The markets
Europe
The FTSE-100 finished yesterday's session 0.27% higher at 6,167.77, whilst the FTSE AIM All-Share index closed 0.24% higher at 726.08. In Europe, equities ended in the negative territory in a volatile trading session. Losses in auto stocks offset the gains in banking and commodity shares. Germany's DAX and France's CAC 40 shed 0.6% and 0.3%, respectively.
Wall Street
Wall Street ended in the red amid speculations of an interest rate hike by the Fed after inflation and industrial production in the US improved during April. Even continued strength in the oil prices failed to lift investor sentiments. The S&P 500 closed 0.9% down, with the consumer staples sector losing the most.
Asia
Markets are trading mixed, as investors remained concerned that the US Fed may increase the interest rate soon. The Nikkei 225 fell 0.1% as a better-than-expected GDP data for Q1 2016 in Japan dampened hopes of further stimulus from Bank of Japan. The Hang Seng was trading 1.6% down at 7:00 am.
Oil
Yesterday, WTI and Brent oil prices increased 1.2% and 0.6%, respectively. The spread between the two varieties stood at US$1.0 per barrel.
Headlines
UK inflation eases in April
As per data from the Office for National Statistics, inflation in the UK eased to 0.3% in April from 0.5% in March, marking the first decline since September 2015. The fall in prices mainly resulted from a drop in airfares and lower clothing prices. On an m-o-m basis, consumer prices rose 0.1% after a 0.4% increase in March.
Japan's GDP grew at 1.7% in Q1 2016
Japan's GDP grew at an annualized rate of 1.7% in Q1 2016, reversing a contraction of 1.7% in Q4 2015. The improvement in GDP was due to a rebound in private consumption as the total consumption rose 1% y-o-y.
Company news
Alecto Minerals (LON:ALO, 0.09p) - Speculative Buy
Yesterday, Alecto Minerals informed it has raised £665,000 gross by adding 831,250,000 new ordinary shares of 0.01 pence each to the company's capital at a price of 0.08 pence per Placing Share. The Placing Shares would represent, in aggregate, approximately 18.64% of the company's enlarged issued share capital. The directors of Alecto Minerals could not participate in the Placing pursuant with the AIM Rules for Companies, as the Company is due to publish its audited accounts for the year ended 31st December 2015; however, after the close period, CEO Mark Jones intends to subscribe for 12,500,000 new ordinary shares, amounting to £10,000 at the Placing Price. The Placing's proceeds are expected to provide additional working capital for the progress of the open-pit Matala Gold Project in the south-central part of Zambia.
Our view: The successful placement for £665,000 gross bodes well for Alecto Minerals as the company prepares to advance the 400,000 tonne per annum open-pit Matala Gold Project to the low-cost production stage in the near to medium term. Investors' faith in the company's future prospects in evident from the strong support received for the Placing, even as funds were raised at a premium to the previous fundraiser in November 2015. Meanwhile, the company continues to progress well in terms of developing the Matala project, and recently announced joint ventures with Randgold Resources and Cora Gold. We believe the company would continue to build on the excellent start it already has, leading to share price appreciation. Therefore, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Alecto Minerals PLC
Land Securities (LON:LAND, 1,162.0p) - Buy
Yesterday, Land Securities announced its preliminary results for the year ended 31st March 2016. During this period, the company's revenue profit and basic net asset value per share rose 10% and 10.3% to £362.1m and 1,482p, respectively. Acquisition, development and refurbishment expenditure amounted to £496.0m for the period, whereas disposals stood at £1,493.1m. However, pre-tax profit dropped almost 45% to £1.3bn from £2.4bn, primarily on a moderate increase in the portfolio value over the previous year. The company's LTV ratio also dipped to 22.0% from 28.5%. On the development front, Land Securities aims to deliver 1 million sq ft of property at London in the next financial year whereas 800,000 sq ft of property is due to open at Westgate Oxford by October 2017. In the long term, a further 1.2 million sq ft of development space at London is in the pipeline. For the period, the company recommended final dividend of 10.55p, raising the dividend for the year by 9.9% to 35.0p.
Our view: The company posted a strong performance for the year as revenue profit, net asset value per share and lease terms increased, while net debt declined. The company's smart asset management and balance sheet discipline ensured the business is in a robust position. This is evident from the proposed rise of 9.9% in dividend. We believe that Britain's impending EU referendum has led to uncertainty in the business and slowdown in decision making as several policies may change if the country votes in favour of leaving the EU. However, the company's portfolio comprises a number of high-quality, resilient property assets, which place it well among peers. Thus, in view of the above, we maintain a Buy rating on the company.
Sirius Minerals (LON:SXX, 18.50p) - Hold
Yesterday, Sirius Minerals announced the expansion of the Probable Ore Reserve at the North Yorkshire polyhalite project. The reserve's capacity was increased to 280 million tonnes of polyhalite at an average grade of 88.4% from the previous level of 250 million tonnes at a grade of 87.8%. This came in after the completion of the Definitive Feasibility Study (DFS). Additionally, SRK Consulting (UK) Ltd completed a detailed work on the mining schedule and resource as part of the DFS. It is important to note that the Probable Ore Reserve comprises tonnage of mineralisation previously reported as an Indicated Mineral Resource. The updated reserve is JORC (2012) compliant.
Our view: The upgraded Probable Ore Reserve at the company's North Yorkshire polyhalite project reaffirms the outstanding nature of the deposit. The expansion comes even as the reserve was touted as the world's largest and highest quality polyhalite reserve. Moreover, the economic viability of exploiting this asset has been confirmed by the DFS. Additionally, relative to most other junior exploration/development mining companies, Sirius has delivered both on ground (drilling, marketing/offtake, feasibility studies and permitting) and through shareholder value. However, the company's outlook depends on its success in acquiring financing for the mine, a very significant challenge given the quantum required. If Sirius takes the traditional equity, debt and offtake finance route, it is unlikely that the share price would increase from the current level of 18.00p. Given the uncertainty surrounding the company's outlook and the limited upside potential, we maintain a Hold rating on the stock.
Taylor Wimpey (LON:TW., 193.60p) – Hold
Taylor Wimpey, the UK focused residential developer, yesterday provided updates to its strategy, dividend policy and financial targets. The Group concluded that principles of its current strategy remain right for the future, while enhanced its dividend policy (subject to shareholder approval) and increased three year medium term financial targets for 2016-2018. Ordinary dividend policy has significantly advanced to c.5% of net assets (previously c.2%) with minimum of £150m per annum to be paid through the cycle from January 2017. Special dividend of £300m is also announced, which will be paid in July 2017, in addition to existing £300m confirmed to be paid in July 2016. The medium term financial targets for 2016-2018 now consists; 1) average annual return on net operating assets of 30%, 2) average operating profit margin of c.22%, and 3) £1.3bn total dividends to be paid in cash to shareholders over the period. The Board stated that "We are operating within the optimal size range of our short term landbank of between 75-80k plots and as a result, we are in "selective land replacement" mode in the short term land market. This, together with the increased profitability of the business, means that we will continue to generate cash that is surplus to the business's requirements. We are confident that our strategy and medium term targets position us well to deliver the best quality and most sustainable returns for our shareholders, without the need to compromise on quality, nor take significant additional land and cyclical risk".
Our view: A positive announcement from Taylor Wimpey! Against the backdrop of a strong housing market, easier access to mortgages at attractive rates, various government subsidies schemes (such as help-to-buy), together with, of course, highly successful management, the Group has proposed an enhanced dividend policy while also increasing its medium term financial targets for 2016-2018. Taylor Wimpey operate within the optimal size range of its short term landbank, supported by a significant strategic land pipeline to ensure the Group remains cash generative through the cycle. A minimum dividend commitment of £150m per annum reflects the Board's strong confidence in future prospects. In 2016, shareholders will receive a total dividend (including special dividends) of c.£357m (c.11.0p per share), while in 2017, Board anticipate to pay a total of £450m (including special dividends) or c.13.8p per share, up +26% against 2016, indicating a yield of 7.5% (based on: 184.90p), subject to shareholder approval. Moreover, Taylor Wimpey continues to perform well with 70% of its order book sold for 2016 private completions and maintaining strong balance sheet generating cash surplus. Last month, the Group said they have not experienced any impact on its trading due to the uncertainty surrounding the BREXIT referendum. Such fears, have nevertheless been seen to overhang sentiment for the entire UK housebuilding sector that has considerably re-rated over the past 5-years and now finds itself very widely owned. In anticipation of this spurring a phase of profit taking, Beaufort downgraded its overweight stance on the entire sector some weeks back from 'Buy' to 'Hold'. Beaufort has not yet revised its overall sector recommendation, but recognises that the sharp correction recently experienced by UK housebuilders now prices in much of these concerns. Anticipating a 'remain vote' on 23rd June, confidence will likely return to the sector quite sharply.
Vodafone (LON:VOD, 227.0p) - Buy
Vodafone, one of the world's largest telecommunication company, yesterday announced its final results for the year ended 31 March 2016. During the period, revenue was £41bn, (-3.0% reported and +2.3% organic basis) and service revenue was £37.2bn (-3.5% reported and +1.5% organic basis), helped by strong growth in Q4. EBITDA was £11.6bn (-2.5% reported and +2.7% organic basis) and loss for the financial year from continuing operations amounted -£3.8bn compared to profit of £5.9bn in FY2015. Consequently, adjusted EPS from continuing operations was 5.04p per share, fell by -9.2%. Free cashflow stood at £1bn and net debt expanded to £29.2bn. On the operational front, the Group completed its Project Spring organic investment programme. Organic service revenue in Europe fell -0.6% year-on-year, however, it advanced by +6.9% year-on-year in AMAP (Africa, Middle East and Asia Pacific). Vodafone's CEO, Vittorio Colao commented ''This has been a year of strong execution for the Group. We will continue to invest in our customer excellence programmes in both mobile and converged services. I am confident we will sustain our positive momentum in the coming year, allowing us to maintain attractive returns for our shareholders". The Group proposed final dividend of 7.77p per share, bringing full year dividend to 11.45p per share, both up by +2%. The Group also noted that it will change its reporting currency from pounds sterling to euros from 1 April 2016.
Our view: The market cheered Vodafone yesterday as it returned to organic growth in both revenue and EBITDA for the first time since 2008. Vodafone's 'Project Spring' turned out very fruitful as service revenues in both AMAP and Europe recorded strong growth in Q4. In particular AMAP accelerated its service revenue by +6.9% year-on-year, while it continued to expand its customer base (+8.2 million to 340.9 million), with 3G/4G data users rising by +17.7 million and data usage increased by +74% over the full year. In Europe, competitive pressure remains high causing service revenue declined -0.6% year-on-year. The trend improved, however, in the final quarter as its two largest markets, Germany and Italy, returned to growth in Q4, resulting overall Q4 service revenue in Europe added +0.5%, the first positive growth since December 2010. Project Spring's organic investment programme is now complete, having delivered almost all of the major targets outlined in November 2013, while achieving tangible benefits in both network and service quality for customers. Looking ahead, for FY2017, the Group expect organic EBITDA growth in the range of +3% to +6%, implying £12.4bn-£12.8bn (against consensus analyst estimates: £12.5bn). Free cashflow for the same period is expected to be at least £3.2bn while capex (post the Project Spring) targeted to be in the mid-teens as a percentage of annual revenue. We are encouraged by the Group's performance and its confidence towards progressive dividends per share growth, demonstrating Board's optimism in future cashflow generation. Now that the Group has decided to change its reporting currency to Euro, in which 65% of Group revenue is generated, the adverse foreign currency charges experienced in past years is likely to moderate, with limited impact from the outcome of UK's EU referendum. Beaufort maintains a Buy rating on the stock.
Economic news
UK PPI
The UK producer price index (PPI) output rose 0.4% m-o-m in April, after a 0.3% increase in March, the Office for National Statistics said yesterday. This was better than the market expected increase of 0.2%. On y-o-y basis, output prices were down 0.7% in April, following a decline of 0.9% in March.
US housing starts
US housing starts rose 6.6% to a seasonally adjusted annual rate of 1.17 million units in April, after a 9.4% decline in the previous month, the Commerce department said yesterday. Housing starts were reported at a revised 1.09 million units in March.
US CPI
US consumer price index (CPI) rose 0.4% m-o-m in April, after a 0.1% rise in March, the US Bureau of Labour Statistics stated yesterday. The markets expected a 0.3% rise in prices. Core consumer prices, excluding food and energy, rose 0.2% m-o-m in April, after a 0.1% rise in March.
US industrial production
Industrial production in the US increased 0.7% m-o-m in April, after a 0.9% fall in March, the Federal Reserve announced yesterday. Markets were expecting output to increase by 0.3%. The capacity utilization stood at 75.4%, compared to 74.9% in the previous month.