Markets
Europe
The FTSE-100 finished yesterday's session 0.15% lower at 6,670.40, whilst the FTSE AIM All-Share index closed 0.44% up at 724.56. In continental Europe, markets ended mixed, as investors await the Bank of England's monetary policy decision. Investors remained concerned over ongoing uncertainty in the Eurozone. France's CAC 40 rose 0.1%, whereas Germany's DAX fell 0.3%.
Wall Street
Wall Street ended broadly flat amid a sharp drop in oil prices, as US crude inventories fell lower than expected based on the data released by the Energy Information Administration. The S&P 500 closed flat in yesterday's trading session.
Asia
Equities are trading higher, as investors await the Bank of England's meeting today and China's GDP data to be released on Friday. The Nikkei 225 rose 1.0% amid speculations of additional monetary easing by the Bank of Japan. The Hang Seng was trading 0.1% up at 7:00 am.
Oil
Yesterday, Brent oil prices decreased 4.6% to US$46.26 per barrel, while WTI prices declined 4.4% to US$44.75 per barrel.
Headlines
House price balance in UK falls in June
As per the Royal Institution of Chartered Surveyors (RICS), the house price balance in the UK dropped to 16% in June from 19% in May. The decrease in the house price balance was mainly due to the UK's decision to leave the European Union.
Japan cuts growth forecast for 2016
Japan's government reduced the country's GDP growth forecast to 0.9% for 2016 from 1.7%. Inflation is expected to increase 0.4% from the earlier estimate of 1.2%. Prime Minister Shinzo Abe stated the government is preparing a stimulus package of nearly US$192bn.
Company news
Barratt Developments (LON:BDEV, 404.80p) - Buy
Barratt Development, the largest UK housebuilder, yesterday provided trading statement for the year ended 30 June 2016 ('FY2016'). During the period, Total completions (including joint ventures) advanced by +5.3% to 17,319 and total average selling price expanded by +10.6% to c.£260k (within this, private average selling price rose +10.5%), against the comparable period (FY2015'). Consequently, pre-tax profit jumped around +20% to c.£680m. Net cash balance at the year-end stood at £590m (end FY2015: £186.5m), and ROCE (return on capital employed) improved by +3% to c.27%. Total forward sales (including joint ventures) fell by -0.5% to £1,762.0m, or from 8,777 to 8,724 plots. Barratt Developments' CEO, David Thomas commented "We have delivered another strong performance for the year. The disciplined growth in completion volumes reflects the strength of our sector leading build and sales teams. With a strong balance sheet and forward order book, and industry leading quality and customer service, we remain confident in the positive fundamentals of both the housing sector and our business." The Group will announce its annual result on Wednesday 7 September 2016.
Our view: Given the number of its UK peers that have also recently provided trading updates, Barratt's own confident, optimistic update, qualified with the same old song of 'we'll wait and see' provided little opportunity for surprise. Of course you know the chorus by now, it goes something like, the fundamentals presently remain excellent with high demand from home buyers, good availability of affordable mortgages, good land supply, inherent shortages and cross party political support to build more homes across the UK. The Group also knows it operates in a viciously cyclical sector, but has learnt from past mistakes and presently sits on a strong balance sheet with c.£590m net cash and an attractive forward sales position. The slight fall in forward sales was due to less contribution from its joint ventures which, when excluded, increased by +18.7% to £1,607.2m year-on-year. Visibility remains good enough to confirm the Group's three year dividend plan, originally announced in September 2014, that will deliver one third of earnings and a special dividend of £400m in aggregate (made or planned) of £100m, £125m and £175m to November 2017. It also outlined contingency plans to be effected by taking appropriate measure whenever necessary, thereby providing confidence in management's market scrutiny. But the equity market can sometimes be a cruel place; housebuilders have been one of Brexit's most obvious casualties. Barratt Development, for example, now trade some -40% below its 52-week high. So the real question must be, whether or not the sector is already wearing a worst case scenario? Does Barratt's 2017E price/book multiple of just 1.2x along with a dividend yield of 8.3%, for example, now represent good value? More to the point, the true extent and magnitude of any possible future downturn will only likely be felt upon completion of the UK's divorce proceedings, effected by Article 50, in two or more years' time. And probably only then if the interest-rate cycle swings sharply upward in tandem as well. Indeed, whether the UK separation from the EU does eventually completes or, indeed, the electorate find themselves being offered a different alternative, only time will tell. Which all suggests the housebuilder share prices may have found themselves just too deeply in the clutches of a reactive, 'phoney' bear market. Investors have just started to see through this, choosing to gently to buy back the shares for income while playing the waiting game. Sure a correction should be factored in, but right now they are discounting calamity. Beaufort recommends buying Barratt Development on this basis, although our analysis suggests similar value can also be found through Persimmon, Berkeley and Taylor Wimpey.
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Burberry (LON:BRBY, 1,279.0p) - Hold
Burberry, an international luxury fashion and beauty brand, yesterday provided its trading update for the three months to 30 June 2016 ('Q1 FY2017'). During the period, revenue remain flat at £423m on a reported currency basis (or +4% at constant currency basis). Comparable sales fell by -3% overall with Asia driven negatively by a double-digit percentage decline in Hong Kong. The rest of Asia (excluding Hong Kong and Macau) and UK remain positive, while Continental Europe and Americas experienced double-digit percentage fall in sales to travelling luxury customers. On the operational front, the Group has noted strong digital growth in all regions with nearly 60% of its traffic to the site now through mobile device. For the FY2017 outlook, the management said they expect to open 15 new mainline stores, similar number of closures with net new space likely to contribute low single-digit percentage growth to total retail revenue. Total wholesale revenue in H1 FY2017 now expected to fall over -10% year-on-year at constant exchange rates and licencing revenue decline by -£20m at constant currency basis due to expiry of Japanese Burberry licences. Favourable foreign exchange rate is expected to add about £90m to FY2017 adjusted retail/wholesale profit at a reported currency basis. The Group also noted that the adjusted pre-tax profit to be weighted towards the second half. Burberry will commence its previously announced share buyback programme of up to £150m this year.
Our view: Burberry delivered a resilient performance for the first quarter of FY2017, with revenues at constant currency improving by +4%. The Group also confirmed that it will commence £150m share buyback programme this year. Beyond this, other than the foreign currency tailwinds, the performance was heavily impacted by a 'challenging external environment'. Underlying cost inflation pressures persist and wholesale revenues, particularly in the US, became more cautious. The macroeconomic environment remains difficult, with the luxury market expected to grow on average by a low single-digit annual percentage at constant exchange rates over the next five years. In mainland China, the largest market for Burberry within the country, comparable sales in Q1 were flat, impacted by the evolution of the store portfolio, losing a net five stores (opening three and closing eight) during FY2016. In FY2017, Burberry planning to open a net three stores in China, as majority of luxury sector growth is still expected to come from new and existing Chinese consumers, both while travelling and at home. We believe Burberry is moving in the right direction in the face of difficult macroeconomic trends, focusing on Chinese customers while enhancing digital activities and adapting itself to changing customer behaviours. UK, on the other hand, comparable sales in Q1 grew by a mid-single digit percentage. We expect this growth to continue as weaker Sterling is likely to attract more foreign customers. Having said this, post the Brexit, 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, which is likely to partially offset some of these gains. Although weaker Sterling also created positive translation for the Group, we would like to see more evidence of the positive effect of its strategy and recent change in new leadership roles. Beaufort reiterates its Hold rating on the shares.
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Motif Bio (LON:MTFB, 49.25p) - Speculative Buy
Motif Bio, the clinical-stage biopharmaceutical company engaged in the research and development of novel antibiotics, yesterday announced it has filed a registration statement on Form F-1 with the SEC as part of the Company's plan to conduct the Proposed US Offering. An extract from the Form F-1 also details unaudited financial information for the company covering the past three months. The exact timing of the Proposed US Offering, the number of, and the price range for the American Depositary Shares ('ADSs') to be offered and sold have not been determined. It remains subject to the SEC satisfactorily completing its review process, and will be subject to market and other conditions. The Company has applied to list the ADSs on NASDAQ and application will also be made to the London Stock Exchange for the proposed US Offering Shares to also be admitted to trading on AIM. Importantly, existing Shareholder Invesco Asset Management Limited, which beneficially owns approximately 25% of the Existing Ordinary Shares, has indicated an interest in participating in the proposed US Offering. Assuming this amounts to US$35 million, Invesco has indicated an interest in purchasing up to an aggregate of US$8.89 million of ADSs in the Proposed US Offering at the public offering price per ADS. Management has indicated that the first US$35 million of the proposed Offer will be used to fund the expenses to be incurred in completing the two Phase III clinical trials of iclaprim for the treatment of ABSSSI; prepare a Phase III clinical trial of iclaprim for the treatment of HABP, including VABP; and fund working capital, general and administrative expenses, research and development expenses, and other general corporate purposes. If more than US$35 million is raised, the Company intends to use the additional proceeds to initiate dosing of the first patients in the INSPIRE Phase III clinical trial. It went on to note that the Company will require further capital in order to complete the Phase III HABP trial and the Board will continue to explore further funding options, including the issuance of additional securities as well as strategic partnerships with other pharmaceutical companies and non-dilutive government funding from grants. A General Meeting for shareholders to vote on the associated resolutions is scheduled for 1st August 2016.
Our view: This is the important news we have been waiting for. Not a total surprise, but still very comforting to know the Company has sufficient support and buy-in from US investors to ensure it will achieve a NASDAQ quotation. While a raise in the range US$35 to US$55 million will not be enough to fully fund the INSPIRE Phase III clinical trials as well, a variety of options should become available in due course. With its exceptional safety and efficacy characteristics, iclaprim is set to achieve first commercialisation (ABSSSI) during 2018, following which a range of further indications (starting with HABP) will be delivered from this platform molecule. Given the urgent and global need for new antibiotic treatment, total annual sales potential can realistically be expected to run into several billions of US$. This might seem to be a dramatic claim, but elementary analysis of the existing North American market bears it out. If one were to consider, for example, just the 3m US patients suffering from skin cancer, while recognising that around 25% of these also suffer from kidney or diabetes-related conditions for which obvious peer drug, Vancomycin, has required renal impairment dose adjustment, the immediate opportunity for iclaprim (being a bactericide) is in excess of US$2bn (based on expected treatment cost of US$3000/day). The potential is truly enormous. More immediately, however, what of today's proposal for a NASDAQ listing? Not only will it provide the next, all important, source of development funding, but also introduce a new realm of specialist US investors who are prepared to much more realistically value such early stage biotech. Take Paratek Pharmaceuticals , for example. It is a near-identical stage antibiotic development company, yet presently sustains a valuation over four-times that of Motif. Realistically, this alone should power quite a dramatic re-rating on achieving the North American listing, which might be expected to take place during September or October. Beyond this, considering the obvious global sales potential for icalprim, given that Motif management are already undertaking drug positioning assessments of US hospitals while also discussing non-US distribution partnerships with Big Pharma, a valuation in excess of US$1bn being achieved within 24 months is by no means unrealistic. Motif Bio remains on Beaufort's Speculative Buy list and remains one of our key stock picks for 2016.
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Poundland (LON:PLND, 220.75p) - Sell
The Boards of Steinhoff International Holdings N.V. and Poundland Group PLC yesterday confirmed that they have reached agreement on the terms of a recommended cash offer. Under these, 220 pence in cash will be paid for each Poundland share while holders will also receive the final dividend of two pence per share announced 16 June 2016, which will be paid on 23 September 2016 to names on the register at the close of business on 9 September 2016. The Offer values Poundland at approximately £597 million on a fully diluted basis and represents a 40.3% premium to the closing price of 158.25 pence on 13 June 2016. Poundland directors, holding approximately 5.5% of the share capital, intend to recommend unanimously that Poundland shareholders vote in favour of the Scheme at the Court Meeting and the resolutions to be proposed at the General Meeting. The scheme will be subject to gaining 75% approval; notice and timing of same will published shortly.
Our view: One thing is for sure – the next three years for Poundland will not be as exciting as the three just passed. Indeed, the UK poundshop 'party' now appears to be drawing to a close; 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. Equity holders will therefore be relieved to get away with a clean break. And given that management have now also donated their own holdings, Steinhoff's equity pot is already close to a blocking minority, which means there is just about nothing to stop it completing on the terms and conditions outlined. Warburg Pincus originally floated Poundland on the London Stock Exchange for 300p per share in early 2014; right now a 220p is as good as you could hope for. Beaufort recommends shareholders accept the cash offer, although given that the equity presently offer minimal arbitrage and that there are now many post-Brexit trading opportunities available in the secondary market, it might be good for holders to sell out right now and put the funds to better use elsewhere.
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Speedy Hire (LON:SDY, 33.50p) - Hold
Speedy Hire (Speedy) provided a trading update for the quarter ended 30th June 2016. Revenue for the period was slightly ahead compared with the same period last year. Utilisation rates increased to 50% by the end of the period. Overhead costs were substantially lower vis-à-vis last year. Net debt as at 30th June 2016 was lower than that in the same period last year. The company informed that it has retained several major framework contracts since the start of the current financial year.
Our view: Speedy is the UK's leading tools, equipment and plant hire services company. It operates across the construction, infrastructure and industrial markets. Speedy had a good start to the year with higher revenue, lower overhead costs and retention of contracts. The company's Board expects full-year results to be slightly better than anticipated previously. Until date, the Brexit has not affected Speedy's trading. The reality, however, is that dealing with larger scale infrastructural and commercial property development the Company must be considered vulnerable to both slowing, possibly recessionary, UK economy and reduced foreign direct investment. We prefer to monitor Speedy's performance over the near term and maintain a Hold rating for now.
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JD Wetherspoon (LON:JDW, 753.0p) - Hold
JD Wetherspoon (Wetherspoon) released a pre-close trading update for the financial year to 24th July 2016 (FY 2016). For the 11 weeks to 10th July 2016, sales increased 3.8%, with like-for-like (LFL) sales growth of 4.0%. For the year to date, sales rose 5.5%, with LFL sales growth of 3.4%. The operating margin before exceptional items and before a £3.8m gain on property for FY 2016 is expected to be 6.8% compared with 7.4% in the previous year. During FY 2016, the company opened 13 new pubs, sold 29 and closed 11 pubs. Net debt at the end of the period is expected to be £670m. Wetherspoon bought back 5.7 million shares for a cost of £39m, since the beginning of the financial year. The company would announce the preliminary results on 9th September 2016.
Our view: Wetherspoon has performed well in FY 2016, recording good sales and LFL sales growth. The company continued with its expansion plans and expects to open 16 pubs this financial year. Nonetheless, Wetherspoon's operating margin is expected to be lower vis-à-vis last year's. The company expects around £13m of exceptional, non-cash losses, mainly associated with pub disposal and closure. Wetherspoon expects an improvement in the UK's prospects after the vote to leave the European Union. However, we believe that the company's post-Brexit performance would be impacted due to the negative influence on consumer confidence and spending. In view of the mixed outlook going forward, we maintain a Hold rating on the stock.