The markets
Europe
The FTSE-100 finished yesterday's session 0.70% higher at 6,262.85, whilst the FTSE AIM All-Share index closed 0.03% higher at 733.50. In continental Europe, markets ended in the green, as international creditors agreed to provide more bailout funds to Greece. Furthermore, an improvement in oil and commodity prices boosted basic resource stocks. Germany's DAX and France's CAC 40 surged 1.5% and 1.1%, respectively.
Wall Street
Wall Street advanced for the second consecutive day, as a decline in crude inventories led to a rally in oil prices. In addition, expectations that the Fed would hike interest rates buoyed investor sentiment. The S&P 500 rose 0.7%, with the energy sector gaining the most.
Asia
Equities are trading mixed, as investors remained concerned over an interest rate hike by the Fed and sustenance of the gain in oil prices. The Nikkei 225 increased 0.1%. The Hang Seng was trading 0.1% down at 7:00 am, tracking China's markets.
Oil
Yesterday, Brent and WTI oil prices increased 2.3% and 1.9%, respectively. The spread between the two varieties stood at US$0.2 per barrel.
Headlines
Brexit to cost UK billions in trade: WTO
The World Trade Organization (WTO)'s Director General Roberto Azevedo has warned the UK that an exit from the European Union would cost it billions and the country would be forced to re-negotiate its membership of the WTO. He added these negotiations would be complex and could take years to reach an agreement.
Company news
Xtract Resources (LON:XTR, 0.20p) - Speculative Buy
Xtract Resources, the gold mining and development company, announced today that it has signed an agreement to dispose of its Manica Gold project in Mozambique to Happy Gold Limited, a wholly owned subsidiary of Minerals Technologies International Limited (MTI), for a cash consideration of US$17.5m. The agreement is subject to obtaining the necessary corporate and regulatory approvals and successful completion of due diligence by the purchasers before 31 August 2016. Under terms of the agreement, should Xtract not deliver a Bankable Feasibility Study before 30 June 2016, the purchase consideration will be adjusted downwards by US$1m. In the event that the transaction does not proceed for any reason, Xtract will continue to maintain its ownership of the Manica licence.
Our view: Management cited substantial dilution and additional debt has the main reasons not to proceed with the development of the Manica Gold project. The estimated initial capital expenditure was US$38m plus an additional US$14m for underground development. To this end, the required capital could have resulted in significant dilution to the current market capitalisation. The sale of Manica, at a 40% return on the initial investment, allows Xtract to focus on its producing Chepica mine in Chile while firming up its balance sheet. We understand that the company is also evaluating other potential high return projects. We look forward to more information regarding the company's strategy as well as updates on operational activity at Chepica. In the meantime, we maintain our Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Xtract Resources PLC
Eurasia Mining (LON:EUA, 0.65p) - Speculative Buy
Eurasia Mining yesterday announced it had "executed an agreement" with a Russian contract mining company to develop its alluvial platinum project West Kytlim. The Russian contractor (OOO SK Region-Story) will be responsible for constructing the mine and all the associated pre-production and operating costs. In return it will receive 70% of revenues with Eurasia receiving 30%. Eurasia will be responsible for the geological side, developing new reserves, and appoint the manager of the recovery plant. Eurasia will also be responsible for selling the platinum concentrate to the refinery. Development is due to start in July and we assume first production will be during 3Q16.
Our view: This is an excellent result for Eurasia. It has three projects in Russia, the Monchetundra hard rock platinum project, West Kytlim alluvial platinum and a gold tailings project called Semenovsky. It needed a development solution for West Kytlim and the agreement announced yesterday means the project is fully funded without the need for an equity fundraise. Management can now focus their attention and resources on the development of Monchetundra and Semenovsky. In the meantime, we reiterate our Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Eurasia Mining plc
Savannah Resources (LON:SAV, 3.375p) - Speculative Buy
Savannah Resources, the diversified mining group focused on exploration and development of mineral sands in Mozambique and copper-gold projects in Oman, announced today that it has completed three gravity surveys on Block 4 and 5 properties in the Sultanate of Oman. Savannah owns a 65% shareholding in Al Fairuz Mining, the owner of the Block 5 licence and is earning a 65% shareholding in Al Thuraya LLC, the owner of Block 4, both are highly prospective for copper and gold. The gravity surveys were completed over airborne VTEM (Versatile Time Domain Electromagnetic) and ground electromagnetic anomalies which had previously identified 12 EM conductors. These areas were drill tested in 2015 and returned encouraging alteration systems suggesting proximity to VMS-type mineralisation. The gravity surveys are in addition to the current 2,080m of diamond drill programme focused on the Maqail South and Mahab 4 prospects in Block 5 as well as the Dog's Bone and Bayda prospects in Block 4. Savannah is targeting an increase in the overall resource potential and upgrade the current resource classification. Drilling will also assist in the completion of initial geotechnical and metallurgical test work which will ultimately feed into feasibility studies as the company continues to target production in late-2017.
Our view: We look forward to results from the gravity surveys, expected in June, to further refine potential targets from the three survey areas. Ground based gravity surveys have a successful track record in identifying VMS-type discoveries. We also look forward to results from the current drill programme with the aim to increase the overall resources and resource classification from the current Inferred and Indicated resource estimate of 1.7Mt grading 2.2% Cu. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Savannah Resources Plc
ANGLE (LON:AGL, 68.50p) - Speculative Buy
ANGLE is focused on commercialising its patented Parsortix liquid biopsy system, which has the potential to transform the diagnosis and treatment of cancer by making it possible to harvest intact cancer cells from patient blood for analysis. The Group yesterday made two important announcements: i) That it had placed new shares with both existing plus three new institutional investors raising gross proceeds of £10.2 million at a price of 64.5p/share and: ii) It signed a contract with The University of Manchester, acting in this instance through the Cancer Research UK Manchester Institute, which will allow incorporation of ANGLE's Parsortix system in the Clinical and Experimental Pharmacology group for routine use in clinical trials and for research purposes. Together with the net proceeds of the placing, the Group's cash resources on Admission of the new shares will be approximately £13.1 million. The Directors believe that the new funds will enable ANGLE to build on the growing body of third party evidence on Parsortix performance and, in particular, compelling initial data that key opinion leaders have generated in both prostate and Breast cancers. The net proceeds of the placing will be used for clinical studies to demonstrate the Parsortix system and also for driving sales through adoption in research-use settings. Admission of the placing shares is expected to occur on 31 May 2016.
Our view: Ground-breaking potential in detection of cancer, which is now funded to comprehensively demonstrate Parsotix's utility! Parsortix offers the same clinically relevant information from a patient's blood test, irrespective of its location in the body, that otherwise can only be obtained from an invasive metastatic biopsy. Though extensive development and clinical trials will be required across a wide range of indications before such tests to achieve standard international acceptance by medical and insurance providers, much earlier and elementary testing for cancer detection looks set to become a reality. Significantly in this respect, ANGLE differentiates itself from other medtech companies claiming similar abilities. In recent months, the medical world has become aware of a number of new, innovative, but early stage, non-invasive tests (be they derived from blood, saliva, sweat, antibodies etc.) that are apparently also capable of elementary and accurate detection of cancer. The fact remains, however, that detection in the form of a simple 'most probably yes' or 'most probably no' is, in fact, of only limited use unless the test is also capable of capturing or harvesting the same cancer cells for laboratory analysis. Without this, doctors will remain unable to ascertain key information, including identifying the cancer itself along with the extent to which it is aggressive or benign and therefore how to treat it. As such, ANGLE is the only such detection technology that is capable of offering such analysis and so, in Beaufort's opinion, is much more likely to become the globally recommended standard for hospitals and associated medical institutes. Yesterday's news drove this point home. Not only was the Group able to secure major new funding from professional investors in order to progress clinical studies, but it also confirmed a UK contract which allows for routine clinical and research use, itself a key part of the Group's strategy for commercialisation. The funds now available are expected to be sufficient to cover the next 2 years of planned clinical studies, which will be bolstered further by rising research sales. Assuming all goes to plan, ongoing studies of ovarian cancer should have sufficiently concluded to permit first commercial sales to EU hospitals during 1H'2017. Beyond this, FDA authorisation for metastatic breast cancer is expected to be secured through substantive studies defined by three major US-based centres. Successful conclusion here, potentially offers scope for initial North American commercial sales for MBC later in 2017. Further indications, including ovarian and prostate will seek a similar route with the FDA. Importantly also, ANGLE management is already advanced in its discussions regarding necessary reimbursement codes for medical insurance in the States. Yesterday's news was a further important step for ANGLE and Beaufort retains its Speculative Buy recommendation on the shares.
Anglo Pacific (LON:APF, 73.50p) - Speculative Buy
Yesterday, Anglo Pacific released its trading update for the period between 1st January 2016 and 23rd May 2016. The company's royalty income for Q1 2016 dropped to £1.9m from £2.3m in Q1 2015. Guidance from Kestrel mine remains unchanged, with 30–35% of production expected within the group's land in H1 2016 and 85–90% in H2 2016. Cash and cash equivalents as on 31st March 2016 stood at £3.7m (31st December 2015: £5.7m). Borrowings as of 31st March 2016 amounted to £9.3m as compared with £7.3m on 31st December 2015. Anglo Pacific's equity stake in Berkeley Energia Limited is valued at £10.3m as on 23rd May 2016.
Our view: Anglo Pacific's performance in Q1 2016 was in line with expectations. The company expects the majority of royalty income in H2 2016, as in the previous year. The Narrabri and Kestrel coal mines in Australia are progressing well, with production expected at Kestrel and a full year of income for the Narrabri royalty. Anglo Pacific also received first receipts from its Four Mile uranium royalty during the period. Meanwhile, the company witnessed positive developments at Berkeley, with the market value of royalty around US$10m higher than the carrying value in its balance sheet. We expect Anglo Pacific to deliver as per the expectations in the year, well supported by recovery in coking coal prices. Therefore, we maintain a Speculative Buy rating on the stock.
HSS Hire (LON:HSS, 103.0p) - Hold
Yesterday, HSS Hire released a trading update for the 14 weeks to 2nd April 2016 (Q1 2016). During the period, revenue increased 16.3% y-o-y to £84.3m, gaining from the extra week's trading, which accounted for around 8% of revenue growth. Revenue in core business rose 15.8% to £71.9m, while revenue from specialist business grew 18.1% to £12.4m. Adjusted EBITDA increased 14.3% to £17.6m. Net debt at the end of the period stood at £234.0m (FY 2015: £218.1m). Meanwhile, the company started operations at National Distribution and Engineering Centre (NDEC) in March 2016. Separately, HSS appointed Paul Quested as Chief Financial Officer. He would join the group and become an executive member of the Board with effect from 22nd August 2016.
Our view: HSS recorded a good performance in Q1 2016 with growth across both its business lines. The company's margins improved due to cost reduction actions implemented in 2015. HSS witnessed utilisation improvements across the group, with core utilisation rising 2% to 49% and special utilisation increasing 4% to 76%. The company's new NDEC would aid its extensive branch network and web capabilities. However, HSS's huge debt remains a factor potentially limiting its ability to fully participate in the continuing recovery. Moreover, a Brexit vote on 23rd June 2016 would likely further dampen the company's prospects. Beaufort's 2016E EPS forecast remains toward the upper end of market expectations at 6.7p (followed by 8.5p the following year), but current uncertainties mean that Beaufort has decided to cut its own price target from 100p/share to 90p/share and maintain its recommendation to Hold until improved visibility justifies a further earnings upgrade.
Dixons Carphone (LON:DC., 447.60p) - Buy
Dixons Carphone, the Europe's leading specialist electrical and telecommunications retailer and services company, yesterday released its trading update for 16 weeks ended 30 April 2016 ('Q4 2016'). During the period, the like-for-like ('LFL') revenues for the Group advanced +5%, which comprised by LFL growth of; +4% in UK & Ireland, +9% in Nordics and flat in Southern Europe. The full year LFL revenue growth for UK & Ireland was +6%, driven by encouraging growth in electricals and mobile phone, contributed to Total revenue growth of +2%. Both in Nordics and Southern Europe, full year LFL revenue rose by +4%. This brings full year LFL revenue growth for the Group up +5%. The Group narrowed its full year headline pre-tax profit expectation to £445m-£450m, the top half of previous guidance, while year-end net debt now expected to be below £300m. On the operational front, the Group gained market share across electricals and mobile in the UK & Ireland, Nordics and Greece. The total number of Carphone Warehouse stores-within-a-store with 3-in-1 formats (PC World, Currys and Carphone Warehouse) in the UK & Ireland now stood at 273 and these stores continued to perform well. In Nordics, the Warehousing project at Jönköping is progressing well and the Group has completed integration of the Infocare business. Dixons Carphone will announce its full year results on 29 June 2016.
Our view: Dixons Carphone delivered better than expected result for the Q4 2016, recording strong LFL revenue growth and expanded market share across electricals and mobiles in its key division. A strong performance in the final quarter enabled the Group to narrow its headline pre-tax profit range from £440m-£450m previously announced in Christmas to £445m-£450m, against current consensus analysts' estimate of £446m. This range suggests an increase in pre-tax profit of c.+17% year-on-year. The Group continued to improve its all-important customer satisfaction and price competitiveness rating across all key markets. Recently, on 21 March 2016, the Group announced that it has entered into an agreement to acquire Simplifydigital, the UK's largest broadband, TV and home phone switching business for an undisclosed sum. This acquisition enables it to significantly improve its Services business, where Dixons Carphone provides independent advice and allowing it to become a trusted partner in customers' homes for responsive, accessible, expert and affordable technology support. In view of the Group's encouraging LFL revenue growth, increasing market share, and operational progress, Beaufort maintains its Buy rating on the stock.
Intertek (LON:ITRK, 3,112.0p) - Hold
The Company issued a Trading Statement yesterday and reported revenue, for the period January – April 2016 up 12.7% at actual exchange rates and 10.6% at constant currency, compared to the same period in 2015. Organic revenue growth was 2.3% and 0.5% at actual exchange rates and constant currency respectively. The Group has started the year well with double-digit revenue growth. Other Product related businesses, which contribute over two-thirds of The Group's earnings, delivered good organic growth performance, and the Group's Trade activities reported solid organic growth while market conditions remained challenging in the Resource related businesses.
Our view: The Group are on track to deliver robust full year revenue growth at constant currency and continue to expect to deliver solid organic growth performance in 2016 with Group margins broadly stable year on year. Intertek operates a high margin and strongly cash generative earnings model with a track record of sustainable growth and shareholder value creation. Looking forward, Intertek will continue to see structural growth opportunities in the Total Quality Assurance market as corporations focus on risk management in their increasingly complex operations and supply chains. Despite Intertek's track record we move our recommendation to HOLD because there appears a slowdown in Q4 and with a rating for the full year 2016 is a full 22x earnings.
Marks & Spencer (LON:MKS, 399.40p) - Hold
Yesterday Marks and Spencer reported 'sales performance unsatisfactory' although strong growth in food was reported. The Profit before Tax was marginally above consensus but M&S has taken a £200m exceptional for impairments and M&S PPI mis-selling. The Company is clear on the actions needed to recover and grow Clothing & Home, which is M&S's top priority, but these actions, combined with the difficult trading conditions, will have an adverse effect on profit in the short term.
Group revenue £10.6bn +2.4% £10.4bn +0.8%
Underlying profit before tax £689.6m +4.3% £684.1m +3.5%
Non-underlying items (£200.8m) n/a (£200.8m) n/a
Profit before tax £488.8m -18.5% £483.3m -19.5%
Underlying basic earnings per share 35.0p +5.7% 34.8p +5.1%
Basic earnings per share 24.9p -16.2% 24.6p -17.2%
Free cash flow £539.3m +2.9%
Net debt £2.14bn -£84.9m
Dividend per share 18.7p 3.9%
Our view: Disappointing results will lead to circa 10% reduction in consensus forecasts, but we note the start of the strategic turn round has commenced, although this will take time against 'difficult trading conditions'. International has been disappointing, but Food is doing well and they do have a focus on growing the Food business. However, the core Clothing and Household will take time and we will monitor Marks and Spencer but maintain our Hold stance.
Zoopla Property (LON:ZPLA, 337.80p) - Buy
Yesterday, Zoopla Property declared its results for the half year ended 31st March 2016 (H1 2016). During the period, revenue soared 130% to £96.4m, mainly due to the inclusion of the Comparison Services division. Adjusted EBITDA surged 89% to £40.5m. Consequently, pre-tax profit rose 53% to £28.1m, leading to an EPS of 6.9p as compared with 3.8p in H1 2015. Net debt at the end of period amounted to £83.9m. On the operational front, Zoopla made investments and partnered with UK's property technology start-ups. After the period, the company acquired the Property Software Group for £75m. The group launched a series of national TV adverts for both its Zoopla and uSwitch brands, with the Zoopla campaign being its biggest to date and resulting in record levels of brand awareness. The company has declared an interim dividend of 1.5p, 50% higher than that in H1 2015, to be paid on 24th June 2016.
Our view: Zoopla performed strongly in H1 2016 with record revenues and enhanced margins. The Property Services division performed as per expectations and reported 12 consecutive months of UK Agency partner growth. The number of property listings grew to 854,000, showing a rise in the number of property partners. On the other hand, the Comparison Services segment outperformed expectations, with the uSwitch brand continuing its strong market hold. The energy vertical's growth was driven by a higher volume of switching during winter. Zoopla recorded strong traffic of over 300 million visits to its websites and apps, with more than 68% via mobile. The company continued product innovation and integration with the launch of new tools for both consumers and professionals. In addition, Zoopla's acquisitions and investments would enhance its consumer experience and help build the ultimate home-related lead-generation platform. The company remains committed to shareholders as it announced higher dividends payable. We believe Zoopla is comfortably placed to continue its growth momentum in the second half of the year. Therefore, we maintain a Buy rating on the stock.
Economic news
Germany IFO
The business climate index for Germany rose to 107.7 in May from 106.7 in the previous month, the survey results from IFO institute revealed yesterday. The markets expected a reading of 106.8. Executives' expectation index increased to 101.6 from 100.5 in the previous month.
US MBA mortgage applications
US home mortgage applications, including both refinancing and home purchase, rose 2.3% w-o-w in the week ended 20th May, after a 1.6% decrease in the preceding week, the Mortgage Bankers Association said yesterday.