The markets
Europe
The FTSE-100 finished yesterday's session 0.08% higher at 6,410.26, whilst the FTSE AIM All-Share index closed 0.13% lower at 733.36. Continental markets advanced for third straight session as a continued rise in oil prices boosted investor morale. Germany's DAX and France's CAC 40 increased 0.7% and 0.6%, respectively.
Wall Street
Wall Street continued its winning streak as the oil prices maintained their uptrend after the US EIA suggested a weekly domestic output fall for the sixth straight week. Upbeat housing data further boosted the investor morale. The S&P 500 added 0.1%, led by gains in financial and energy stocks.
Asia
Equities are trading higher, tracking overnight gains from the global indices. Nikkei 225 added 2.7% supported by a relatively weaker yen and higher oil prices. The Hang Seng was trading 1.8% up at 7:00 am.
Oil
Yesterday, Brent and WTI crude oil prices increased 4.0% and 3.8%, respectively. The spread between the two varieties stood at US$3.2 per barrel.
Headlines
UK households financial outlook worsens
According to the Markit Household Finance Index for April, the UK households outlook for their financial well-being over the next 12 months, deteriorated for the first time in three months. The reading for UK households outlook for financial well-being index over the next 12 months dropped to 49.6 in April compared to 51.4 in March. A reading above 50 indicates an improvement in sentiment. On the price front, inflation pressures increased in April.
Company news
ARM Holdings (LON:ARM, 954.0p) - Buy
Yesterday, ARM Holdings announced its unaudited financial results for the first quarter ended 31st March 2016. Revenues for the period grew 22% to £276.4m as revenue from technology royalty for processor and Physical IP improved 23% and 48%, respectively. Operating expenses were up 33% to £132.9m, impacted by a weak sterling. Pre-tax profit improved 14% to £137.5m; consequently, EPS expanded 15% to 8.2p. On the operational front, the ARM processor technology gained wider acceptance with 39 processor licences signed by a broad range of companies. Robust demand was witnessed for ARM's most advanced technology, with several licences signed for the RM Cortex-A technology and multimedia processor. The company's chip shipments rose 10% to 4.1 billion, whereas ARM-based microcontroller and smartcard shipments grew 20%y-o-y.
Our view: ARM Holdings' current technology has gained market share in the end markets. The company's licensing pipeline for the remaining year looks strong, with leading companies vying to license the ARM technology for their next-generation products. We expect the ARMv8-A technology to continue penetrating into the mobile and enterprise markets, and the high royalty rate earned on these products is expected to underpin future royalty revenues. Continuous improvements in the devices is leading to large amounts of data, which needs to be protected, transmitted, managed and stored across the Internet. These trends are creating tremendous opportunities for ARM and its partners. Thus, given the strong demand for the company's next-generation products, we expect it to explore new opportunities and create new revenue streams. Thus in view of the above, we reiterate a Buy rating on the stock.
BHP Billiton (LON:BLT, 997.0p) – Hold
BHP yesterday announced its 3Q 2016 and 9 month operational update. Iron ore production is down by 10Mt (7Mt attributable) due to bad weather and some railroad maintenance, all other production declines are as planned and as guided. U.S. onshore oil (and liquids) production is down 4% YoY, gas down 5%, while conventional oil is also down 4% due to natural decline rates. FY2016 oil guidance is maintained as a 12% reduction overall. Copper production is also down as planned due primarily to lower grades at Escondida offset by increased production at Olympic Dam. FY2016 copper production guidance is maintained at 1.5Mt of which 940kt is from Escondida. Coking coal is flat, thermal coal is down 10% YoY. Other nuggets of interest include iron production costs of US$15/t (no longer including Samarco) and the US$2.9bn Jansen potash project is 59% complete. Other large capex projects are Escondida's new desalination plant (US$3.5bn, 85% complete) and US$1.0bn of onshore U.S. development expenditure for FY2016.
Our view: Apart from a small 10Mt reduction in iron ore production, BHP's 3Q 2016 performance is in line with previous guidance. It is good to see low US$15/t iron ore production costs and a continued commitment to its highest grade US onshore oil assets in the Eagleford and Permian, although this strategy depends on ones view of the future oil price. BHP will obviously be hoping it starts rising again. As noted earlier this week, we have a cautious view on commodity prices (particularly iron) and downgraded Rio to a Hold. We also recommended more defensive investors and those concerned about China's economy take profits or reduce their weighting to the large cap mining sector. Our official recommendation for BHP however remains Hold.
Bunzl (LON:BNZL, 2,080.0p) - Buy
Yesterday, Bunzl released its trading statement for the period since 31st December 2015. During the period, revenues grew 13% on actual exchange rates and 10% on a constant currency basis, led by contributions from acquisitions and additional trading days. Furthermore, the company completed the acquisition of Bursa Pazari, in line with its earlier announcement on 29th February 2016, after clearance of the transaction by the Turkish Competition Authority. Additionally, Bunzl informed about the retirement of Michael Roney at the upcoming AGM. He would be succeeded by Frank van Zanten, who has been serving as Managing Director of Bunzl's Continental Europe business area.
Our view: The company's overall trading has been in line with expectations, and overall financial position has remained intact. The company traded well despite challenging macroeconomic environment across the countries in which it operates. Bunzl continues to have a strong cash flow and balance sheet, which should allow the company ample flexibility for its operational performance support to explore new opportunities. Bunzl's promising acquisition pipeline is likely to present consolidation opportunities in the market and drive growth. Although there is some concern over the Group's future direction following the proposed retirement of its CEO, Michael Roney, who will have been in a role for over 10 years in April 2016, we remain confident that the company will continue to grow successfully in 2016 given its competitive position and successful recent acquisitions. Therefore, in view of the above positives, we reiterate a Buy rating on the stock.
Yesterday, the global engineering business company GKN released its trading update for the three months ended 31st March 2016. Management sales for the period increased 12% to £2,179m, comprising 1% organic growth, 8% acquisition growth and other gains from currency translation. On the operational front, the company's automotive business continued to perform impressively, whereas trading in the aerospace business was in line with the guidance. However, the land systems market remains tough. The company's trading margin also declined due to low military orders, a mix of new and mature programmes, and the absence of one-off benefits similar to those from the previous year. GKN's Aerospace division sales were flat at £767 million on an organic basis, with £159 million added by the acquisition of GKN Aerospace Fokker. Sales from GKN Driveline expanded 7% to £976m due to new programme launches and a continued strong performance from premium vehicles in Europe. GKN Powder Metallurgy's sales stood at £246m, while those of GKN Land Systems declined 3.2% to £181m on weak demand for agricultural equipment and the ending of a chassis contract. The company plans to release its half-yearly results on 26th July 2016.
Our view: GKN's quarterly performance was in line with expectations as the end markets presented the company with favourable new and repeat business opportunities. Moreover, Fokker's contribution following its integration in the system is likely to underpin the company's growth in 2016. Besides the Land Systems business, which has displayed weakness due to the softer demand for agricultural equipment, the company's other divisions have continued to perform well. The company's Aerospace division continues to transition to new platforms, which have significant GKN content and are likely to drive future growth. Meanwhile, the automotive business continues to outperform the market. Hence, with all the major divisions exhibiting good performances, the company remains well-positioned to witness decent growth in the global markets. Therefore, we retain a Buy rating on the stock.
Motif Bio (LON:MTFB, 40.50p) - Speculative Buy
Motif Bio plc, the clinical stage biopharmaceutical company specialising in developing novel antibiotics, yesterday announced its maiden full year audited financial results as an AIM-listed company. Operational highlights of the period included he U.S. Food and Drug Administration (FDA) agreed to Phase III trials of iclaprim; QIDP designation granted by the FDA for iclaprim in ABSSSI and HABP in July 2015; Independent tests by JMI Laboratories showed iclaprim to be effective in vitro against a range of Gram-positive bacteria and 16 times more potent than trimethoprim; and Motif contracting Covance, a global leading CRO, for Phase III clinical trials of iclaprim. Since the accounting period end, Motif began dosing the first patient in the Phase III iclaprim trials, it named MTS Health Partners as its U.S. Corporate Financial Advisor in conjunction the Group's expected securing its own NASDAQ listing in 2017 and also confirmed numerous senior appointments, including Pete A. Meyers as CFO, Rajesh B. Shukla as Vice President Clinical Operations, and named Jon Gold as strategic financial consultant.
Our view: Motif Bio now finds itself ideally positioned as an antibiotic development company with a lead compound, iclaprim, in Phase III clinical trials. It is targeting serious and life threatening infections where a 30-year absence of new development together over-prescription of existing products has created an urgent need for new and novel solutions. Moreover, it is in the rare position of already having comprehensive data from clinical trials from more than 500 patients, including activity against multi-drug resistant bacteria such as MRSA. With exceptional safety and efficacy characteristics, iclaprim is set for commercialisation during 2018, from which new indications for this platform molecule will be developed and from which total annual sales potential will amount to several billions of US$. This might seem to be a dramatic claim, but elementary analysis of the existing North American market bears it out. If one were to consider, for example, just the 3m US patients suffering from skin cancer (iclaprim's ABSSSI indication), while also recognising that around 25% of these also suffer from kidney or diabetes-related conditions for which obvious peer drug, Vancomycin, has required dose adjustment for renal impairment, the immediate opportunity for iclaprim (being a bactericide) is in excess of US$2bn (based expected treatment cost of US$3000/day). The potential is truly enormous. Much more immediate news for Motif, however, concerns its pending NASDAQ listing – which is very important, given the willingness of specialist US investors to much more realistically value such early stage biotech. Indeed, Paratek Pharmaceuticals , which is a near-identical stage antibiotic development company, sustains a valuation over four-times that of Motif. Realistically, Motif should quite dramatically re-value upon achieving its own NASDAQ listing, which is expected to take place during Q3'2016. Beyond this, considering the obvious global sales potential for iclaprim, given that Motif management are already undertaking drug positioning assessments of US hospitals while also discussing non-US distribution partnerships with Big Pharma, a valuation in excess of US$1bn being achieved within 24 months is by no means unrealistic. Motif Bio remains on Beaufort's Speculative Buy list and is one of our key stock picks for 2016.
Travis Perkins (LON:TPK, 1,818.0p) - Hold
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 trading updates for the Q1 2016. During the period, total sales advanced +5% (+6.2% on a comparable days basis), while on a like-for-like ('LFL') basis, sales grown by +4.2%. Two-year LFL sales growth were +9.5%. LFL sales for General Merchanting division were up +4.7% with good growth in heavyside categories and timber, Plumbing & Heating division grown +2.2% experienced a more settled period of trading in Q1 2016 following the sales disruption caused by the restructuring programme in 2015. Contracts division grown across all businesses in the division increased by +2.1% LFL despite a strong 2015 comparator, with two-year LFL growth of +17.5%. LFL sales for Consumer division jumped +7.3% with Wickes continued to invest in value, improved ranges and customer service and both Toolstation and Tile Giant grew market share. Group stated that the "investments made should continue to underpin outperformance of the market and drive market share gains, supporting the Group's ambition to grow earnings at around 10% in the year ahead".
Our view: Travis Perkins delivered a satisfactory result for the Q1 2016. LFL sales growth of +4.2% showed a recovery from previous two quarters (Q3 2015: +2.6% and Q4 2015: +1.4%) and management reiterated guidance for earning growth of +10% in FY2016. The result were due to some recovery in repair, maintenance and improvement ('RMI') market, the rush to complete buy-to-let properties ahead of the hike in Stamp Duty and by the Group's ongoing five-year investments plan improve its customer proposition. Although such improvement in background market conditions should be positively received, Beaufort has recently taken the precautionary step of downgrading the entire UK Housebuilding and Building Material sectors, including Travis Perkins, from 'Buy' to 'Hold', in anticipation for UK's EU referendum-related pause in new investment and associated concerns. Fears of a 'yes' vote for BREXIT, which would likely discouraging international property buyers, not just from the EU, and possible push UK into recession, while a further GBP devaluation would increase costs of both materials and labour. That said, Beaufort is likely be quick to recommend re-building holdings following any serious correction and upon growing confidence in the electorate choosing to remain part of the EU.