The markets
Europe
The FTSE-100 finished Friday's session 1.27% lower at 6,241.89, whilst the FTSE AIM All-Share index closed 0.37% lower at 727.71. In Europe markets ended higher, taking positive cues from robust economic data released in the Eurozone. Germany's DAX and France's CAC 40 surged 0.8% and 0.3%, driven by gains in auto stocks.
Wall Street
Wall Street ended in the green, recovering some of the losses from the previous week. Investors cheered better-than-expected corporate earnings released. The S&P 500 advanced 0.8%, with the consumer discretionary sector gaining the most.
Asia
Equities are trading lower after the release of poor economic data from China. Moreover, a drop in oil prices weighed on investor sentiment. The Nikkei 225 remained closed for the Constitution Day holiday. The Hang Seng was trading 1.1% down at 7:00 am.
Oil
Yesterday, Brent and WTI oil prices decreased 4.8% and 2.5%, respectively. The spread between the two varieties stood at US$1.1 per barrel.
Headlines
China's manufacturing sector continues to contract in April
The Caixin manufacturing Purchasing Managers' Index (PMI) for China fell to 49.4 in April from 49.7 in March. The decrease was largely due to stagnant new orders and a decline in new exports. The contraction renewed concerns about the health of the country's economy.
Company news
London Stock Exchange (LON:LSE, 2,713.0p) - Buy
On 28th April, Beaufort's Breakfast Today included an update on the London Stock Exchange plc which reviewed the Group's current merger proposal with Germany's Deutsche Börse and the potential for a counter-bid from, amongst others, the Intercontinental Exchange ('ICE'), the owner of the New York Stock Exchange ('NYSE'). Beaufort's review considered ICE's 1st March declaration that it may propose its own approach for control of the LSE plus subsequent press comment suggesting that it had secured the necessary £10bn funding through a banking consortium. Within this, Beaufort suggested that application of the '53-day rule' (Rule 2.6 (d, e) of the Takeover Code) would shortly force ICE to show its hand. Following consultation with the London Stock Exchange, further clarification to this point has now been provided as detailed below.
Our view: Under the proposed merger, implementation will be through a new UK TopCo acquiring the LSE by way of a Scheme of Arrangement (and acquiring party, Deutsche Börse, then making a securities exchange offer). Accordingly, the so-called 'put-up-or-shut-up' date for ICE will in fact be linked to the date of the LSE shareholder vote and can therefore only be determined by the Panel once the parties have confirmed the transaction timetable. Provisionally this would be 7 days before the shareholder vote although, of course, this remains at the discretion of the Panel). As a result, the deadline will be somewhat later than the 8th May that was previously suggested by Beaufort. Beaufort will, of course, provide more information regarding the schedule as it become available and retains its 'Buy' recommendation for the London Stock Exchange plc in anticipation of shareholders receiving an improved offer.
Pearson (LON:PSON, 805.0p) - Buy
On Friday, Pearson released its interim management statement for the first three months of 2016. The company in general traded in line with the expectations set out in the final year results released on 26th February 2016. During the period, the company's continuing sales were down 4% in underlying terms, primarily due to the weakness in assessments revenues in the US and UK. Revenues declined 9% at constant exchange rates, reflecting underlying revenue declines and the impact of a change in revenue model at Connections Education. Headline sales decreased 6%, with the positive impact of a strengthening US dollar sterling partly offset by the weakness of key emerging market currencies. In North America, revenues fell modestly in underlying terms. Revenues declined in the Learning Studio and Assessments, but increased in the Connections Education, where four new full-time state-wide virtual public schools are now enrolling students for the 2016-17 school year. Revenues also improved for Pearson Online Services, with good growth in course enrolments at existing programmes and the launch of new programmes for Hofstra University and University of California, Riverside. The company's adjusted operating profit and adjusted earnings per share before the cost of restructuring is expected to be between £580m and £620m and between 50p and 55p, respectively, for the full year, assuming exchange rates as of 31st December 2015. The restructuring in 2016, worth approximately £320m, is likely to generate annualised savings of nearly £350m. The company proposed an unchanged final dividend of 34p, giving a total dividend of 52p for 2015, up 2% y-o-y, and in line with the dividend policy announced earlier in the year.
Our view: Pearson has made good progress with its online education business even as it shifts from being a media conglomerate to an education specialist. The restructuring cost of £320m is expected to weigh on the company's profits for the year, but expansion in the online learning business remains on track and is likely to support future growth. The company traded in line with expectation as most of its business is significantly weighted towards the second half of the calendar year. We expect the company to expand its online school services in China and India as internet access in these countries expands. Meanwhile, Pearson's Connections Education arm has already begun enrolling students to four new virtual public schools in the US, which aim to tutor youngsters outside of the public school system. Though Pearson still faces several challenges, including uncertainty around curriculum change, loss of testing contracts in the US, and volatile demand in the company's fast growing markets, we expect the company's performance to improve once the effects of the simplification plans and cost savings begin to kick in. Moreover, Pearson has announced an unchanged dividend for the year that further strengthens our faith in the company's prospects. Therefore, we maintain a Buy rating on the stock.
Pets at Home (LON:PETS 241.40p) - Buy
Pets at Home Group, the UK's leading specialist retailer of pet food, pet accessories, veterinary and grooming services, on Friday announced that it had acquired majority stake in two veterinary specialist referral centres, Dick White Referrals ('DWR') and Eye-Vet Referrals ('EVR'). The Group acquired 76% stake for a consideration of £14.1m in DWR, one of the UK's largest small animal specialist referral centres employing 31 veterinary specialists and treating over 5,000 cases per annum, based in Cambridgeshire. The remaining 24% stake will be retained by the founder, Professor Dick White and they key clinicians. EVR, on the other hand, is a dedicated ophthalmology centre based in Cheshire, employing 6 veterinary clinicians. It already provides services to the Group's NorthWest Surgeons, as well as to other primary opinion veterinary practices. The Group acquired 90% stake with undisclosed amount, where remaining 10% will be held by the founders. Both DWR and EVR will be operate the practice as a shared venture model.
Our view: The acquisitions of the two further veterinary specialist referral centres will extend the Group's presence in these geography with increased customer reach. The Group currently operates the UK's largest small animal veterinary business with 388 practices, run principally under a Joint Venture model using the Vets4Pets and Companion Care brand names, as well as four (post acquisitions) veterinary specialist referral centres. The Group stated that it sees further opportunities in the veterinary market that will "deliver growth and attractive returns". Pets at Home recently announced a FY2016 trading updates with +8.8% in revenue growth while like-for like revenue (for 53 weeks) increased +2.1%. The Group sees continued positive sales momentum in Merchandise business and excellent performance in both vet practices and grooming salons. We expect these acquisitions will creates stronger brand awareness for the Group and enhance its long term growth prospects. Beaufort retains its Buy rating on the stock.
Restaurant Group (LON:RTN, 274.50p) - Hold
On Friday, Restaurant Group provided an update on recent trading and expectations for FY 2016. Since the company's update on preliminary results on 9th march 2016, trading conditions in the Leisure business have further deteriorated owing to structural and business challenges. As a result, for the 17 weeks to 24th April 2016, total sales are up 4.7%, whereas like-for-like (LFL) sales are down 2.7%. The company does not expect any improvement in LFL trends and, therefore, annual LFL sales are expected to decline in the range of 2.5–5.0%, leading to a full-year pre-tax profit in the range of £74m to £80m. Also, the company began a comprehensive review of its current operating strategy, the results of which are expected in August 2016. For the year, overall site openings are expected to be fewer than last year; however, at least 30 sites are expected to be opened. Meanwhile, Stephen Critoph will step down as the company's CFO with immediate effect—search for his replacement has already begun.
Our view: Restaurant Group announced another disappointing result with profit warning siting full year pre-tax profit to be in the range of £74m-£80m (FY2015: £86.8m). The Group is facing significant challenges as LFL revenues continue to decline, which expected to decline further by -2.5% to as much as -5.0%. Though the business continues to generate cash and the balance sheet remains strong, there are few signs of improvement in the business that can brighten the prospects. Continuous fall in retail footfall is caused by growing online shopping (food delivery services) and intense competition from branded restaurants and food-led pubs. Now that National Living Wage officially kicked in, we expect it weigh heavily on the Group's profitability, which, the management previously expects increase of c+£2m of incremental direct cost. Furthermore, the unexplained resignation of the CFO after 11 years in the Restaurant Group will not be well digested by the investors. In view of the weak current trading, the management's down beating outlook and challenging market environment, Beaufort maintains its Hold recommendation on the stock.
Valirx (LON:VAL, 10.0p) - Speculative Buy
ValiRx announced that ValiSeek Limited, the joint venture between ValiRx and Tangent Reprofiling Limited, has received notification from Tangent that a US patent covering the use of VAL401 as a treatment for adenocarcinoma has been allowed by the US patent office. Adding to the earlier US patent grant covering the composition of formulation for VAL401, as announced on 14 May 2015, the directors of ValiSeek believe this announcement to be further validation of the innovative scientific foundation behind and supporting the VAL401 project just as the upcoming clinical trial has been designed to provide validation of the clinical applicability.
Our view: This further US patent has been allowed at an opportune moment as ValiSeek progress through the clinical trial preparations. At such a late stage in the preparations of the Clinical Trial for VAL401 the fact that the compound is now in receipt of additional IP protection, adds value to shareholder funds and further endorses the joint venture. This is a powerful confirmation of the science lying behind VAL401 and we very much look forward to following VAL401 on its clinical trial pathway. Beaufort assigns a Speculative Buy rating on the stock.