The markets
Europe
The FTSE-100 finished yesterday's session 0.82% higher at 6,405.35, whilst the FTSE AIM All-Share index closed 0.11% better-off at 734.34. Continental markets advanced as a sharp rise in oil and commodity prices boosted investor sentiment. Encouraging corporate earnings and upbeat economic sentiment in Germany added to the optimism. Germany’s DAX and France’s CAC 40 increased 2.3% and 1.3%, respectively.
Wall Street
Wall Street ended in the positive terrain amid rise in oil prices and a mixed earnings report. The S&P 500 added 0.3%, with materials leading eight sectors higher and consumer discretionary and information technology being the only decliners.
Asia
Equities are trading mixed after retreating from early morning gains as oil prices slipped again. Nikkei 225 extended the previous day’s gains and closed 0.2% higher, supported by a relatively weaker yen. The Hang Seng was trading 1.4% lower at 7:00 am.
Oil
Yesterday, WTI and Brent Crude Oil prices increased 3.3% and 2.6%, respectively. The spread between the two varieties stood at US$3.0 per barrel.
Headlines
Eurozone Banks tighten home mortgage norms
According to European Central Bank survey, Eurozone banks tightened standards for granting home mortgages, after the implementation of the EU mortgage credit directive, requiring banks to extensively assess borrowers. Banks in Netherland and Germany tightened restrictions, while those in Italy and Spain eased them. Overall, banks are expected to follow stricter credit standards in the second quarter of 2016.
Company news
Karelian Diamond Resources (LON:KDR, 0.90p) - Speculative Buy
Karelian Diamond Resources, the diamond exploration company focused on Finland, announced yesterday that it has entered into an agreement with A&G Mining to acquire the mining permit over the Lahtojoki diamond project in Finland. Under terms of the agreement, Karelian will pay €150,000 plus a royalty of 1% payable in cash or diamonds on production up to 2.5 million carats and 2% payable on diamond production above 2.5 million carats. Karelian will pay an initial purchase price of €50,000 plus a further €100,000 after 24 months should Karelian decide to proceed with development of the project. The Lahtojoki diamond project is located in the Kuopio – Kaavi region of Finland with good infrastructure including road access and power. Management believes that Lahtojoki diamondiferous kimberlite pipe has the potential to become a profitable, low strip ratio open-pit diamond mine and will now review exploration and feasibility work to date.
Our view: The above acquisition is positive news for the company as it continues to develop its diamond plays in Finland. Whilst much more work is required for development of the Lahtojoki project we are encouraged with the acquisition of a valid mining permit in an area with numerous kimberlite pipes and dykes. As such, we reiterate a Speculative Buy on the stock.
Beaufort Securities acts as a corporate broker to Karelian Diamond Resources Plc
Stratex International (LON:STI, 2.05p) - Speculative Buy
Yesterday morning, Stratex announced that Resource Capital Funds had invested US$2m of equity into Thani Stratex. As a result Stratex will own 32.4%, Thani Emirates 52.4% and RCF 15.2% of Thani Stratex.
Our view: Stratex is focused on its producing gold mine in Turkey (45% ownership) and building its gold portfolio in West Africa through acquisition. Regarding the Thani Stratex vehicle, both the existing shareholders (Stratex International and Thani Emirates Resources) have sought new investors to progress its projects in East Africa. Incubator fund Nutureex is funding exploration at Pandora (Djibouti) and now RCF’s funding will help with corporate overheads and the Egypt exploration projects. Although dilutive, RCF’s investment allows Stratex to focus its resources elsewhere. We reiterate our Speculative Buy rating on the stock.
Victoria Oil & Gas (LON:VOG, 41.75p) - Speculative Buy
Yesterday, Victoria Oil & Gas (Victoria) announced an operational update for the three-month period ended 31st March 2016. Its average gas production improved to 13.2mmscf/d in Q1 2016 from 4.5mmscf/d in Q1 2015. Victoria reported a 180% y-o-y rise in gas sales to 1,131mmscf in Q1 2015 due to the commencement of the first half of the dry season. The company’s revenue was US$12.8m in Q1 2016 vis-à-vis US$7.6m in Q4 2015. After the end of Q1 2016, Victoria completed the Matanda acquisition deal and secured a US$26m debt facility from the BGFIB Bank. Furthermore, Victoria has signed a drilling contract with Savannah Oil Services to provide drilling rig for the onshore Cameroon Logbaba field.
Our view: The seasonal increase in Victoria’s gas supply was in line with market expectations and indicates the company’s ability to stay on schedule. Victoria has made substantial progress on the gas expansion capital projects by GDC. In addition, it is on track to deliver the first phase of the 2016 Bonaberi pipeline extension. Average figures and daily supply peaks have been close to Victoria’s comfortable production capacity. Furthermore, the Matanda Block is significant for the company’s long-term gas development plans; the company plans to commence work by the end of 2016, subject to approvals. Meanwhile, the debt facility from BGFIBank is likely to give adequate funding support to Victoria to bolster its share of the capital programme underway. Victoria plans to expand its market beyond Cameroon and become a key energy provider in other parts of Africa. We believe that Victoria has considerable upside potential, given the company’s current progress and future plans. Therefore, we reiterate a Speculative Buy rating on the stock.
Collagen Solutions (LON:COS, 6.25p) - Speculative Buy
Yesterday, Collagen Solutions (Collagen) announced the completion of a supply agreement with Merck AG. According to the agreement, the company’s medical-grade collagen products would be provided to researchers worldwide through Merck's broad distribution network. Such products are likely to support a wide range of medical devices and other regenerative medicines across various applications and clinical indications.
Our view: The completion of the supply agreement with Merck lends further credence to Collagen’s high-quality, medical-grade biomaterials to support medical devices and other products for regenerative medicines. In addition to consistency, the research material provided by the company should be easily scalable without any loss in quality or change in characteristics. The update mentioned above is in line with Collagen’s plans to expand its market for collagen-related products. Furthermore, Collagen has been actively pursuing other deals to acquire patents. In view of the company’s increasing market penetration and continuous efforts to expand its service portfolio, we maintain a Speculative Buy rating on the stock.
Saga (LON:SAGA, 200.60p) - Buy
Saga, the UK’s leading provider of products and services primarily tailored for the over 50s, yesterday announced its preliminary results for the year ended 31 January 2016 (‘FY2016’). During the period, revenues advanced +7% to £963.2m (FY2015: £900.5m) and trading EBITDA increased by +5% to £238.8m (FY2015: £227.4m). Pre-tax profit jumped by +54.8% to £176.2m (FY2015: £113.8m), consequently resulting basic EPS to 13.3p per share compared to 8.6p per share a year ago, up by +54.7%. The Group improved the free cashflow by +9.3% to £178.1m, resulting continued reduction in leverage with debt ratio (net debt to EBITDA) of 2.3x from 2.6x a year ago. On the operational front, the Group expanded its core insurance policies by +8.5% to 2,908k (FY2015: 2,679k) while motor combined operating ratio were 74.4% (FY2015: 77.9). In the travel business, tour operating passengers were up by +9.9% to 189k and ship passenger days increased by +0.9% to 339k. Total contactable people on Saga database rose by +3.7% and active customers improved +1.2% to 2.66m. During the year, Saga launched motor panel to offer competitive products to a broader section of target marketplace and Saga Investment Services, its investment management joint venture with Tilney Bestinvest. The Group proposed a full year dividend of 7.2p per share (FY2015: 4.1p per share) to be paid on 30 June 2016. Its CEO, Lance Batchelor commented “I'm delighted that we are able to propose an increased dividend for the year that is above expectations as well as committing to a higher future payout range. I look ahead to the next period for Saga with a great deal of confidence.”
Our view: Saga delivered pleasing results for the year ended 31 January 2016 with management clearly confident of continued financial performance and visibility. The Board hiked its full year dividend by +75.6% to 7.2p per share (representing payout ratio of 57%, up +7.5% from previous year). More to the point, the Group also projected an improved dividend payout in the range of 50%-70%, compared with the previous 40%-60% level. This was enabled by continuing confidence in its pre-tax profit growth, improving free cashflow and reduced capital requirement for its underwriting business. Despite a highly competitive environment for the UK motor insurance and home insurance market, the creation of a new panel of motor insurers (motor panel) helped build out its client base and generated a +17.8% increase in trading profit to £118.3m for the motor insurance and +3.2% increase in trading profit to £64.1m for the home insurance. The Group’s travel business also delivered customer and profit growth across its tour operating and cruise businesses, with trading profit rising by +26.5% to £17.2m. Going forward, the Group expect steady profit before tax growth and ongoing customer expansion assuming current market conditions are sustained. We believe the Group is well placed to continue its growth momentum and maximise shareholder return. With respect to the UK’s BREXIT referendum, the Group believe “the result of the EU referendum is unlikely to have a material impact on the business”. Beaufort reiterate its Buy rating on the stock.
Meggitt (LON:MGGT, 413.20p) - Buy
Yesterday, Meggitt announced a trading update for Q1 2016. The company reported first-quarter revenue growth at 1% on an organic basis. It expects the majority of revenue and earnings to be skewed towards H2 2016. During the period, revenues from civil aerospace increased 6% organically and those from military rose 1%. Meanwhile, the company has made progress towards its cost-cutting plans. It aims to achieve its target of headcount reduction of 400 by the end of H1 2016. The company has maintained its guidance for the year and expects an organic growth of low single digit organic revenue growth for 2016.
Our view: Meggitt’s trading update is largely in line with expectations even though the gain in the civil aerospace segment was somewhat offset by weak energy prices. The company remains on track with regard to its cost-cutting plans. Furthermore, Meggitt is likely to benefit from a stronger US dollar and the two composite acquisitions completed towards the end of 2015. The company has undertaken initiatives to improve investments in R&D and acquire new platforms. Such initiatives are likely to drive revenue growth in the long term. In addition, the deployment of the Meggitt Production System has resulted in several tangible improvements in several operational and customer satisfaction metrics. Meggitt’s high focus on product quality, operational efficiency and programme management is likely to make the company more attractive as a supplier of choice to meet the changing needs of customers. Thus, in view of continuous internal improvements and multiple contract wins, we reiterate a Buy rating on the stock.
Rio Tinto (LON:RIO, 2,301.76p) – Hold
Rio Tinto announced yesterday 1Q 2016 production results which were strong across the portfolio. Y-o-y, iron production was up 13%, iron shipments up 11%, bauxite production up 10% and copper and coal (both coking and thermal) effectively flat. Copper was notable for its recovery versus 2H 2015 (+27%) largely due to completion of de-watering at Kennecott. Sam Walsh’s statement highlights continued commodity price volatility and that the focus is on controlling costs and maximising free cashflow.
Our view: Rio’s operating performance was very good in 1Q 2016, delivering on things it can control while commodity prices continue to fluctuate. Iron ore has risen approximately 43% from its US$40/t low in January to a current price of US$57/t and Rio shares are up circa 45% from its low point of 1577p on 20 January. Looking forward, we expect the shares to continue to follow commodity prices, in particular iron ore but also copper and coal. On that basis, given the uncertain outlook for commodity prices, in particular iron ore, we are taking a more cautious stance. We downgraded our recommendation from ‘Buy’ to ‘Hold’ and see now as a sensible time to take profits on the whole sector of large cap mining producers. For investors cautious about the global macro outlook and in particular China’s economy, we recommend reducing your weighting.