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Markets
Europe
The FTSE-100 finished yesterday's session 0.27% lower at 5,950.48, whilst the FTSE AIM All-Share index closed 1.08% lower at 709.29. In continental Europe, markets ended lower due to a relentless slide in oil prices amid global growth concerns. In addition, the possibility of Britain's exit from the European Union dampened investor sentiment. Germany's DAX and France's CAC 40 shed 0.6% and 0.4%, respectively.
Wall Street
Wall Street ended it five-session losing streak to end modestly higher, led by gains in the telecom sector. Nonetheless, investors remained concerned over the impending Brexit vote and weak oil prices. The S&P 500 gained 0.3% in yesterday's trading session.
Asia
Equities are trading higher, taking positive cues from gains in the US market. The Nikkei 225 advanced 1.1% as a weaker yen led to gains in export-driven stocks. The Hang Seng was trading 0.5% up at 7:00 am, tracking the Chinese market.
Oil
Yesterday, WTI prices decreased 3.7% to US$46.21 per barrel, while Brent oil prices fell 3.6% to US$47.19 per barrel.
Headlines
BoE maintains interest rates
The Monetary Policy Committee of the Bank of England (BoE) voted 9-0 to retain the bank's benchmark interest rate at 0.5%. The rate has remained at this level for seven years. The committee also voted to maintain quantitative easing at £375bn.
Company news
PHSC (LON:PHSC, 23.50p) - Speculative Buy
PHSC, a leading provider of health, safety, hygiene and environmental consultancy services and security solutions to the public and private sectors, yesterday provided trading update for the year ended 31 March 2016 (FY2016). During the period, revenue declined -9% to £7.04m principally due to large asbestos management contract previously delivered by its subsidiaries, Adamson's Laboratory Services Limited ('ALS') with a leading university has ended and that ALS unable to find sufficient replacement work during the H2. The underlying EBITDA, excluding the goodwill impairment charge and various costs associated with 2 acquisitions made in December 2015, fell -48.9% to £418,000. Legal and other costs Totalled approximately £50,000. In addition, a further £50,000 has been expended in meeting the initial integration costs of one of those acquisitions, SG Systems (UK) Limited, in the period to 31 March 2016. Given the challenging trading conditions experienced by ALS, and in accordance with standard tests applied by its Auditors, the Group anticipate an impairment of £600,000 (approximately -9%) in the carrying value of goodwill in respect of ALS in the consolidated net assets of the Group before this adjustment. Although the Group's revenue in the H2 FY2016 increased around +12% against H1 FY2016, due to an impairment in the carrying value of goodwill mentioned above, the Board expects that the results for the full year will not meet its expectation. Final results will be announced in early August 2016.
Our view: A disappointing trading update coming ahead of the Group's full year results. It's largely down to one specific item, with subsidiary, ALS, failing to secure a replacement contract necessary to fill the gap of an ending large-value asbestos-related one with a leading university. The net result is to create an £600,000 impairment charge to be written off against the Group's net assets. Having said this, post the period, the Group confirmed revenues and EBITDA so far in FY2017 remain ahead of the comparative figures for last year, with positive cash flow. Its cash balance has also been maintained at c.£0.25m during June 2016, along with undrawn loan facility of £0.2m. PHSC appointed new non-executive director ('NED') in April 2016 and reaffirmed its commitment towards its progressive dividend policy. Subject to the AGM, the Board expect to declare a dividend payment in line with previous year at 1.5p per share. The acquisition of SG Systems and Camerascan CCTV in December 2015 has enhanced its pipeline of opportunities, while also strengthening its presence in the retail security tagging and other sector-related areas. We believe this will create further business momentum and synergies for the Group as the acquisition becomes fully integrated. Considering this potential opportunity, the Group's lowly valuation and continuing yield, Beaufort reiterates its Speculative Buy rating on the shares.
Beaufort Securities acts as corporate broker to PHSC plc
Chariot Oil & Gas (LON:CHAR, 6.60p) - Speculative Buy
Yesterday, Chariot Oil & Gas (Chariot) announced that its wholly owned subsidiary, Chariot Oil & Gas Investments (Morocco) Limited, has been awarded a 75% interest and operatorship of the Mohammedia Offshore Exploration Permits (Mohammedia). The licences have been awarded by the Office National des Hydrocarbures et des Mines, which would hold a 25% carried interest in the licences. Mohammedia is located in the near shore and covers approximately 4,600 sq. km with water depths less than 500m. It is located adjacent to Chariot's Rabat Deep Offshore Exploration Permits. Separately, the company also informed shareholders that it did not enter into the First Renewal Phase of the C-19 licence in Mauritania. Chariot stated that the work it undertook to de-risk the licence attracted some industry interest, but none of the potential discussions led to a firm deal within the required timeframe.
Our view: Overall, this update should be seen as favourable for Chariot. Although the company was not able to attract third-party funding for an exploration well in C-19, it achieved zero-cost exploration on the license. Perhaps more importantly, the conversion of the Mohammedia license into exploration permits introduces several opportunities for Chariot. This region is known for its proven and potential-play systems. The company plans to enhance the prospects in Mohammedia through the acquisition of additional seismic programmes. Chariot has also committed to acquire a minimum of 2000 km of 2D seismic over the rest of the licence to identify the nature and extent of the play systems in this underexplored region. Both of these 2D and 3D seismic programmes would be acquired in 2017. In the recent past, Chariot updated its plans to reduce personnel and payroll in its head office by approximately a third. The company would also reduce the size of the board, with Matthew Taylor (Technical Executive Director), David Bodecott (Non-Executive Director), and Bill Trojan (Non-Executive Director) stepping down. These steps have been taken in the best interest of the company and its stakeholders. Right now, the company does not face any concerns related to funding of its current operations, while the reduction in cost base will not only help uphold its strict capital discipline, but also retain core exploration expertise, operating capability and project delivery capacity. Despite the challenges posed by the current market sentiments, Chariot's high-quality assets and tight cost control continue to attract industry investment. Beaufort retains its Speculative Buy recommendation on the shares.
Poundland (LON:PLND, 205.0p) - Hold
Poundland yesterday released full year 2016 results. The highlight of year was the transformational acquisition of 99p Stores. The protracted CMA review process, however, significantly impacted the 99p Stores' business before completion and management decided to accelerate conversion plans in order to reverse its declining performance and to capture the benefits of scale as quickly as possible. This was then completed at unprecedented pace, while incurring integration costs of around £10 million. Underlying results, however, confirm challenging trading conditions remain, with key like-for-like sales at -3.9% (2015: +2.4%) on a constant currency basis. Total sales were +9.3% to £1,214.8 million on an actual currency basis (2015: £1,111.5 million), while comparable pre-tax profits (excluding converted 99p Stores, brand amortisation and ineffective element of the hedge) -13.5% to £37.8 million (2015: £43.7 million). Diluted EPS were -10.8% to 11.68p (2015: 13.10p) and Net debt £12.0 million (2015: net cash of £13.9 million). Final dividend proposed of 2.00p per share (2015: 3.00p), giving total dividend payment for the year of 3.65p per share (2015: 4.50p), with cover maintained at 3 times comparable underlying EPS. Operational highlights included the opening of 60 net new stores, as well as 190 conversions of 99p Stores to Poundland in FY 2016, taking the estate in UK & Republic of Ireland to 896 stores (2015: 588). Planned store openings for FY2017 in the UK and the Republic of Ireland reflect a year of consolidation, with; 20 to 30 net expected, primarily in the Republic of Ireland and in retail parks.
Our view: Sober reading. The Group's message appears to be that the UK poundshop 'party' is now drawing to a close, that approaching saturation means organic growth profits are harder to win, that shoppers are getting a little bored with the repetitive high street format and that the much anticipated phase of consolidation must now accelerate. With Q1 sales patterns following recent trend, a tough 2016/17 is foreseen with continuing negative like-for-like sales growth plus further disruption as converted 99p Stores bed down into the larger estate. In the absence of further consolidation amongst remaining national chains and accelerated closures within the myriad of competing sole traders, however, a return to positive comparatives might not even be possible next year. Indeed, the year-end statement's cautionary tone could even be enough for shareholders to believe Jim McCarthy is about to recommend throwing in the towel of independence. Which might well now be the case. Steinhoff International Holdings NV, the integrated retailer that sells, sources and manufactures household goods and general merchandise in Europe, Africa and Australasia has, of course confirmed it is considering a possible offer for the Group's entire issued share capital. Steinhoff, the US$22 billion furniture conglomerate which has lost out in two high profile takeover battles already this year, said on Wednesday it had acquired 22.78% of Poundland. Under UK takeover rules, it now has until July 13 to announce a firm intention to bid for all of Poundland, whose main shareholder had been private equity firm Warburg Pincus until confirming on Tuesday that it had sold down its 15% stake. Although there appears no obvious strategic or operational fit between the two groups, ultimately they are both elementary, branded, discounters that throw-off plenty of free cash flow. Given that Poundland operates in an overpopulated sector which offers just about zero barriers to entry and little customer loyalty, it is hard to see a counter bid emerging. Should Poundland management now donate their holdings to Steinhoff as well it's holding will, in any case, find itself close to a blocking minority. Warburg Pincus originally floated Poundland on the London Stock Exchange at 300p per share in early 2014 and the shares peaked around 420p a year later; this bubble has, of course, since burst and realistically, the final take-out price is not likely to be much more than 10% above the 195p Warburg achieve on Friday. Beaufort recommends Poundland shares as a 'Hold'.