The markets
Europe
The FTSE-100 finished yesterday's session 0.68% higher at 6,156.65, whilst the FTSE AIM All-Share index closed 0.07% higher at 724.02. On the continent, equities ended higher, nudged ahead by a handful of positive earnings and a sharp rise in commodity stocks and prices. Germany’s DAX and France’s CAC 40 closed 0.7% and 0.4% higher, respectively.
Wall Street
Wall Street closed in the green, as oil prices registered gains. In addition, investors welcomed the Chinese government’s move to stimulate the country’s economy, thereby boosting energy, chemicals and machinery companies. The S&P 500 advanced 1.3%, with energy leading all 10 sectors higher.
Asia
Markets turned mixed, erasing earlier gains, as oil prices retreated and the yen regained ground against the US dollar during Asian trade. The Nikkei 225 added 0.1% by close even as the Japanese exporters recorded losses. Meanwhile, the Hang Seng was trading 0.6% lower at 7:00 am, as the banking and insurance sectors tumbled.
Oil
Yesterday, Brent and WTI crude oil prices increased 4.3% and 2.8%, respectively. The spread between the two varieties stood at US$0.9 per barrel.
Headlines
UK’s trade gap widens in Q1 2016
According to the Office for National Statistics, the UK’s trade deficit, which is the gap between exports and imports, in services and goods widened to £13.3bn during Q1 2016, its highest level in eight years. The weak trade data weighed on the overall economic growth for the quarter. The services sector, however, enjoyed a healthy trade surplus, which was offset by deficit in the goods sector.
Company news
Keras Resources (LON:KRS, 1.18p) - Speculative Buy
Yesterday, Keras Resources announced that it has exercised the option agreement over the Lindsay's Project (Lindsay's) in the Western Australian Goldfields which was granted by KalNorth Gold Mines Limited (KalNorth) in March 2016. The option agreement entailed an exclusive and irrevocable option to mine the Lindsay's Project in consideration for a share of the net revenues derived from the project. The company will finalise a formal agreement with KalNorth before commencing mining operations. After exercising the option, the company's attributable resources will increase by 215,100 ounces Au (gold) at a grade of 1.7g/t Au, of which 77% falls in the Indicated Resource category. In addition, three open pit resources comprising approximately 100,000 tonnes of ore at an average 2.46g/t for 7,900 ounces have also been identified. Mining will initially start on the remaining open pit resources with a fully ramped up underground production rate expected to be between 10,000 and 20,000 ounces per annum. The company has already secured the required permits for the current operation. In addition, the company plans to commence a 10,000t bulk sample at the Lindsay's Underground Mine under a Programme of Works licence, concurrent with the open pit operation. The bulk sample will provide grade and geotechnical data for the ongoing underground feasibility study as well as test material for the optical sorting equipment.
Our view: Subsequent to the successful placing for £1.25m last month, the company managed to fast-track its internal assessment of the Lindsay's Mine and exercised the KalNorth Option to redevelop the project. The company plans to extract the ore through a staged approach with significant grade control and in-fill drilling ahead of the mining phase in order to mitigate the risks associated with mining. Last month, the company delivered some 1,427oz of contained gold from two deposits within the Grants Patch Gold Tribute lease area, achieving a significant milestone. Also with the option exercise mentioned above, the company shows that it continues to improve efficiencies and speed-up plans for the next open pits. We look forward to more such updates regarding the 10,000t bulk sample at the Lindsay's Underground Mine and refurbishment of the high-grade Prince of Wales mine along with the confirmed gold grades and payments for the Lindsay’s Project. In the meantime, we maintain our Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Keras Resources plc
AdEPT Telecon (LON:ADT, 272.5p) - Buy
AdEPT has acquired Comms Group U.K. Ltd., a specialist in the Avaya IP Office product suite applicable to smaller–scale SME operations. The initial cash consideration is £3.5m, which will be funded from AdEPT’s revolving debt facility, with Barclays. The last filed accounts of Comms Group for the year ended 31st March 2015 reported revenue, operating profit and profit before tax of £3.3m, £0.5m and £0.4m respectively. Net and gross assets at that date were £1.2m and £1.8m, respectively. The trading performance of Comms Group for the year ended 31st March 2016 was ahead of the historic results with the unaudited management accounts of Comms Group showing revenue and operating profit of approximately £3.7m and £0.8m respectively.
Our View: Comms Group is an excellent fit because, like AdEPT, it is asset-light, complements and builds upon AdEPT's existing expertise and skills, particularly within the Avaya product set, and further extends its offering in the unified communications space through the addition of IT services. Following the acquisition, AdEPT is now in a position to provide a complete unified communications offering which can address the whole of the market, from small customers right through to very large enterprise clients. Comms Group has a well-developed customer base with long-term relationships across a range of customers. The acquisition is expected to be earnings enhancing from completion. We reiterate our Buy stance on the Company.
Bovis Homes (LON:BVS, 887.50p) - Hold
Yesterday Bovis released an AGM statement and it stated that the Company is trading well and it is on track to deliver planned growth for 2016; It also reported that housing market conditions remain positive with strong demand from home buyers who are benefitting from good access to mortgage finance and that sales prices continue to show levels of sustainable growth driven by an improving mix of homes. Weekly sales rates have improved and in the year to date Bovis has achieved 0.65 net private reservations per site, in line with last year. Bovis has launched 17 new sites for sale with many sites acquired in 2015 now launched and selling well. As highlighted in February, the profile of legal completions in 2016 will be H2 weighted in a similar manner to 2015.
Our View: The trading update in line with expectations with management saying that group is seeing good demand. The Company has repeated guidance that the year will be H2 weighted. Good to hear that build cost inflation is moderating compared to high levels seen in 2015. Shares are cheap compared to the peer group, however any re-rating may wait until successful implementation of strategy to push up returns and wait to see real evidence that the Group is on track. We are close to upgrading but retain for now a Hold.
Chariot Oil & Gas (LON:CHAR, 8.75p) - Speculative Buy
Yesterday, Chariot Oil & Gas Limited provided an update on its cost structure and Board changes. The company plans to reduce personnel and payroll in its head office by approximately a third. The company will also reduce the size of the Board, with Matthew Taylor, Technical Executive Director, David Bodecott, Non-Executive Director, and Bill Trojan, Non-Executive Director, stepping down. However, Matthew Taylor is expected to work with Chariot as a consultant for portfolio de-risking and other technical aspects of the exploration programme. Besides savings arising from restructuring, these changes along with other G&A initiatives are likely to help the company realise net cash savings of about US$1.5m per year in addition to the US$1.5m cost reduction announced on 5th May 2015. Meanwhile, there are no concerns regarding the funding for the company’s current work commitments.
Our View: As part of Chariot's ongoing focus on capital discipline and in light of the continuously challenging business environment, the company reviewed its expenditure across the business and decided to implement the changes mentioned above as a precautionary measure. These steps have been taken in the best interest of the company and its stakeholders and are expected to be beneficial for its long-term wellbeing. As of now, the company does not face any concerns regarding funding its current operations, and a reduction in the overall cost base will not only help it uphold its capital discipline but also retain core exploration expertise, operating capability and project delivery. In March, Chariot signed a farm-out agreement with Eni, a world-class explorer and an experienced operator focused on projects with the potential for material production, as the future operator of its Rabat Deep acreage. Moreover, despite the challenges posed by the current market sentiment, Chariot’s high quality assets continue to attract industry investment. Therefore, we maintain a Speculative Buy rating on the stock.
easyJet (LON:EZJ, 1,510.0p) - Buy
easyJet, a low-cost European airline company, yesterday announced its results for the 6 months ended 31 March 2016. During the period, total revenue rose +0.3% to £1.8bn against comparable period (H1 2015). Pre-tax profit and margin remain relatively flat at constant currency basis, however, at a reported basis, the Group delivered loss before tax of -£24m (H1 2015: profit of £7m) caused by adverse foreign exchange rate of £33m. Consequently, basic loss per share stood at -5.1p per share compared to earnings per share of 1.3p in H1 2015. Constant currency revenue per seat fell -4.2% to £52.62 while constant currency cost per seat (including fuel) reduced by -4.3% to £52.46, primarily driven by lower fuel costs. The load factor remain flat at 89.7% but passenger traffic expanded +7.4% to 31 million customers. Its CEO, Carolyn McCall commented “easyJet has delivered a robust financial performance during the half year despite the well-publicised external events. We are confident that over the full year we will again grow passenger numbers, revenue and profit”. The Group proposed increase in ordinary annual dividend payout ratio to 50%, up from 40% subject to shareholder’s approval.
Our view: easyJet delivered resilient performance during the H1 2016, despite being impacted by three terrorist attacks (Sharm el-Sheikh, Paris and Brussels) as well as series of strikes by air traffic controllers in countries including France, Belgium, Greece and Italy. Such events have a direct impact on airlines as they discouraged potential travellers and caused flights cancellations. Due to timing of an early Easter plus terrorist attack in the Brussels, the Group expects Q3 revenue per seat to decline by around 7%. Revenue per seat for the H2, by comparison, is expected to decrease by low to mid-single digit percentage points, although bookings are currently in line with prior year. On the operational front, easyJet continued its strategy of easy and affordable travel as it passed on benefits of lower fuel costs to the customers, expanded passenger traffic and offset the reduction in revenue per seat (at constant currency basis) through lower cost per seat. The Group has extensive cost control and targets flat cost per seat (excluding fuel) at constant currency from FY2015 to FY2019 on the basis of a normalised level of disruption. The current market environment remain supportive, with easyJet’s Board expecting the overall European short-haul market to grow by +5.3% year-on-year during H2 2016, and +7.7% in its own markets. Considering easyJet’s strong balance sheet and its Board’s confidence, we too believe the Group can continue its growth momentum. The half-year performance was largely in line with consensus estimates (loss before tax of £26m) and given that the share price already been hit by -16.7% since the beginning of FY2016, yesterday’s result provided some relief to the shareholders. Beaufort reiterates its Buy recommendation on the shares, although at this time Ryanair remains our preferred comparative. As noted before, easyJet is a strong supporter of “IN” vote for the UK’s forthcoming EU referendum, noting that being able to fly without restriction across Europe is positive for the Group and its customers.
Venn Life Sciences (LON:VENN, 26.25p) - Speculative Buy
Yesterday, Venn Life Sciences announced its audited final results for the year ended 31st December 2015. During the period, the company’s revenues jumped 135% to €11.47m and it swung to an EBITDA profit (before exceptional items) of €0.39m from an EBITDA loss of €1.53m in 2014. The EBITDA profit was attributable to CRO Business (€0.8m), whereas the EBITDA losses were attributable to investment in Innovenn (€0.44m). The company’s overall loss for the year stood at €0.20m compared to €1.8m in 2014. On the operational front, Venn acquired Kinesis Pharma BV to extend its service capabilities into drug development. The resource base was increased to 196 personnel and Paris operations were re-located to a flagship location. Beyond the period, the company continued to win new business and proposals. It secured a €3.4m contract in January and booked revenues of €4.4m for Q1 2016. The company also got listed on the Enterprise Securities Market.
Our view: Venn Life Sciences displayed a formidable performance all through 2015 and witnessed an impressive 135% growth in revenues. The acquisition of Kinesis Pharma BV in October 2015 has broadened the service offering and opened up further opportunities for growth. Moreover, the company expanded its client base through the successful cross-selling of drug development and late phase services. The company stands at an interesting juncture as the business has now moved from its development phase into commercialisation. The year 2016, too, has begun on a positive note. Furthermore, the company plans to acquire companies in Central and Eastern Europe in the wake of several opportunities in the region, at minimal costs. Venn is well funded, with sufficient cash to expand its international coverage. Overall, the company is well placed, with a strong balance sheet and enhanced contract base, to maintain its growth momentum in 2016. Beaufort maintains its Speculative Buy rating on the shares.
Economic news
Germany Industrial Production
Industrial production in Germany fell by 1.3% m-o-m on a seasonally adjusted basis in March, following a revised loss of 0.7% in the previous month, the Federal Ministry of Economics and Technology said yesterday. Economists, on the contrary, had predicted the production to fall by a smaller 0.2% for the month. On y-o-y basis, industrial production increased 0.3% in March, compared to 1.1% rise expected by the economists.
US Wholesale Inventories
US wholesale inventories rose 0.1% m-o-m in March 2016, after a revised 0.6% decline in February, data from the Commerce Department revealed yesterday. Markets had expected inventories to increase 0.1% during the month.