway funds for DC schemes. Overall, the group saw an improvement in most parameters, including solvency surplus, annuity assets and AUM. L&G’s solid cash position allowed it to increase full-year dividends. The group is proactively divesting non-core businesses to reduce costs in real and nominal terms. These initiatives have enhanced efficiency across business lines and enabled the company to focus on key markets. L&G increased investment in urban regeneration, housing, alternative finance and clean energy to capitalize on the opportunities available in these domains. The group plans to invest in growth markets and expand its product portfolio. In light of the above argument, we maintain a Buy rating on the stock.
Horizonte Minerals (LON:HZM, 1.80p) - Speculative Buy
Yesterday, Horizonte Minerals (Horizonte) announced its results for the year ended 31st December 2015. During the period, operating loss stood at £1.3bn vis-à-vis £1.1bn in 2014 mainly due to adverse exchange rate movements and losses on impairment of available-for-sale assets. Consequently, pre-tax losses widened to 1.7bn from £1.2bn in the previous year, leading to loss per share of 0.31p compared with 0.28p in 2014. Cash at the end of the period stood at £2.7m compared with £5.0m in 2014. On the operational front, the company acquired Glencore's Araguaia Project (GAP). Horizonte completed phase 4 of an infill resource drilling programme at Araguaia. The company collected 160 tonnes of ore for the trial phase of the pilot programme. Horizonte’s metallurgical pilot plant campaign confirmed production of high-grade commercial ferronickel from representative Araguaia ore by the proven Rotary Kiln Electric Furnace (RKEF) process.
Our view: Horizonte was resilient in 2015 despite challenging market conditions. The company’s margins were hurt by high impairment and finance costs, which offset the cost savings achieved in other sections. Nonetheless, Horizonte witnessed an excellent year on the operational front, as it acquired Glencore Araguaia Project, located near Horizonte’s flagship Araguaia nickel project. Combined together, the projects constitute one of the largest nickel saprolite resources in the world (at the upper end of the grade curve), located in a proven mining region. In addition, the company completed the pilot plant campaign, which confirmed that Araguaia would support the production of high-grade ferronickel. The related technical data would be incorporated in the feasibility study of GAP. Despite sluggishness in the resource sector, we are confident about Horizonte’s strategy of expanding its land position and rapid progress at its Araguaia nickel laterite project. Therefore, we maintain our Speculative Buy rating on the stock.
Sirius Minerals (LON:SXX, 20.75p) - Speculative Buy
Yesterday, Sirius Minerals said it may announce the material findings of a definitive feasibility study (DFS) for its polyhalite project in North Yorkshire on 17th March 2016 at 7am.
Our view: Sirius is a potash development company focused on the York Potash project in the UK. The project has a JORC-compliant probable mineral reserve of 250 million tonnes of 87.8% polyhalite. The announcement on DFS would provide the company with better insights on the project. Meanwhile, Sirius has initiated the process of selection of preferred tenderers. Recently, Sirius signed a major take-or-pay offtake agreement with Huaken International (Huaken) in China for the purchase of polyhalite generated from the project. This is in addition to renewal of its take-or-pay supply contract with one of its prevailing agribusiness customer supplying 1.5 million tonnes of polyhalite per annum. Moreover, these contracts confirm that Sirius supplies high-quality polyhalite. In view of the high demand, the company plans to expand its annual polyhalite production to 10 million tonnes from 6.5 million tonnes. Furthermore, Sirius performed strongly in the first half of FY2015, as it narrowed losses and enhanced its asset base. In light of the overall optimism, we maintain a Speculative Buy rating on the stock.
Petards Group (LON:PEG, 12.62p) - Speculative Buy
Petards reported its audited results for the year ended 31 December 2015. Revenues fell slightly to £13.1 million (2014: £13.5 million) but gross margin was up to 35.2% from 30.4% in 2014. EBITDA increased 24% to £1,260,000 (2014: £1,015,000) and operating profit increased 22% to £935,000 (2014: £769,000 profit), with profit after tax £765,000 (2014: £620,000 profit). The Company generated £1.2 million of operating cash inflows (2014: £0.8 million) and cash at 31 December 2015 was £2.5 million (31 Dec 2014: £1.4 million) with no bank debt, although there were convertible loan notes of £1.5 million maturing in September 2018 providing long term finance (31 Dec 2014: £1.5 million). Basic EPS increased 22% to 2.19p per share (2014: 1.80p) with diluted EPS increased 18% to 1.62p per share (2014: 1.37p per share). The year-end order book was £16 million (2014: £20 million), but the highlight of the order book for eyeTrain maintained, with significant orders received from Siemens Mobility, Bombardier Transportation and Hitachi Rail Europe. Defence order intake was disappointing but the Company indicate there are signs of improvement in Q1 2016. Recurring revenue orders for eyeTrain spares and support were 90% ahead of 2014 and export revenues increased by 25% and Totalled 26% of Group revenues. Raschid Abdullah, Chairman of Petards, commented: "Our strong opening order book together with recently received orders provides £11 million of revenues that are scheduled for delivery in 2016, out of a Total order book of £16m. With new projects still under discussion, the board is confident that the Group is well positioned to achieve another good year's performance in 2016."
Our view: We are encouraged with the progress made and the orders received from Siemens, Bombardier and Hitachi speak for themselves. The recently announced MOD order brings the Total order book at £11m scheduled for delivery in 2016. The margin improvement was largely a reflection of the changed product mix during the course of the year with revenues being weighted towards the transport and emergency services products and reduced levels of revenue being recorded from lower margin defence products. The improved performance in profitability for 2015 generated excellent cash flow in the business during the course of the year with Group cash balances growing from £1.4 million at the close of 2014 to £2.5 million at the end of 2015, a £1.1 million increase. We maintain our Speculative Buy stance.