Beaufort Securities Breakfast Alert: Xtract Resources, Barratt Developments, Experian, Horizonte Minerals, National Express, Premier Oil


The markets
The FTSE-100 finished yesterday's session 0.10% higher at 6,162.49, whilst the FTSE AIM All-Share index closed 0.41% better-off at 726.97. On the continent, shares from the gains over the previous two days on disappointing corporate earnings releases. The banking sector continued to drag down the overall market sentiment. Germany's DAX and France's CAC 40 closed 0.4% and 0.8% lower, respectively.
Wall Street
Wall Street erased previous day's gains, as disappointing earnings from Disney, Macy's and other retailers triggered concerns over consumer spending patterns in the country. The S&P 500 closed 1.0% down, with consumer discretionary leading all the nine sectors lower.
Markets wilted under pressure amid decline in oil prices and discouraging cues from global markets. The Nikkei 225 recovered initial losses to add 0.4% by close and record a fourth consecutive day of gain as yen weakened. Meanwhile, the Hang Seng was trading 0.4% lower at 7:00 am.
Yesterday, Brent and WTI crude oil prices increased 4.6% and 3.5%, respectively. The spread between the two varieties stood at US$1.4 per barrel.

UK house price balance falls in April: RICS
Accord to the Royal Institution of Chartered Surveyors (RICS), UK house price balance dipped to +41 in April, the lowest since June 2015, from +42 in March. London accounted for the sharpest fall in demand in April. The drop was primarily ascribed to reduced demand from the buy-to-let and second-home buyers, following the imposition of the additional stamp duty since 1st April 2016.

Company news

Xtract Resources (LON:XTR, 0.19p) - Speculative Buy
Yesterday, Xtract Resources informed that Minxcon Ltd. has completed an independent technical report on the mineral resources of the company's Fair Bride gold deposit at the 3990 Mining Concession (Manica) in Mozambique. According to the report, the resource expanded 36% to 1.257Moz at a cut-off of 1g/t compared with the previous estimate by Auroch Minerals. The measured and indicated resource increased 22% to 678koz from 555koz, while inferred resource jumped 57% to 579 koz. The report is expected to form a key part of the Bankable Feasibility Study on the Manica project, which is nearing completion.

Our view: The completion of the independent technical report on Xtract Resources' Mining Concession (Manica) in Mozambique bodes well for the company, as the amount of potential gold at the operation would rise over 36%. In addition, the measured and indicated volume available to be mined increased over 56%. The significant increase in the inferred category also shows that the life of the mine could be extended well beyond 12 years with further drilling. This would create flexibility from an open-pit perspective. We look forward to the completed BFS and formalisation of any potential project financing; we understand that the management is currently engaged with several banks and institutions regarding financing. In the meantime, we maintain our Speculative Buy rating on the stock.

Beaufort Securities acts as corporate broker to Xtract Resources PLC

Barratt Developments (LON:BVS, 869.50p) - Hold
Barratt yesterday issued a trading update in respect of the 19 weeks from 1 January 2016 to 8 May 2016. Management detailed continuing strong market conditions together with its exceptional confidence going forward. It detailed a sales rate of 0.75 (2015: 0.74) net private reservations per active outlet/week, with total forward sales (including joint ventures) up by 9.7% to £2,844.0m, equating to 11,605 plots (2015: 11,713 plots). Private forward sales were up 11.0% at a value of £1,803.2m (2015: £1,623.9m). It also confirmed 51 new developments launched in the period with the expectation of controlled outlet growth in FY17, along with excellent land opportunities which should result in approval of between 21,000-23,000 plots in the current financial year. The Group continues to make good progress on securing strategic land, with around 1,900 strategic acres (2015: c.1,300 acres) approved in the year to date; management targets some 20% of annual completions to be from strategically sourced land by FY17. It also detailed that in London the Group is focused on land opportunities in zones 3-6 having not been able to secure opportunities in zones 1 and 2, given the Group's minimum hurdle rates.

Our view: Barratt remains confident on its ability to deliver a significant improvement in performance for the full year as it continues to execute key strategies. It aims to ensure disciplined growth and improving key financial metrics through a focus on efficiency and continued delivery of attractive cash returns. Indeed, with the Help-to-Buy (which is in place at least until 2021) scheme adopted for 38% of period's sales (up from 25%), there appears little to slow this party for some time to come. It targets a minimum gross margin of 20% and minimum ROCE of 25% by FY17, while current expectation remains on-track to deliver attractive future cash returns of £678m over two years to November 2017. This equates to around £1bn of dividends paid out over the three-year period, which underlines management's drive to deliver exceptional income for shareholders combined with strong forward visibility. So, against such a positive background, should we be surprised that the shares have fallen over 15% so far in 2016, or that the UK housebuilding sector itself is down 12%? Not really. Given its quite extraordinary performance over the past three years (+330%) and the fact that housebuilding shares have become very widely owned, investors remembering just how viciously cyclical this sector has been in the past have, not surprisingly, been keen to take some money off the table on any cautionary story. These, of course, came from several different directions, including stamp duties hikes affecting particularly premium and Buy-to-Let properties, Brexit concerns, etc. Beaufort itself downgraded the entire housebuilding and materials sectors from 'Buy' to 'Hold' some weeks back which, of course, is where Barratt sits right now. That said, a 2016E P/E of 9.7x, a P/NAV of 1.73x (against 1.85x for the sector), together with a 6.6% dividend yield suggests the Group still offers quite exceptional value. In this respect, the housebuilding sector stands out as one of main 'Brexit-fear' casualties; indeed, it now appears to discount much of any realistic 'worse case' scenario while also offering potential for quite a dramatic rebound should the 'Remain Camp' be victorious on June 23rd. Beaufort expect to upgrade both Barratt and its wider sector back to 'Buy' once its confidence in the latter scenario rises.

Experian (LON:EXPN, 1,265.0p) – Buy
Experian, the global information service company, yesterday announced its full year financial results for the 12 months ended 31 March 2016. During the period, total revenue from continuing activities advanced +5% for both total and organic revenue at constant exchange rates basis to US$4,477m. Due to the adverse foreign exchange rate movement, total revenue from continuing activities at actual exchange rate basis fell -4%. EBIT from continuing activities was up +5% to US$1,195m and down -6% to US$1,210m, at constant exchange rate and actual exchange rates, respectively. EBIT margin at constant exchange rates were flat whereas at actual exchange rate, it decreased by -0.6%. Benchmark pre-tax profit rose +3% to US$1,136m or up +2.1% at actual exchange rate. Consequently, the benchmark EPS improved by +5% to US cents 89.1 at constant exchange rate (+6% at actual exchange rate). Cashflow conversion stood at 105% and net debt reduced by US$194m to US$3,023m with net debt to EBITDA ratio remaining at 1.9x. On the operational front, the Group sold six non-core activities and focused on supported a range of new organic investments in health, business information, decisioning software, fraud prevention and in other areas. Repositioning of North America customer service was successful and it turned into growth in the H2. Its CEO, Brian Cassin commented "We have returned Experian to organic revenue growth within our target range and driven greater efficiencies in our business. As we look forward, we're investing in a range of initiatives which will help us deliver another year of good growth, within our target range of mid single-digit organic revenue growth, with stable margins and further progress in Benchmark earnings per share". The Group declared second interim dividend of US cents 27.5 per ordinary share, bringing full year dividend to US cents 40.0 per share, up by +2%.

Our view: Experian delivered stable performance in the FY2016 with organic growth of +5% and good financial results at constant exchange rate basis. The Group was impacted by the adverse foreign exchange movement due to its US dollar denominated currency, especially the Brazilian real, reduced the total revenue by -US$412m and total EBIT by -US$137m with its EBIT margin fell by -0.6%. Putting this aside, at constant exchange rate basis, all four regions expanded their total revenue from continuing activities. For both total and organic basis, North America grown +3%, Latin America rose +7%, UK & Ireland up +5% and EMEA/Asia Pacific improved +7%. Post the year end, on 19 April 2016, Experian has signed a definitive agreement to acquire CSIdentity Corporation, a leading provider of consumer identity management and fraud detection services. The acquisition, which is expected to complete during H1, enables Experian to attract range of customers, broaden its offerings to third-party white-label partners and expand the consumer identity protection services internationally. The Board continued to create shareholder value returning almost US$1bn through dividends and share buyback programme. Proposed full year dividend increased by +2% to US cents 40.0 per share and Board extended share buyback programme to US$800m from US$600m, of which, US$656m had been completed as at 31 March 2016. For the FY2017, the Group announced share buyback of US$400m, including remaining US$144m to complete the existing US$800m programme. We believe Experian is in position to continue its momentum towards FY2017 target organic revenue growth of mid single-digit with stable margins. Beaufort retains its Buy rating on the stock.

Horizonte Minerals (LON:HZM, 2.12p) - Speculative Buy
Yesterday, the company released its interim financial statements for the three months ended 31st March 2016. The company's losses for the period contracted to £332,100 from £956,035 due to lower administrative expenses and gains from foreign exchange. On the operations front, the company announced that it won four new concession areas adjacent to the Araguaia Project on 9th February 2016. Going forward, the company plans to complete the acquisition and integration of Glencore Araguaia Project (GAP) and Araguaia. A new resource estimate would combine Araguaia and GAP, while the prefeasibility study would be upgraded to make the project larger. The company plans to advance the project to the Feasibility Study phase. Horizonte also aims to secure regulatory approval for the social and environmental impact assessment (SEIA) at Araguaia. Thereafter, it would secure the preliminary licence (LP). The company closed the quarter to March with cash of £2.17mn.

Our view: The four new concession areas adjacent to the Araguaia Project is good news for Horizonte, as the company continues to build on the operational successes of the previous year. Last year, the company acquired GAP, located near Horizonte's flagship Araguaia nickel project. Together, these projects constitute one of the largest nickel saprolite resources in the world (at the upper end of the grade curve), being located in a proven mining region. The related technical data would be incorporated in GAP's feasibility study. Despite a sluggish resource sector, we are confident about Horizonte's strategy to expand land position, rapidly progress with its Araguaia nickel laterite project, and create shareholder value in return. Therefore, we maintain our Speculative Buy rating on the stock.

National Express (LON:NEX, 330.0p) - Buy
Yesterday, National Express Group reported its interim management statement for the period from 1st January 2016 to 30th April 2016. During the period, the company's revenue rose 11% on a constant currency basis, including the benefit from acquisitions and the start of German rail operations in December 2015. On an underlying basis, revenue was up 4%, supported by 3% underlying passenger growth across the company. Commercial revenue from the UK Bus grew 3%, with passenger volumes broadly remaining flat. The underlying revenue from the UK coach increased 4%, with a 7% like-for-like growth in passenger journeys at c2c. In Spain, revenue and passenger growth for the period was 3% and 5%, respectively, driven by improvement in revenue management, new contract wins, and the acquisition of Herranz in December 2015. In Morocco, the company recorded over 50 million passenger journeys, up 11% y-o-y. Meanwhile, the North American School Bus bid season is progressing well and has maintained the high retention rates, with 96% contracts retained to date. In addition, the company's pre-tax profit increased despite high bid costs and increased c2c franchise premium. Overall, the company remains on track to perform in line with expectations and expects to fulfil full-year targets of free cash flow of £100m and leverage of 2–2.5 times EBITDA.

Our view: National Express traded well for the first four months in 2016, with improvement in revenue and passenger numbers across business regions. The company's established businesses continue to grow, and its new markets including Germany and Bahrain are already carrying millions of passengers. The company seems to have struck the right mix of innovation, partnership and customer service as evident from the full-year profit and cash flow expectations. The company upholds strict financial criteria to seek long-term and capex-light opportunities to build a business with balanced risk profiles and limited exposure to individual contracts. Thus, in view of the upbeat trading update despite the dip in coach travellers in April after the Brussels attacks, we reiterate a Buy rating on the stock.

Premier Oil (LON:PMO, 69.75p) - Speculative Buy
Premier Oil gave a positive trading update for the period 1 January to 30 April 2016 at their AGM yesterday. The Company reported average group production in the period was 57.3k boepd. Premier also reported it is on track to deliver 'at or above the upper end of 2016 guidance of 65-70k boepd for the full year.' Production from the first of two producer wells from the Solan field began on 12 April 2016 and rates of over 14k bopd have been achieved. The second producer well is expected on-stream in mid-2016. The Catcher project remains on track for first oil in 2017 and also under budget. Pre-first oil capex is now expected to be 15% lower due to cost savings.

Our view: This is an encouraging first four months of 2016 and good to report first production from Solan after well flagged weather delays earlier this year. Production for the year has been flagged at the upper end or above the earlier guidance is also positive. We reiterate our Speculative Buy stance.

Economic news
UK industrial production
UK industrial production increased 0.3% m-o-m in March, compared to a decline of 0.2% in February, the Office for National Statistics reported yesterday. The February data was marginally revised upwards from a 0.3% decrease reported earlier. Markets were expecting a 0.5% rise. On a y-o-y basis, industrial production fell 0.2% in March, following a rise of 0.1% in February, beating an expected drop of 0.4%.
UK manufacturing production
The Office for National Statistics reported that the UK manufacturing output rose 0.1% m-o-m in March, after a 0.9% fall in February. This was worse than the market expected increase of 0.3%. On a y-o-y basis, manufacturing output fell 1.9% in March in line with the market expectations. The output fell a revised 1.6% in March.
US mortgage applications
US home mortgage applications, including both refinancing and home purchase, increased 0.4% w-o-w in the week ended 6th May, after a 3.4% declined in the preceding week, the Mortgage Bankers Association said yesterday. However, the mortgage application for refinance edged up 0.5%.

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