The markets
Europe
The FTSE-100 finished yesterday's session 0.38% better-off at 6,284.52, whilst the FTSE AIM All-Share index closed 0.34% lower at 729.22. In continental markets equities ended in the red as investors digested a slew of corporate earnings, while focusing on the meeting outcomes of several central banks due later this week. Germany’s DAX and France’s CAC 40 fell 0.3% each.
Wall Street
Wall Street ended in the positive terrain yesterday as improved oil prices propped the energy sector. Meanwhile, the Fed commenced its two-day policy meet, the outcome of which is expected to be released later today. The S&P 500 closed 0.2% higher, led by gains in the energy sector.
Asia
Markets are trading lower ahead of the key policy rate decisions from the Fed and Bank of Japan. The Nikkei pared initial gains to close 0.4% lower as several Japan-based suppliers of iPhone parts declined after Apple Inc. reported a drop in iPhone sales. The Hang Seng was trading 0.5% down at 7:00 am.
Oil
Yesterday, WTI and Brent Crude Oil prices rose 3.3% and 2.8%, respectively. The spread between the two varieties stood at US$1.7 per barrel.
Headlines
UK banks approve fewer mortgages in April: BBA
According to figures released by the British Bankers’ Association, banks in the country approved just 45,096 mortgages for house purchases in March, compared with 45,646 mortgages in February. This number is the lowest since December, but recorded an increase of 14% y-o-y. The number of mortgages has been impacted particularly by the imposition of higher tax on buy-to-let properties.
Eurozone meeting on Greece reforms delayed
The finance ministers of the Eurozone countries have decided against meeting this Thursday to discuss future bailout plans for Greece. They require more time to assess the contingency package and debt for the country.
Company news
Keras Resources (LON:KRS, 1.20p) – Speculative Buy
Keras Resources, the Australian gold mining company, announced yesterday that it has completed its second ore parcel haulage to the Paddington Mill from the Accord deposit, located within the Grants Patch Gold Tribute lease area in Western Australia. Approximately 17,000t grading 1.93g/t Au for an estimated 1,055oz of contained Au was hauled and will be processed under the agreement with Paddington Gold, a subsidiary of Norton Gold Fields. An estimated 1,427oz of contained gold has now been delivered with mining operations moving between the Accord and Anomaly 22 deposits. Once ore parcels are delivered (minimum 3,000t each), Paddington Gold has 42 days to pay for the agreed contained gold, as determined by truck weights and gold grades based on rigorous sample procedures at the processing plant.
Our view:Keras has, in less than a month, delivered some 1,427oz of contained gold from two deposits within the Grants Patch Gold Tribute lease area. This represents a significant milestone for the company as it continues to improve efficiencies and advance plans for the next open pits. We look forward to updates regarding the refurbishment of the high-grade Prince of Wales mine as well as confirmed gold grades and payments of the first two ore deliveries. In the meantime, we maintain our speculative buy on the stock.
Beaufort Securities acts as corporate broker to Keras Resources plc
BooHoo.com (LON:BOO, 49.25p) - Buy
boohoo.com (‘boohoo’), one of the UK’s largest online own-brand fashion retailers, yesterday announced its results for the year ended 29 February 2016 (‘FY2016’). During the period, revenue advanced +40% to £195.4m (FY2015: £139.9m), where revenue for the UK, rest of Europe (‘ROE’) and rest of world (‘ROW’) increased by +38%, +25%, and +56%, respectively. Revenue growth in the ROE was impacted by the weaker Euro, whereas encouraging growth in the ROW was driven by strong performances in the Australian and US markets. Gross margin declined by -300 basis points to 57.8% due to adverse exchange rate movements and lower margin third party sales. Adjusted EBITDA expanded by +32% to £18.7m (FY2015: £14.1m) and pre-tax profit rose +42% to £15.7m (FY2015: £11.1m). Consequently, basic earnings per share jumped to 1.11p per share from 0.75p per share, up +48% compared to a year ago. Cash at the end of the period stood at £58.3m (FY2015: £54.1m). On the operational front, number of active customers (who shopped during the period) has grown to 4 million, up +33.8% compared to the previous year with accelerated international growth which now stands 33.4% of total revenue (FY2015: 32.5%). The Group has launched mobile apps for UK, USA and Australia while introduced responsive websites for European sites. The Group also completed £7.7m, 270,000 square feet warehouse extension. The capacity now stands at 525,000 square feet and it is already in use. Its joint CEOs, Mahmud Kamani and Carol Kane commented “we are pleased to report a year of strong revenue growth across all geographic regions. We have had an encouraging start to the 2017 financial year and we currently anticipate sales growth of c.25% for the financial year, in line with current market expectations. We will continue to look at opportunities to invest in incremental growth, which may impact margins on a short term basis, although we will look to maintain EBITDA margins at similar levels to the financial year just ended (in line with current market expectations)".
Our view: boohoo delivered robust result for the FY2016 as it expanded revenue across all regions. This growth was helped particularly by strong performances in the Australian and US markets, as well as successful trial to distribute products through third party internet retailers. Although third party sales have reduced the overall gross margin (by -100 basis point), the Group intend to expand the number of partners in order to build its brand internationally and broaden customer reach. The Group has strengthened its balance sheet, which had £58.3m cash at the year-end, despite completing a warehouse extension of 270,000 square feet with another 275,000 square feet extension already started. The conversion of large number of warehouse operatives' contracts from agency to permanent together with capacity extension should result smooth operation with some cost savings and enable boohoo to power future growth. Though Group strategy is to increase its spending on marketing & promotions and third party retailers may further impact its gross margins, EBITDA margins are still expected to be maintained. While sales growth of c.+25% in FY2017 anticipated by the Board appears rather conservative, we believe worldwide market for internet fashion sales will continues to expand as shopping preferences shift towards convenience and competitive pricing affordable by internet retailers as was, perhaps, evidenced by the collapsed of BHS last Monday. Even in an unexpected circumstance of BREXIT, we do not expect any significant impact on the Group given that just 11.6% of its total revenue is derived from EU (excluding UK) which could, in theory at least, be imposed with a minor additional online levy. Beaufort retains its Buy rating on the stock.
BP (LON:BP., 375.90p) - Buy
Yesterday, BP released its results for Q1 2016. The company’s underlying replacement cost profit for the quarter improved to US$532m from US$196m in Q4 2015 and US$2.6bn in Q1 2015. The underlying operating cash flow in the first quarter was US$3.0bn, excluding payments of US$1.1bn related to the Gulf of Mexico oil spill, offset by divestment proceeds of US$1.1bn. Organic capital expenditure for the period was US$3.9bn, compared with US$4.4bn in Q1 2015. For the year 2016, the total organic capital expenditure is estimated to be around US$17bn. Moreover, if oil prices continue to remain low, it may move to US$15–17bn in 2017. At the end of the quarter, BP's gearing level was 23.6%. The company intends to return to managing gearing within its historical range of 20–30%. Segment-wise, BP's Downstream segment reported an underlying pre-tax replacement cost profit of US$1.8bn for this quarter, higher than US$1.2bn in the previous quarter. BP's Upstream segment recorded an underlying pre-tax replacement cost loss of US$747m for the quarter, broadly similar to the previous quarter's result. Meanwhile, the company progressed on the strategic front with the extension of the Khazzan licence agreement in Oman. BP also entered into a shale gas production sharing contract in China and an agreement to work on future opportunities with the Kuwait Petroleum Company across all business lines. Production was commenced in January 2016 on two other upstream projects: the In Salah Southern Fields project in Algeria and the Exxon-operated Point Thomson project in Alaska. In the Downstream segment, the global rollout of BP's Ultimate with ACTIVE technology project continued, its biggest fuel launch in a decade. BP also expanded its convenience retail partnerships with new agreements in Germany and the Netherlands.
Our view: Despite a challenging oil price environment, BP reported profits for the first quarter of the year. This was primarily led by strong operational refining and a positive trading performance. BP’s restructuring and cost reduction plans have progressed well, with the company reporting significant savings during the quarter. Furthermore, upbeat performance from the Downstream segment has helped the company beat the estimates for the quarter. The company remains on track for the development of its next wave of material upstream projects. Market fundamentals continue to suggest that the combination of robust demand and weak supply growth would move global oil markets closer into balance by the end of the year. The Brent oil marker price averaged US$34 per barrel in the quarter, compared with US$44 in 4Q 2015 and US$54 in 1Q 2015. Moreover, refining margins were at the lowest quarterly average for over five years. As the company steadily improves cost, we expect it to adjust further within its financial frame despite low oil prices. In light of this and the partial recovery in oil prices anticipated during H2 2016, Beaufort maintains a Buy recommendation on the shares.
British American Tobacco (LON:BATS, 4,144.50p) - Buy
British American Tobacco (‘BAT’), one of the world’s largest tobacco company, yesterday announced its interim management statement for the 3 months ended 31 March 2016 (Q1 2016). During the period, revenue increased by +1.7% at current exchange rate, compared to the same period last year, largely impacted by the adverse foreign currency movement. Revenue at constant exchange rate basis, on the other hand, advanced +7.5% and increased +6.1% on organic basis. Cigarette volume from subsidiaries increased by +3.6% to 158 billion, or +2.4% organically. Like-for-like volume grown +1.1%, excluding the effect of inventory movements in the comparator period. The volume growth for its five Global Drive Brands (Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans) expanded +10.5% and its UK Next Generation Products (such as e-cigarettes) has also grown. The Group has notes that the trading environment remains challenging due to continuing impact of adverse exchange rates, and estimated a profit headwind of c.-7%, with a consequent impact on operating margin. On the other hand, there will be positive effect of c.+3% on earnings if sterling stays at the current rate. Its CEO, Nicandro Durante commented “while profit growth will be weighted to the second half of the year, partly due to the impact of foreign exchange on our cost base, I remain confident that we will deliver another year of good earnings growth at constant rates of exchange".
Our view: British American Tobacco delivered a good result for the first quarter, despite the continuing pressure of volatile currencies. BAT increased organic market share by +0.2%, and number of countries recording increases in cigarette volume more than offset relatively sluggish activity from Pakistan and Malaysia who were impacted by significant excise-led price hikes. The Group’s Global Drive Brands expanded well, while it also continued to improve its range of Next Generation Products, having recently completed the acquisition of Ten Motives, an e-cigarettes company in UK. Next Generation Products, other than e-cigarette, contain Licensed Medicinal Products (a nicotine product licensed as a medicine) and Tobacco Heating Products (an electronic device that heats a nicotine-containing liquid into an inhalable vapour). One of Licensed Medicinal Products, Voke, a nicotine inhaler, is plan to be launched in the UK later 2016 and the test marketing for a new Tobacco Heating Products will also start this year. As an increasing number of countries adopt new and various means in order to reduce domestic cigarette consumption, we believe BAT’s continuous investment in transforming its existing product portfolio is correct way to move the business forward. Beaufort reiterates its Buy rating on the stock.
Horizon Discovery (LON:HZD, 182.50p) – Speculative Buy
Yesterday, Horizon Discovery released its preliminary results for the year ended 31 December 2015. During the period, with a contribution of £7.8m and £12.2m from products and services, respectively, the company’s revenues increased 69% to £20.2m. The EBITDA loss for the period stood at £6.6m, which was better than market expectations. The company expanded its research milestone portfolio by 32% to approximately £208m, plus royalties. On the operational front, the company expanded its product catalogue to over 23,000 genetically defined cell line and in-vivo models, and molecular diagnostic re-agents. Horizon Discovery entered into new partnerships and acquired new firms to broaden its product offering. The company appointed Grahame Cook as Non-Executive Director and Chairman of the Audit Committee. At the end of this period, the company formed a joint venture with Centauri Therapeutics Ltd called Avvinity Therapeutics to explore the development and discovery of novel therapeutics for immuno-oncology.
Our view: The year saw Horizon reinforce its business engine through targeted investments in internal infrastructure, including e-commerce and ERP systems. Moreover, with the integration of recent acquisitions into the company, Horizon has been successful in creating a fully integrated life science gene-editing service company. New marketing channels were established through partnerships with leading organisations such as ThermoFisher and Abcam. During the year, the company grew in strength on the core capabilities front and expanded its catalogue of products to over 23,000. Horizon is at the forefront in these game-changing areas of medicine as we believe that the new era of Personalised and Genomic Medicine is here to stay. The company’s pipeline of innovative products leads us to believe the outlook is positive. Thus, in view of the above developments, we maintain a Speculative Buy rating on the stock.
St. James Place (LON:STJ, 918.0p) - Buy
Yesterday, wealth management group St. James Place issued an update on new business inflows and funds under management for the three months ended 31st March 2016. For the period, the gross inflow of funds stood at £2.45bn, up 16% y-o-y, whereas the net inflow of funds under management was £1.36bn. The company retained 95% of the client funds, and the total funds under management reached £62bn. Other initiatives during the period included the acquisition of Technical Connection Ltd to deliver technical support and insight, and for proposition development. The company also launched the St. James Place inter-generational mortgage suite in conjunction with Metro Bank. This new product range, exclusive to the clients of St. James Place, is specifically designed for parents and grandparents who wish to support their children or grandchildren with purchasing their first home.
Our view: The quarter has been quite fruitful for the company, considering the variability in the global stock markets. The company’s investments reached £62bn, accompanied by the strong retention of clients and their investments. Consequently, the company recorded a substantial jump in the net inflow of funds, supported by a record £1bn in gross monthly inflows in March. Furthermore, no changes in pension tax relief and a high limit for individual savings ISAs in 2017, coupled with reduced capital gains tax, bode well for the company’s future prospects. St. James Place acquired Technical Connection Ltd, specialist in technical support, insight, and proposition development, which would enhance the company’s ability to provide business-focused technical support to its partners to guide clients in making effective financial decisions. We believe the company has the potential to improve profit and generate substantial returns for its shareholders. Therefore, we continue to recommend a Buy rating on the stock.
Whitbread (LON:WTB, 3,969.0p) - Buy
Yesterday Whitbread issued its results which were broadly in line with its pre-close trading update and market consensus. Revenues rose 12% to £2,921m and operating profit up 12.4% at £600.4m. The full year dividend was up 10% at 90.35p. Both Premier Inn and Costa benefit from attractive market growth opportunities and the company will continue to capitalise on these by developing its network and brand strength as the company confirm its targets to reach c.85,000 UK hotel rooms and c.£2.5 billion system sales in Costa, by 2020. The company has identified three key strategic themes to develop the business: grow and innovate in the core UK businesses; focus on the company’s strengths to grow internationally; and build the capability and infrastructure to support long-term growth. The company believe this strategy will enable Whitbread to deliver its significant growth ambitions, grow earnings and dividends, maintain good returns on capital and create further value for shareholders. Whitbread comment that, while it is only six weeks into the new financial year the company remain confident of making good progress this year.
Our view: Whitbread has made good financial and operational progress this year. Its financial success is based on another year of strong growth in their two leading brands, Premier Inn, the UK's best economy hotel brand and Costa, the UK's favourite coffee shop chain (according to British Travel Awards 2015). Premier Inn and Costa both continue to benefit from what Whitbread regard as significant structural market opportunities. The budget hotel market is continuing to grow as the independent sector declines, and there is an increasing demand for great coffee. It is worth highlighting three strategic themes that the company has identified 1) grow and innovate in the core UK businesses, 2) focus on strengths to grow internationally 3) build the capability and infrastructure to support long term growth. So, in our view, more of the same. Following the underperformance in the share price we recommend Whitbread as a Buy.
Economic news
US durable goods orders
US durable goods orders remained improved 0.8% in March, following a revised drop of 3.1% in February, the Commerce Department said yesterday. Excluding orders for transportation equipment, durable goods orders edged down 0.2% after a 1.3% fall in the previous month.
US consumer confidence index
As per the Conference Board, US consumer confidence index fell to 94.2 in April, from a downwardly revised 96.1 in March. The reading missed the market estimates of 95.8.