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Markets
Europe
The FTSE-100 finished yesterday's session 1.10% lower at 6,231.89, whilst the FTSE AIM All-Share index closed 0.07% lower at 744.13. In continental Europe, markets ended lower, dragged by the pullback in oil and commodity prices amid concern surrounding the health of the global economy. Germany’s DAX and France’s CAC 40 shed 1.3% and 1.0%, respectively.
Wall Street
Wall Street ended in the red as a fall in oil and commodity prices led to loss in basic resource stocks. Rising bond prices globally exerted pressure on financial stocks. The S&P 500 fell 0.2% in yesterday’s trading session.
Asia
Equities are trading lower, tracking the global markets. Energy stocks remained under pressure due to decline in oil prices, driven by the strengthening of the US dollar. The Nikkei 225 fell 0.4%, while the Hang Seng was trading 0.6% down at 7:00 am.
Oil
Yesterday, WTI and Brent oil prices decreased 1.3% and 1.1%, respectively. The spread between the two varieties stood at US$1.4 per barrel.
Headlines
UK trade deficit narrows in April
As per data from the Office for National Statistics, trade deficit in the UK narrowed to £3.29bn in April from £3.53bn in March, the lowest since September 2015. This is ascribed to an 11.2% rise in goods export volumes in April, the highest since first being recorded in 1988.
Company news
Amryt Pharma (LON:AMYT, 18.50p) - Speculative Buy
Yesterday The Company announced its Financial results for the nine months to 31st December 2015. Amryt was admitted to trading on AIM and Ireland's ESM post period end on 19 April 2016 following the reverse takeover of Fastnet Equity Plc. During the period under review the Company concluded a detailed asset review of the Company's Oil & Gas portfolio and, in light of the rapidly deteriorating economic conditions, executed the transition to an investment company to acquire businesses within the healthcare sector. It demerged the Company's Oil & Gas subsidiaries into a standalone company, Fastnet Hydrocarbons Limited resulting in the Company no longer having any on-going interest or further cost exposure in respect of its legacy Oil & Gas portfolio. The Company had €12.6m cash balance at 31 December 2015 (€15.2m at 31 March 2015) and the net loss for the 9 month period of €2.5m (12 months to 31 March 2015: loss of €36.0m which comprises general and administrative costs of €1.3m and discontinued oil and gas operations of €1.2m). There was a change of the functional currency of Company to € from US$ and change of accounting reference date to 31 December 2015. Post Period saw a transformation into a specialty pharma company by way of a reverse takeover of Amryt Pharmaceuticals DAC through the issue of 123,495,095 new ordinary shares, with the resulting company renamed Amryt Pharma plc. In addition to an 8 for 1 share consolidation resulting in 43,171,134 new ordinary shares of 1p, there was the appointment of a highly experienced Board and management team, as part of the admission of Amryt to trading on AIM and ESM. Following completion to the transaction the enlarged group:
• Consists of the wholly owned subsidiaries Birken AG and SomPharmaceuticals
• Has an EU approved drug for the treatment of partial thickness wounds and a promising pipeline of orphan drug candidates for epidermolysis bullosa, acromegaly and Cushing's disease.
Amryt will focus on building, developing and subsequently monetising a commercially attractive pipeline of drug candidates focused on treating orphan diseases. The orphan drug sector is a growing and commercially attractive segment of the pharmaceutical market, with worldwide orphan drug sales forecast to total US$176bn and account for 19.1% of global prescription sales by 2020. The acquisition of Birken and SOM has secured access to promising potential orphan drug candidates for epidermolysis bullosa (EB), acromegaly and Cushing's disease. In January 2016, Amrt’s lead product, Episalvan®, was approved by the European Commission for the treatment of partial thickness wounds (PTW) and has been granted US and EU Orphan Drug Designation for EB. The current EU approval of Episalvan® for PTW, in the Board's view, substantially de-risks the future development and approval of the product for the treatment of EB, a rare and distressing genetic skin disorder affecting young children for which there is currently no treatment. This approval would unlock a significantly larger worldwide market estimated to be worth US$1.5 billion per year. The funds raised as part of the reverse acquisition process will help accelerate the Phase III EB trials which are due to start in Q1 2017. Other opportunities exist for the Company both through the development of earlier stage products for the treatment of acromegaly and Cushing's disease.
Our view: We believe that the orphan drug sector represents a significant opportunity for Amryt. Currently there are 7,000 orphan diseases, which affect 1 in 10 of the global population. Drugs with orphan designation are usually fast-tracked to market. The lower phase III trial costs, smaller trial sizes, higher price point and long term marketing exclusivity granted in both the EU and US makes it a uniquely attractive market segment. This is reflected in the forecasted sector growth figures with expected prescription sales to total US$176bn by 2020 (Source: Evaluate Pharma as of 17th July 2015 )accounting for 19.1% of all worldwide prescription sales, excluding generic. Amryt is well positioned to benefit from this forecasted growth through the medium term development of its EU and US orphan drug designated Episalvan. The reverse takeover of Fastnet Equity plc was an important strategic milestone in realising the Company's vision of becoming a significant player in the underserved orphan disease market. Amryt is focused on building a diversified portfolio of commercially attractive, propriety new drugs targeting best in class performance to help address some of these rare and debilitating illnesses for which there are currently no available treatments. In May 2016, Pfizer purchased Anacor Pharmaceuticals for $5.2 billion in an all cash deal to get access to their Eczema gel which is in a phase three trial at the moment. Amryt has been tracking this company for some time now as Anacor's lead product is also a topical skincare gel aimed at the pediatric market and just over 3 years ago their market cap would have been sub $150m when the shares traded at $3.19 a share as opposed to around $100 today. This demonstrates the really exciting potential of Amryt as its pharmaceutical product Episalvan is of interest to many of the multinational pharma companies as it has already been approved by the European Medicines Agency earlier this year and will be commencing sales shortly. Furthermore, as soon as the Amryt phase three trial of Episalvan for Epidermolysis Bullosa gets under way then Amryt is going to be of even more interest to these multinational pharmaceutical companies. In view of the potential sales for Orphan drugs, and the interest from Big Pharma, we recommend as a Speculative Buy.
Bellway (LON:BWY, 2,694.0p) - Buy
Yesterday, Bellway released a trading update for the period from 1st February to 5th June 2016. During the period, the company recorded an 8% increase in the weekly reservation rate to 196 per week (2015: 182 per week). As of 5th June 2016, Bellway had net bank debt of £161m (31st May 2015: £191m), representing a gearing of around 9% (2015: 13%). The company’s order book was valued at £1,293m as on 5th June 2016, accounting for 5,346 homes. The sale of Barking Riverside Limited resulted in a profit of £17.3m, along with retaining a pre-emption to purchase around 2,600 development plots. Bellway would release a trading update for the financial year ending 31st July 2016 on 5th August 2016.
Our view: Bellway continued its growth momentum and performed strongly in all key metrics. The company recorded robust sales, which is reflected by a surge in the weekly reservation rate. Bellway benefitted from the favourable housing market and consumer demand, and was well supported by availability of affordable mortgage finance. The introduction of ‘Help to Buy’ scheme eased the burden of customers to purchase new homes. Customer confidence remained strong, with a low cancellation rate of 11%. Bellway plans to invest the proceeds from the sale of Barking Riverside in additional land opportunities to generate high returns and enhance shareholder wealth. Going forward, the company plans to open a 19th operating division in the North of England in the first half of the next financial year. The company remains on track to meet expectations for the full year, aided by solid forward sales position and a rise in the average selling price. In light of Bellway’s progress during the period and positive outlook, we maintain a Buy rating on the stock.
Vodafone (LON:VOD, 219.65p) - Buy
Yesterday, Vodafone agreed to sell its New Zealand (Vodafone NZ) unit to Auckland-based Sky Network Television Ltd (SKY). As per the deal, SKY would acquire all shares of Vodafone NZ for NZ$3.4bn (cash and debt free) via the issue of new SKY shares, which would give Vodafone 51% interest in the combined group and cash consideration of NZ$1.3bn; this purchase would be funded through debt. The new SKY shares would be issued at a price of NZ$5.40 per share, representing a 21% premium to SKY’s last close of NZ$4.47.
Our view: The deal between SKY and Vodafone is beneficial for both companies. It provides SKY with the opportunity to broaden its offerings beyond the traditional satellite broadcast market and compete with giants such as Netflix and Apple’s online content service. Moreover, SKY could leverage on the large customer base of Vodafone NZ, covering over 2.35 million mobile connections and more than 500,000 fixed-line connections. The combined group would be one of the largest firms listed on the NZX main board with an expected revenue of NZ$2.9bn. For Vodafone, the deal provides it an easy exit from the market that it had considered non-essential for a long period. Recently, Vodafone extended its partner market agreement with sub-Saharan African telecommunications provider Afrimax Group to cover Zambia. The companies have already partnered to launch 4G services in Uganda, and plan to provide high-speed 4G data services to consumers and businesses in Zambia. In light of the overall developments surrounding Vodafone, we maintain a Buy rating on the stock.
Watkin Jones (LON:WJG, 115.0p) - Speculative Buy
Watkin Jones, the leading UK developer and constructor of multi occupancy property assets with a focus on the student accommodation sector, yesterday announced its half year results for the 6 months ended 31 March 2016 (H1 FY2016). During the period, revenue advanced by +40.6% to £145.9m against the comparable period (H1 FY2015). Operating profit before exceptional IPO costs rose +83.5% to £17m, and adjusted EBITDA jumped by +82% to £17.3m. Consequently, adjusted basic earnings per share expanded to 5.2p, up +87%. Cash and cash equivalent at the period end stood at £32.6m, of which, net cash was £15.4m. On the operational front, Watkin Jones successfully admitted to AIM on 23 March 2016. The Group forward sold all its developments for completion in the FY2016 and there is only one development for completion in FY2017 remaining to be sold, which is currently in legal negotiations. For FY2018, all sites are secured and for 2019/2020 four sites secured and a number of additional site acquisitions progressing. The Group acquired Fresh Student Living Limited (‘Fresh’), operator of purpose built student accommodation assets, for £15m prior to IPO and now fully integrated. First month post-acquisition, Fresh contributed revenue of £0.4m and a gross margin of £0.26m. Watkin Jones’ CEO, Mark Watkin Jones commented “Our student accommodation development business remains positively underpinned by the fundamentals of the student accommodation market and the forward sale model provides us with excellent visibility as to future earnings and cash flow. The current student accommodation pipeline of 31 development sites underpins the business outlook to FY 2018, with 16 of the 17 developments for delivery by the end of FY 2017 already forward sold. We are at advanced positions regarding the acquisition of a number of site opportunities that will be for delivery in FY2019 and beyond”. The Group proposed a maiden interim dividend of 1.33p per share, in line with its IPO guidance (initial dividend yield of 6%), which will be paid on 30 June 2016.
Our view: Excellent result indeed! It does remind us that the Group is operating the right business model at the right time. Watkin Jones delivered all its promises but ahead for its site acquisition progress for post FY2018 delivery. This alternative asset class offers both excellent cash flow visibility and highly stable property-sector yields from operations that are well insulated from underlying economic activity. As such, it is able to pre-sell and forward-fund its projects to a long list of hungry institutional buyers – creating an ideal high return, high visibility, capital light model that is almost unique in the world of residential development. Currently, the Group has development pipeline of over 11,300 student beds across 31 sites, with 17 forward sold and four more in legal negotiations or under offer. With just 6% of the UK’s total full-time student population currently occupying purpose built student accommodation, at a time when government legislation is limiting houses in multiple occupation supply and introducing higher stamp duty on buy-to-let property, the sector is expected to enjoy quite significant growth for years to come while capital growth continues to sharpen returns. Significant demand headroom in all regions, suggests little or no impact even in the unlikely event of BREXIT dissuading EU students from seeking UK education. Furthermore, the Group sees opportunity for its residential business, with the potential to apply its student accommodation model to the development and management of purpose built Private Rented Sector ('PRS'), schemes. The gross margin for the residential business is estimated to strengthen as more profitable developments come on stream. The management of multi occupancy property assets in the PRS will be done by Five Nine Living Limited, the recently established division. The division is currently undertaking its first purpose built PRS development in Leeds, which is scheduled for completion in FY2017. Given excellent forward sold student accommodation pipeline and that all developments for this year's delivery progressing well, Beaufort sees good value in Watkin Jones and reiterates our price target of 135p, along with Speculative Buy rating on the shares, recommends to both income and growth investors