The markets
Europe
The FTSE-100 finished yesterday's session 1.82% lower at 6,053.35, whilst the FTSE AIM All-Share index closed 0.34% down at 722.64. In Europe, markets ended sharply lower, as the Fed’s minutes of meeting increased the possibility of an interest rate hike in June. Travel and airline stocks were under pressure after an EgyptAir flight went missing. Germany’s DAX and France’s CAC 40 declined 1.5% and 0.9%, respectively.
Wall Street
Wall Street ended in the red amid growing concerns that the Fed may hike interest rates in June. Investors largely ignored positive corporate earnings releases. The S&P 500 fell 0.4%, primarily dragged down by the industrial sector.
Asia
Equities are trading higher, led by a rally in oil and commodity prices. Investors shifted their focus towards the meeting of the Group of Seven finance leaders in Japan starting today. The Nikkei 225 rose 0.5%, while the Hang Seng was trading 1.2% higher at 7:00 am.
Oil
Yesterday, Brent and WTI oil prices decreased 0.2% and 0.1%, respectively. The spread between the two varieties stood at US$0.7 per barrel.
Headlines
Retail sales in UK rise in April
As per data from the Office for National Statistics, retail sales in the UK grew 1.3% m-o-m in April after a revised 0.5% decline in March. The rise was led by a 2.5% increase in non-food sales. On a y-o-y basis, retail sales advanced 4.3% in April after a 3.0% gain in March.
Company news
Kibo Mining (LON:KIBO, 4.12p) - Speculative Buy
Kibo Mining, the exploration and development company focused on energy and mineral projects in Tanzania, announced yesterday that Phase 1 of the Mbeya Coal to Power Project (MCPP) Environmental and Social Impact Assessment (ESIA) was formally accepted and officially registered with Tanzanian Government. The company is now working on Phase 2 as Environmental Certification for the MCPP requires that the Mining and Power components be registered as separate ESIA documents. Following review of the submitted ESIA briefs, the National Environment Management Council (NEMC) has concluded that the MCPP application met with all required criteria for registration and acceptance and may continue with the rest of the assessment.
Our view:Yesterday’s announcement is another important tick in the box as the MCPP progresses. We are encouraged with the Phase 1 registration and acceptance at first pass and reveals Kibo’s understanding of the ESIA process. We look forward to completion of Phase 2 ahead of submitting the final ESIA as this is one of the key components alongside the Mining and Power Definitive Feasibility Study (MDFS) for the Integrated Bankable Feasibility Study. In the meantime, we maintain a Speculative Buy on the stock.
Beaufort acts as corporate broker to Kibo Mining PLC
Sunrise Resources (LON:SRES, 0.14p) - Speculative Buy
Yesterday, Sunrise Resources (Sunrise) incorporated a 100% owned subsidiary named Westgold Inc (Westgold) in Nevada, USA. Westgold is a special purpose vehicle (SPV) for low-cost acquisition of precious metals in western USA and would operate as a project generator. Westgold has started a claim-staking programme with claim secured in two project areas in Nevada: the Clayton Silver-Gold Project and the Newark Gold Project.
Our view: Sunrise has continued on the path of creating new subsidiaries to explore more gold projects in western USA. The company plans to work on these potential belts to leverage on low valuations due to weak commodity markets. The Nevada gold space has potential to deliver similar or greater upside, without diverging from the low-cost model. The formation of separate subsidiaries enables Sunrise to work easily, independently on different areas. Westgold focuses on projects where drilling has verified the presence of gold and silver and indicated the potential to define a resource on additional work. The projects currently claimed by Westgold have shown large deposits of gold and silver. Sunrise is assembling and sourcing historical drilling results from these two projects. The company also has other interesting projects including diamonds in Australia and Pozz Ash (potential cement ingredient) in the USA. In light of the above argument, we maintain a Speculative Buy rating on the stock.
Beaufort acts as corporate broker to Sunrise Resources Plc
Booker Group (LON:BOK, 174.90p) - Buy
Yesterday, Booker Group (Booker) declared its results for the year ended 25th March 2016. During the period, Total sales increased 5% y-o-y to £5.0bn, of which non-tobacco sales rose 6.3% and tobacco sales increased 2.2%. Booker like-for-like (LFL) sales fell 1.9%, with tobacco and non-tobacco LFL sales declining 5.2% and 0.3%, respectively. Operating profit (before exceptionals) increased 11% to £155.1m. Consequently, pre-tax profit surged 9% to £150.8m, leading to an EPS of 7.24p as against 6.73p in the previous year. Net cash at the end of period stood at £127.4m (2015: £147.0m). The company has proposed a final dividend of 4.03p, bringing the full-year dividend to 4.60p as compared with 3.66p in the previous year. Booker also proposed a third return of capital to shareholders of 3.20p (2015: 3.50p). Total return to shareholders totalled 7.80p, 9% higher than that in the previous year.
Our view: Booker performed strongly in FY 2016, despite challenging market conditions. The company benefitted from the acquisitions of Londis and Budgens as both divisions recorded rise in sales. Booker is progressing well in integrating these businesses into the group. Booker Wholesale Makro, the company’s cash-and-carry business, recorded a strong performance with high customer numbers, customer satisfaction scores and cash profit. The company’s other segments – Booker Direct, Chef Direct, Ritter and Booker India – performed to expectation. Booker’s solid margins paved the way for an increase in total returns payable to shareholders. Meanwhile, the company continues to grow in the online space, with internet sales rising 12% to £979m. The balance sheet remains healthy with a solid cash position. Booker plans to expand the business and implement initiatives to enhance customer experience. The company has started FY 2017 on a positive note, with trading in the first seven weeks ahead of that in the previous year. In light of the above argument, we maintain a Buy rating on the stock.
Ferrexpo (LON:FXPO, 31.0p) - Speculative Buy
Ferrexpo, an iron ore company with assets in Ukraine and transport and sale operations throughout the world, yesterday provided its trading update for the Q1 2016. During the period, total production including third party ore was 2.9 million tonnes, in line with Q1 2015. Pellet production from own ore, advanced by +6% to 2.9 million tonnes, while production of premium 65% Fe pellets from own ore, expanded by +20% compared to Q1 2015. Premium 65% Fe pellets stood at 96% of total production volumes compared to 85% in the Q1 2015. Ferrexpo’s Non-Executive Chairman, Michael Abrahams commented “The Group's production and marketing operations continue to perform very well, producing record levels of pellets, notably a significant increase in the output of the Group's premium 65% Fe pellets, and increasing Ferrexpo's presence in key markets.” The Group has repaid US$103m of debt amortisation and interest costs year to date, as of 30 April 2016. The Group is expected to receive US$10m overdue VAT repayment at the end of April.
Our view: Against the backdrop of increased production from own ore, lower oil prices and the Ukraine Hryvnia devaluation against the US dollar, the average C1 cash cost of pellet production continued to fall in 1Q 2016. The Group has seen stronger demand for pellets year to date, and has made shipments to new high-quality customers in Western Europe and South East Asia in May. Although it remains below 2015 average levels, management reports spot pellet premiums are now improving from the low levels of December 2015. While growth in steel output, especially in China is expected to remain weak and the iron prices may not recover in the near term, we believe that the Group has been taking the right steps to stem its losses though quality enhancement and cost cutting initiatives. Assuming Ferrexpo is successful in rescheduling its debt repayments in 2016, we see an interesting buying opportunity for this undervalued company. Beaufort retain its Speculative Buy rating on the stock.
Merlin Entertainment (LON:MERL, 411.0p) - Buy
Merlin Entertainments (‘Merlin’), the European entertainments company operating the world’s second-largest visitor attractions, yesterday provided trading update for the period since year ended 26 December 2015 to 19 May 2016. The Board confirmed that the trading remain broadly in line with expectations, continuing the key trend experienced in 2015. Despite the favourable foreign exchange rate (the Euro strengthened c.+3.8% against pound sterling since 26 December 2015 to date), the Group said market conditions in London remain challenging. On the operational front, the Group said the new rides and features opened so far this season together with three new Midway attractions have been well received by the visitors. The development of new accommodation is progressing well, with the expansion of the LEGOLAND Deutschland Holiday Village already open, and further offerings at Gardaland, Chessington World of Adventures and Warwick Castle on track to open over the coming weeks.
Our view: Though no new figures were provided, Merlin’s performance to date in 2016 appears to be meeting with expectations. To remind the readers, the key trends underlying FY2015 was; Like-for-Like (‘LFL’) revenue growth of +2.3% and +8.2% for Midway Attractions and LEGOLAND Parks, respectively, while Resort Theme Parks LFL revenue declined -12.4%. Overall, the Group LFL revenue growth was up +0.4%. In 2015, revenue from Midway Attractions, LEGOLAND Parks and Resort Theme Parks stood at 44%, 34% and 22%, respectively, of the total revenue. Although challenging condition in London (comprising: SEALIFE, the Dungeons, Madame Tussauds, The Eye Brand, Shrek’s Adventure) could disappoint the market’s best expectations, the Group’s clear strategy, diversified revenue stream and a strong development pipeline should support the long-term growth trajectory of the business. In the final result for 2015, Merlin has set out new milestones targets includes 2,000 new rooms, 40 new Midway Attractions and four new LEGOLAND Parks by the end of 2020. We believe the strategic partnership and US$34.4m investment in Big Bus Tours announced end-February will provide Merlin with revenue and marketing synergies and further cross selling opportunities in coming years. Considering its long-term growth potential, Beaufort maintains its Buy recommendation on the stock.
Mitchells & Butler (LON:MAB, 278.60p) - Buy
The Company issued its interims yesterday and reported on a completed review of its strategic options over the last 6 months. In the first half Mitchells & Butler (M&B) increased its adjusted earnings per share by 9.0%. However, in order to accelerate the trading performance of the group there is much to do in their three priority areas: building a more balanced business; instilling a more commercial culture; and increasing the pace of execution and innovation. Total revenue was £1,096m, down 1.5% but sales from invested sites were in excess of 10% in first year and offset by a decline in the uninvested estate, giving an overall like-for-like sales decline of -1.6%. Profit before tax was £83m (H1 2015: £75m) and basic earnings per share came in at 18.4p (H1 2015: 14.4p). Capital expenditure was £88m (H1 2015: £94m), including 4 new site openings and 22 conversions and Net debt of £1.86bn representing 4.2 times annualised adjusted EBITDA (H1 2015: 4.4 times).
Our view: The results in line with consensus and the strategic review now gives visibility to analysts with a plan for every site, totalling to 1775 sites, by 2020. This plan is aimed at building a more premium estate, by converting sites where appropriate into growth concepts, and with a small number of selected disposals. A key feature to the estate plan is the level of investment. In order to remain competitive in this environment, and to fully leverage the power of their brands, they believe they must invest in improving and maintaining amenity levels across the estate. As such they have accelerated their investment in remodels and conversions. M&B will aim for 300 to 350 sites per year, equivalent to a five to six year investment cycle compared to the cycle of over ten years on which they have been operating. This acceleration has begun already, with 142 remodels completed in the first half of this year, compared with 97 in the same period last year. Ambitious indeed, but welcomed after some difficult issues that have distracted management. The Company site three examples:
1. At the premium end of the estate, the Company will look to grow the Miller & Carter brand towards 100 sites by 2018, from a current level of 43. This is a brand with a clear and attractive offer to guests, and one which consistently delivers strong like-for-like sales and volume growth. M&B completed three Harvester to Miller & Carter conversions in the first half, all of which are trading very well in their first few months with EBITDA returns well in excess of the targeted 30%. The Company have identified a number of further sites which are suitable for conversion to the brand.
2. Within the mid-market, Harvester has been competing in a market which has seen significant new openings, with competitor offerings often being well-invested. By contrast, too many of the 233 Harvester sites have been under-invested in guest-facing areas in recent years, making it difficult to remain competitive in their local markets. Over time M&B are looking to reduce the scale of the Harvester estate to a core, all of which will be remodelled within the next 18 months, offering a consistent proposition and a level of amenity to truly leverage the brand's strength.
3. Within the value-led sites the Company are rolling out its successful Pizza & Carvery format, of which there are currently 14 sites that previously traded as Crown Carveries. These sites have been trading well, generating EBITDA returns of around 25%. M&B will convert around 20 more by the end of FY 2016, with plans for a total of more than 80 by 2018. The Company believe the format offers a compelling conversion opportunity for a number of their Crown Carveries sites, and selected sites from the unconverted Orchid estate.
M&B’s plans in this area are already well under way. In the current year they have accelerated their capital programme and anticipate delivering around 260 remodels and conversions plus 10 new site openings, at a total capital cost of around £180m. Next year the Company anticipate delivering around 300 remodels and conversions, supplemented by around 15 new site openings, at a total capital cost of around £200m. We welcome these ambitious plans where management are also instilling a commercial culture through a more rigid trading mentality and have installed a dedicated sales team in London, and a sales incentive scheme, engaging more closely with guests, and reviewing pricing, and in the latter part of 2015 the digital focus was on consolidation of their guest database. The latter has 8m guests in a single customer warehouse, and the future digital marketing plans look to build on this foundation, via a MAB-wide digital roadmap. This roadmap works across five key pillars: guest acquisition, user web experience, customer relationship management, guest loyalty and social media. We believe these plans are ambitious, but also visionary and focussed and this is the beginning of a journey that looks, challenging but nonetheless exciting over the medium term. Management have had the strategic review, have begun its execution and we support them in their endeavours. Buy.
National Grid (LON:NG., 970.60p) - Buy
Yesterday, National Grid announced its results for the year ended 31st March 2016. During the period, revenue remained broadly flat at £15.1bn. Adjusted operating profit increased 6% to £4.1bn. Consequently, adjusted pre-tax profit rose 9% to £3.1bn, resulting in an EPS of 63.5p, 10% higher than the previous year. The company’s return on equity increased to 12.3% from 11.8% in 2015. Total investment during the period increased to £3.9bn from £3.5bn in 2015, which resulted in a regulated asset base growth of 4%. National Grid proposed a final dividend of 28.34p, taking the full year dividend to 43.34p, 1.1% higher than that in the previous year.
Our view: National Grid delivered excellent performance in FY 2016 on both financial and operational fronts. The company benefitted from the electricity price difference in Britain and continental Europe, which lifted trading volumes on its network. National Grid recorded robust growth in the UK and generated savings of over £330m for customers in the first three years of regulated price control (RIIO). The company made substantial progress with rate filings in New York and Massachusetts. Value-added metric, which reflects the key component of value delivery to shareholders, was strong with value added in the year amounting to £1.8bn or 47.6p per share. National Grid is selling the majority stake in its UK gas distribution business. After the sale, the company expects to deliver higher growth and also maintain a solid balance sheet to fund its investment programme. We are encouraged by National Grid’s progress in FY 2016 and look forward to further updates. Therefore, we maintain a Buy rating on the stock.
Royal Mail (LON:RMG, 488.40p) - Buy
Royal Mail, the UK’s designated universal postal service provider, yesterday announced its final results for the year ended 27 March 2016. During the period, revenue remain flat, increased by +1% to £9,251m and operating profit before transformation costs increased by +5% to £742m against FY2015. Adjusted operating profit margin after transformation costs was 6%, declined by -0.1%, as a result of increased transformation costs due to cost avoidance and efficiency programme. Pre-tax profit fell by -5.4% to £538m, consequently, earnings per share also declined to 41.3p from 42.8p in FY2015. The Group reduced net debt by -18.5% to £224m. Looking at the revenue by each business units, UKPIL (UK Parcels, International & Letters) declined -1% whereas GLS (General Logistics Systems) advanced +9%. The Group reduced -1% in underlying UKPIL operating costs before transformation costs. Royal Mail’s CEO, Moya Greene commented “We have delivered a resilient performance in challenging markets. We are introducing new and improved products and services and responding quickly to changing customer needs. These measures, alongside our emphasis on customer focus and delivering a value for money service, have helped us to maintain our pre-eminent position in UK letters and parcels and driven growth in GLS”. The Group proposed a final dividend of 15.1p per share, brining full year dividend to 22.1p per share, up by 5%.
Our view: Royal Mail delivered a resilient performance, despite the challenging market conditions resulting from slowing economic growth, low inflation, and intense competition. UKPIL parcel volumes increased +3%, driven by continued growth in import parcels, and a strong performance by Parcelforce Worldwide. Royal Mail also won several new contracts in account parcels during the period, including contracts with: John Lewis Partnership, Urban Group, M&S and Waterstones. GLS continued to perform strongly with its volumes jumped by +10%, revenue up +9%, with growth in almost all markets. Given the particularly strong performance this year, however, the rate of revenue growth in GLS expected to slow in FY2017. Royal Mail management continued to provide a cautious outlook for FY2017, in the face of a number of challenges in the coming year, in particular the forthcoming negotiation of pay and pensions. Having said that, we believe the Group is capable of identifying further opportunities to drive efficiency across the organisation. During the FY2016, transformation costs amounted to £191m due to accelerated efficiency programme, primarily driven by higher voluntary redundancy costs associated to net reduction of around 3,500 employees in UKPIL over the period. In FY2017, transformation costs is currently expected by the Board to be around £160m, while annual net investment spent is expected to be within the £550m-£600m range for the medium-term. Management’s confidence in the Group’s long-term prospects and cashflow visibility was also demonstrated through the increased dividend (ahead of the consensus by +2%), reaffirming its commitment to a progressive dividend policy. We believe Royal Mail’s continuing investment will support its high quality growth over the long-term. Beaufort retain its Buy rating on the stock.
Economic news
US initial jobless claims
The number of Americans that filed their first initial claims for unemployment benefits decreased by 16,000 to a seasonally adjusted 278,000 in the week ended 14th May, the Labor Department stated yesterday. Economists had forecasted a reading of 275,000. Meanwhile, the four-week moving average of continuing claims rose by 7,500 to 275,750 last week.
US leading index
The Leading Economic Index for the US increased 0.6% m-o-m in April, after a flat reading in March, the Conference Board said yesterday. The markets expected a 0.4% rise in index.