The Markets
Market opening: The FTSE-100 is expected to start this morning's session (the last before the extended Easter weekend) around 47-points lower.
New York: On Wall Street last night, the Dow fell 79.98 points to close at 17,502.59, the Nasdaq ended 52.8 points lower at 4,768.86 and the S&P 500 lost 13.09 points at 2,036.71.
Asia: In Asia this morning, the Nikkei was recently down 63.31 points at 16,937.67 and the Hang Seng had fallen 250.37 points to 20,364.86.
Crude Oil: WTI crude oil traded at $39.66 a barrel and Brent at $40.49.
UK small caps: The FTSE AIM All-Share index closed 0.18% higher yesterday at 710.33.
Today's news
Next sees 'challenging year' ahead
Retailer Next has forecast that 2016 will be a "challenging year" for its business, "with much uncertainty in the global economy". The prediction came as the High Street chain unveiled its annual results for the year to 30 January, showing a modest rise in profits. Pre-tax profit for the 12 months came in at £836.1m, up from £782.2m a year earlier. Next said the year ahead "may well be the toughest we have faced since 2008".
'Opportunities in the Uncertainty' - Mike Franklin on the current market movements
When there are so many countervailing trends, both private and professional investors might be forgiven for an element of confusion demanding of a cool head. There is an overwhelming need to be able to cut through the noise and to ignore what may prove to be irrelevant. So, what are the issues facing investors as we approach the end of the turbulent first quarter of 2016 with the FTSE 100 Index, after all the fuss, only marginally changed year-to-date?
Company News
Anglo Pacific Group (LON:APF, 69.00p) - Buy
Yesterday, Anglo Pacific Group released its full year results for the period ended 31 December 2015. During the period, the Group's royalty income increased by 149% y-o-y to £8.7m, driven largely by strong production at Narrabri and an increase in mining within the royalty lands at Kestrel. Overhead costs (before share-based payments) were reduced by 34.5% y-o-y to £3.2m (£4.9m in 2014). Adjusted earnings, excluding non-cash revaluations and impairments, increased by 82% y-o-y to £4.0m resulting in adjusted earnings per share of 2.47p versus a loss of 1.97p in 2014. Loss after tax for the period was £22.6m (£47.6m in 2014) largely due the Kestrel revaluation charge of £27.2m (£11.8m in 2014), resulting in a loss per share of 14.06p (42.09p in 2014). As at 31 December 2015, the Group had a cash balance of £5.7m (£8.8m in 2014) and a net debt of £1.8m (nil in 2014). The Group has recommended a final dividend of 3p per share resulting in a total dividend for 2015 of 7p (8.45p in 2014) and maintains its long-term progressive dividend policy of at least 65% of adjusted earnings.
Our view: Despite a challenging year in the resource sector, Anglo Pacific has made good progress in 2015 as seen in its royalty income more than doubling. This coupled with a significant reduction in operating costs marked a return to profitability for the year after adjusting for non-cash revaluations and impairments. With production expected to increase from Kestrel in 2016 and further production increases at Narrabri in 2017, we believe Anglo Pacific is well placed to achieve further growth in the near term. We also note that the dividend has been adjusted earlier in the year to a more sustainable level. Given the Group's pipeline of future royalties coupled with stringent cost controls, we maintain a Speculative Buy rating on the stock.
AstraZeneca (LON:AZN, 3,952.00p) - Hold
Yesterday, AstraZeneca declared results from the trials assessing the effectiveness of Brilinta/Brilique (90mg twice a day) compared with aspirin (100mg daily) for patients suffering from acute ischaemic stroke or transient ischaemic attack (TIA). The company stated that the primary endpoint goal of time to the first occurrence of any event from a stroke, heart attack or death was not met by the treatment. Fewer events were observed related to Brilinta/Brilique versus the comparator in the trial population, but the trend did not reach statistical significance.
Our view: AstraZeneca's heart drug Brilinta's failure to help stroke patients is a major setback, as its expected sales could generate annual sales of US$3.5bn by 2023. Nonetheless, the company is progressing well in relation to the development of oncology and respiratory drugs. AstraZeneca recently received breakthrough therapy designation (BTD) for its drug durvalumab (MEDI4736) by the US Food and Drug Administration. This was the third BTD AstraZeneca received from the FDA for medicines in oncology. The designation provides AstraZeneca an opportunity to further collaborate with the FDA for the durvalumab development programme. Of late, the company has been working on a lot of drugs for various diseases and is in the development phase for most of them. Thus, it would take some time before these drugs start generating revenue. Moreover, AstraZeneca has been facing some growth-related concerns, as some of its key medicines face patent expiry in the near future and may be substituted by cheaper generics. In view of the uncertain future of AstraZeneca, we maintain a Hold rating on the stock.
DFS Furniture (LON:DFS, 310.00p) - Buy
Yesterday, DFS Furniture declared its half-yearly results for the 26 weeks ended 30th January 2016. The company’ gross sales for the period rose 7.0% to £461.3m, mainly due to a 6.2% increase in DFS sales and higher contribution from Sofa Workshop and Dwell. The company’s EBITDA improved 12% y-o-y to £31m against H1 2015. As a result, DFS swung to a pre-tax profit of £16.2m in H1 2016 compared with a pre-tax loss of £14.4m in H1 2015. Consequently, the company’s EPS for the period was 10.6p against loss per share of 46.2p in H1 2015. The upside was attributed to a sharp fall in finance expenses. Cash flow amounted to £37.7m, up 7.1% y-o-y. On the operational front, the company opened two stores in the UK and Ireland, along with its second store in the Netherlands. DFS established its seventh customer distribution centre (CDC). The company declared an interim dividend of 3.5p, 12.9% higher than H1 2015.
Our view: DFS, a UK-based upholstered furniture retailer, has a strong market share of 25.7%. The company started the first half of the year on a positive note as it recorded high sales and enhanced margins. DFS made good progress in implementing its growth plan, which focusses on extending its presence in the UK and abroad, and making optimal use of its retail space. New stores were opened in the UK and the Netherlands and partnership agreements were extended with French Connection, House Beautiful and Country Living. DFS continued on its CDC conversion programme to transform in-store warehouses into additional retail space and consolidate warehouse operations into efficient offsite facilities. Furthermore, the company witnessed higher traffic in its website, accounting for 40% of the UK upholstery web traffic. DFS invested in the platform with the launch of a product viewer on its website and introduced online order tracking, both of which have been positively received by customers. Meanwhile, DFS’ solid cash flow generation enabled it to reduce leverage and return cash to shareholders. We believe the company is well placed to sustain the growth momentum and maintain its market share. Therefore, we maintain a Buy rating on the stock.
William Hill (LON:WMH, 330.00p) - Hold
Yesterday, William Hill released a trading update for the period between 30th December 2015 and 20th March 2016. The company’s online performance was weaker than expected during the period. This has been mainly due to increased time-outs and automatic self-exclusions over the recent weeks, which impacted the level of activities across the online business, particularly in gaming. Other important factors for the slowdown were unfavourable European football results and the worst Cheltenham results in recent history. William Hill expects online profits to reduce £20-25m in 2016, if the current trend persists. The company is trading in line with its internal expectations. William Hill expects operating profit for 2016 to be £260-280m, subject to normalised gross win margins in the rest of the year.
Our view: William Hill has performed poorly in the period, weighed on by reduced activity in its online business. The company faced one of the worst results at the Cheltenham festival, along with negative results in European football events. The weak show across the business declined William Hill’s operating profit for 2016 compared with last year. In addition, the company suffered due to tough regulatory environment and advances in mobile technology that have changed the face of the UK gambling industry. However, William Hill witnessed favourable UK football results and strong US Super Bowl results. The company’s Australian business is progressing well after the changes in 2015, as it witnessed growth in wagering and new account addition. William Hill is in discussions with a partner, as it plans to invest in a gaming software company Openbet. Though, the company’s recent performance has been less than promising, we expect it to adapt well to the changes and deliver better online performances. Therefore, we maintain a Hold rating on the stock.