Markets
Europe
The FTSE-100 finished yesterday's session 0.03% lower at 6,680.69, whilst the FTSE AIM All-Share index closed 0.84% up at 721.39. In continental Europe, markets ended higher, as investors sentiment was buoyed by anticipation of fresh stimulus from the Bank of Japan. Moreover, better-than-expected corporate earnings released boosted buying. France's CAC 40 and Germany's DAX surged 1.6% and 1.3%, respectively.
Wall Street
Wall Street ended in the green, led by a rally in oil prices. Furthermore, positive corporate earnings releases and speculation of additional stimulus by the Bank of Japan fuelled buying. The S&P 500 advanced 0.7%, with the energy sector gaining the most.
Asia
Equities are trading higher, taking positive cues from gains in the global markets. Indications of political stability in the UK and expectations of further monetary easing from Japan created optimism among investors. The Nikkei 225 rose 0.8%, and the Hang Seng was trading 0.5% up at 7:00 am.
Oil
Yesterday, Brent oil prices increased 4.8% to US$48.47 per barrel, while WTI prices rose 4.6% to US$46.80 per barrel.
Headlines
Eurozone's GDP to grow 1.6% in 2016
As per an economic forecast jointly published by the French statistical office Insee, Italy's statistical agency Istat and the research institute Ifo, the Eurozone's economy is expected to expand 1.6% in 2016, faster than the 1.4% growth projected in April. Inflation is estimated to increase marginally during the rest of the year, taking the annual growth to 0.3%.
Company news
DekelOil Public (LON:DKL, 11.0p) - Buy
Bargain hunters looking for shares that have been hurt badly since the Brexit fallout, could do worse than look at DekelOil. In fact, far from being a casualty of the June 23rd vote, Dekel is a clear net winner of Sterling's rout given its earnings are in Euros. And in recent weeks, management has clearly engineered a significant enhancement to shareholder value backed by UK institutions at a price 17% above yesterday's closing. It agreed the acquisition of some 34.75% in CS DekelOil Siva Limited, the Group's already majority-owned joint venture having been canny enough to fix GBP/EUR at 1.30 with the seller. Post the general meeting of 17th June, DekelOil's Total stake rose to approximately 85.75% on the Project. The acquisition was funded via a £10.8 million capital raise by way of placing of new ordinary Shares to institutional and other investors. The Company also proposed a 10 for 1 share consolidation, which became effective on 21 June 2016. So right now DekelOil is sitting pretty. Current production numbers have increased over 30% for H1 2016 compared to H1 2015 and operations are cash positive. Indeed the Company has indicated that EBITDA for H1 2016 will be materially higher than H1 2015. With significant organic production growth to come over the next two years Ayenouan has the potential to be both highly cash generative and profitable for many years to come. In its first full year of operations, the 60 tonnes per hour extraction mill produced 35,000 tonnes of CPO, which generated revenues of €23.4 million and EBITDA of €3.7. With a capacity to produce 70,000 tonnes of palm oil per annum, there is room to double CPO production. Combined with the Group's recently commissioned kernel crushing plant, which is already producing value-added products, production is on course to substantially increase going forward. The significant growth in profitability means the Company can comfortably fund its scheduled debt repayments from operational cashflow and we expect the Company will announce further improved debt terms in the near future given its strengthened financial position. Importantly and as previously noted, DekelOil is a Brexit winner with the appreciation of the Euro against the Pound of over 10% post Brexit translating into higher Sterling earnings. Having positioned itself so, Beaufort believes the Group will be able to support its long-term operational expansion while producing sustainable surplus. As these ambitions are realised going forward, shareholders can expect to be rewarded by management implementing a formal dividend policy. Remembering that new institutions apparently entered the share capital during May's equity placing have yet to be declared, it will be interesting to see which new professional investors also recognise this potential. Beaufort retains its Buy recommendation on the shares.
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Beaufort Securities acts as a corporate broker to DekelOil Public plc
ASOS (LON:ASC, 4,473.0p) - Hold
ASOS released a trading update for the four months ended 30th June 2016. During the period, retail sales increased 30% y-o-y to £500.5m. UK retail sales rose 28% to £203.1m, and international sales soared 31% to £297.4m. Retail gross margin for the period dropped 180 basis points from the previous year, mainly due to sale phasing and planned price investment. Total active customers at the end of period increased 24% y-o-y to 12 million. ASOS closed its loss-making business (ASOS.cn) in China. ASOS expects full-year sales growth at the upper end of the 20–25% range. The company would declare its results for the year to 31st August 2016 on 18th October 2016.
Our view: ASOS delivered good performance in the four months to 30th June 2016. The company recorded robust growth across the UK and international markets. The European Union gained from continued price investments and proposition expansions, registering 32% sales growth. ASOS announced that it would shut down its operations in China and would cater to customers through ASOS.com instead of the local website. ASOS expects to book a one-off £10m cost arising from discontinuation, along with an operating loss of £4m, for the financial year to 31st August 2016. Moreover, ASOS continues to face stiff price competition from other online retailers. The outlook for the retail market and consumer confidence in the UK has taken a hit after the Brexit. Therefore, we would like to wait and assess the company's approach and performance in the near term and maintain a Hold rating for now.
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Galliford Try (LON:GFRD, 951.0p) - Buy
Galliford Try plc, the housebuilding and construction group, yesterday provided investors with an update on trading for the year ended 30 June 2016. Management noted that it expects to announce its results for the full year on 14 September. It went on to state that it expects to report record full year results, with profit before tax in line with management's expectations. It also detailed net debt at 30 June of £2 million (2015: net debt £17 million), with average debt in accordance with the Group's plan. Linden Homes recorded completions (including joint ventures) of 3,078 units (2015: 2,769 units) and record year-end sales carried forward position up 27% at £380 million (2015: £300 million). Its landbank stood at 11,500 plots (of 14,200 total Group) with land market continuing to be positive, while all were secured for the new financial year's production and 84% for FY 2018. The Galliford Try Partnerships held a strong contracting order book of £0.85 billion (2015: £0.825 billion), while Construction's own total of £3.5 billion (30 June 2015: £3.5 billion) remained predominantly in the public and regulated sectors. The Board also noted that Greg Fitzgerald has decided to step down as non-executive Chairman at the AGM on 11 November 2016. He will be succeeded as planned by Peter Ventress, currently non-executive Deputy Chairman and Senior Independent Director.
Our view: Another record year, with growth across all three businesses. And there appears still more to come. Linden Homes saw a strong average sales rates, achieving 0.68 per site per week in the second half from increased average outlets of 84, and enters the new financial year with record sales exchanged and reserved of £380 million. Galliford Try Partnerships has continued to grow its mixed tenure revenues, which is key to achieving the targets it has set for the business, and maintained a strong contracting order book. Construction continues to enjoy an excellent order book and has grown revenues in the year, with good margins on newer work, although the overall result is still constrained by legacy contracts. The fact that the shares were hit very hard on June 24th and still remain 40% below their price immediately prior to the vote, suggests a degree of over-reaction. Galliford, like just about all building and construction-related operators, notes "It is too early to predict specific effects on our markets, but the strength of underlying demand for new homes and the continuing availability of mortgage finance and Help-to-Buy give grounds for confidence in both Linden Homes and Galliford Try Partnerships". The CEO went on to note that the late-cycle nature and public sector focus are key advantages for the Group, with the order book already 82% secured for FY17. Based on the full year to June 2017E, Galliford shares are presently trading on price/book of just 0.95, a PER of 7.2x, while offering a yield of 10.4%. If the sector is, as Beaufort research suggested last week in the midst of a 'phony bear market', which has far too aggressively attacked share prices across the board without realistic consideration, then this is the time to pick up some bargains. Beaufort moves Galliford back to Buy.
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Hotel Chocolat (LON:HOTC, 178.0p) - Sell
Hotel Chocolat, a British manufacturer and omni-channel retailer of premium chocolate and cocoa-related products, yesterday provided its trading update for the 52 weeks ended 26 June 2016 ('FY2016'), ahead of its maiden preliminary results expected in mid-October 2016. During the period, revenue advanced by +12% to £92.6m, marginally ahead of market expectation. Within this, revenue from its digital retail channel expanded by +20%. On the operational front, the Group admitted on AIM in May 2016, continued its store opening programme and updated that its capital projects to increase its manufacturing capacity are on schedule and within budget. Post the period, the Group expect four additional stores to open later this year and said trading remain in line with management's expectations. Hotel Chocolat's Co-Founder & CEO, Angus Thirlwell commented "Hotel Chocolat has had a good start as a listed company, with pleasing growth slightly above expectations. We remain confident in our strategy. Our plans to invest further in our British chocolate manufacturing operations, in new stores, and in our digital offering are all progressing well."
Our view: Beaufort recommended participating in Hotel Chocolat's IPO back in May, which priced at 148p per share. This was because we saw sufficient 'momentum' at the time to achieve a successful IPO and to power its immediate after-market. In the same respect, however, we were less convinced regarding the Group's ability to sustain the premium 24x forward earnings multiple awarded to upon Admission. In the event the share price got carried away, peaking on second day post-IPO at 210p. Since then it has fallen back to 178p. The reality is that Hotel Chocolat has created a powerful brand, from which has developed a loyal and highly engaged customer base centred on its core competence in chocolate. But some investors have long memories. They recall another chocolatier, Thorntons, having a similar booming experience back in the 1990's; then, near-term success led to its dramatic over-expansion (600 national stores at one stage), followed by implosion and ultimately financial collapse. This is a stark reminder of just how painfully fickle the consumer can be, particularly when dealing with narrow product offerings and rapidly changing tastes. The reality is that having created outlets in the most obvious high-footfall, international and wealthy customer locations already, Hotel Chocolat is likely to find that going forward it is more difficult to sustain a profitable domestic expansion, while more intense competition will possibly limit international ambitions to all but the most costly locations, like airports and luxury malls. Post BREXIT, the share price has suffered, weighing the fact that the majority of its revenues are derived from the UK (Revenue Split: UK 92%, Europe 5%, Rest of the World 2%) while, the Group purchases ingredients in Euros which of course has risen by +10% against Sterling. More to the point, Hotel Chocolat's product will be impacted by any fall in consumer confidence, given that it has set its pricing at the premium end of such discretionary purchases. Based on GfK's early findings, the UK's consumer confidence index dropped to -9 in July from -1 in June, marking its highest monthly decline since 1994. With this warning and yesterday's news lacking any excitement ahead of release of its FY2016 figures, confirming only revenues roughly in line with consensus and no comfort regarding like-for-like sales growth, we were left unexcited. The Group will have to deliver more to sustain its current 2017E multiple of 25x. Beaufort recommends taking profits on the shares. Sell.
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Imperial Innovations (LON:IVO, 415.25p) - Hold
Imperial Innovations informed that its portfolio company Cell Medica (27% stake) acquired Switzerland-based Delenex Therapeutics AG. The financial details of the acquisition were not disclosed by Cell Medica.
Our view: This acquisition is a positive step for Cell Medica. Delenex is a clinical stage biopharmaceutical company focussed on developing antibody therapeutics. Last week, Imperial Innovations portfolio company Econic Technologies completed a £5m funding round. The funds would help Econic in progressing with its growth plans. However, last month, Imperial Innovations informed shareholders with a disappointing outcome, following clinical trials undertaken by Circassia Pharmaceuticals in which it has significant investments. The study failed to achieve the desired result, given that both the active treatment and placebo groups were not significantly different. Circassia would now review its full dataset to understand the detailed results and assess whether or not any other confounding factor affected the outcome, as well as the more general impact on its allergy portfolio. Imperial invested £25.5m in Circassia (9.3% stake), the group's largest asset with a net fair value of £77.5m (based on market capitalisation of £833.6m), standing at c.22% of Imperial's net portfolio value of £355.1m as of 31st January 2016. The market reacted negatively to the news, with Circassia's share price falling 67% that day. In light of the growing uncertainty in Imperial's portfolio company, we maintain a Hold rating on the stock.
Economic news
Germany CPI
Consumer prices in Germany increased 0.3% y-o-y in June, after a 0.1% increase in the previous month. This was in line with the market expectations. On m-o-m basis, consumer prices rose 0.1% in June, after a 0.3% increase in May.
US wholesale inventories
US wholesale inventories inched up 0.1% m-o-m in May, after gaining 0.7% in April, the US Commerce Department reported yesterday. The reading missed the market forecast of a 0.2% increase.