Markets
Europe
The FTSE-100 finished yesterday's session 0.21% higher at 6,724.03, whilst the FTSE AIM All-Share index closed 0.24% higher at 746.27. In continental Europe, markets ended in the green, led by positive corporate earnings releases. Investors await decisions on the monetary policy by central banks this week. Germany’s DAX and France’s CAC 40 rose 0.5% and 0.2%, respectively.
Wall Street
Wall Street remained broadly unchanged amid mixed corporate earnings released yesterday. Investors were cautious ahead of the Fed’s policy statement today. The S&P 500 ended broadly flat, with the industrials and materials sectors being top performers and the telecommunications sector losing the most.
Asia
Equities are trading mixed ahead of key central bank decisions and earnings reports due in Japan. The Nikkei 225 surged 1.7%, boosted by a weaker yen, after reports indicated that the government’s fiscal stimulus package may be increased to ¥27tn. The Hang Seng was trading 0.3% down at 7:00 am.
Oil
Yesterday, Brent oil prices gained 0.3% to US$44.87 per barrel, whereas WTI prices fell 0.5% to US$42.92 per barrel.
Headlines
Mortgage approvals in UK fall to 15-month low in June
As per the British Bankers’ Association, the number of mortgage approvals in the UK dropped to 40,103 in June from 41,842 in May, the lowest since March 2015. The value of net mortgage lending fell to £1.399bn in June from £1.665bn in May.
Company news
Harvest Minerals (LON:HMI, 4.88p) - Speculative Buy
Harvest published a maiden resource estimate for its Arapuá fertilizer project in Minas Gerais, Brazil. From approximately 3% of the known mineralisation on Harvest’s licences, consultants estimate indicated resources of 883kt at 4.21% K2O (potash) and 3.53% P2O5 (phosphate). The resource also includes other potentially valuable minerals including 6.34% CaO, 5.95% MgO and 35% SiO2. Although this is a small resource, Harvest’s immediate target is to develop a small scale 50kt per annum operation using a trial-mining licence or ‘GUIA’. The 883kt resource is more than sufficient and can be expanded if all goes well. The main objective is to establish a market for Arapuá’s multi-nutrient (mainly potash and phosphate) direct application product. Harvest has applied for the trial-mining permit, a scoping study is underway, and work has started on defining the initial product. Presumably this will include tests where the rock will be crushed to different sizes and applied to crops – much like the studies undertaken by Sirius Minerals.
Our view: Harvest Minerals’ Arapuá project could become a decent sized direct application fertilizer business. Although relatively low grade an Arapuá product would be a lower cost substitute to traditional fertilizers. In addition to cost advantages, the Arapuá rock is multi-nutrient containing potash, phosphate and secondary nutrients magnesium and calcium. At this stage there are several questions which need answering such as what price might an Arapuá product sell for, and how large is the market. Fortunately, Arapuá is located in a major agricultural belt in Brazil where large scale palm oil, coffee and sugar cane operations are obvious nearby markets. In terms of pricing and potential margins, the upcoming scoping study should provide some insight. In the meantime, we like the concept of a low capex, easy to mine direct application fertilizer product in Brazil, a country that currently imports most of its fertilizer requirements. Harvest only joined AIM in 4Q15, is a relatively unknown story, and its shares have effectively traded sideways since the start of the year. Although Arapuá is conceptual in nature, it has excellent potential and we recommend a speculative BUY.
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Beaufort Securities acts as corporate broker to Harvest Minerals
KEFI Minerals (LON:KEFI, 0.54p) – Speculative Buy
KEFI has raised £3.8m which net of costs and including its existing cash takes it cash position to c.£5.8m. This is enough money to relocate the affected Tulu Kapi communities and start some of the pre-mine earthworks. It will also pay for closing the mine financing and includes $600k of exploration costs. Although the Tulu Kapi financing isn't yet closed, all parties (involved in the senior debt) are advanced in their due diligence and internal processes, we fully expect financial close in 4Q16. This would mean mine construction proper starting this year or in January.
Our view: Tulu Kapi is fast approaching the construction stage. The senior debt providers and mining contractors long ago started spending their own money, acting like they know mine construction will be starting soon. The fact that the mining contractor Ausdrill took part in the £3.8m placing demonstrates this, plus it shows Ausdrill's confidence in its ability to successfully selectively mine the Tulu Kapi orebody. Financial close, selective mining and community relocation are probably the three main concerns about KEFI. We believe these risks are being dispelled. Also worth noting is Odey's involvement (now 29.5%) who are very supportive of any future equity requirements. We recommend a SPEC BUY.
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Beaufort Securities acts as corporate broker to KEFI Minerals plc
BP (LON:BP., 434.60p) - Buy
BP declared its results for Q2 2016 and H1 2016. Underlying replacement cost profit stood at US$720m for Q2 2016 compared with US$532m in Q1 2016 and US$1.31bn in Q2 2015. Underlying replacement cost profit for H1 2016 totalled US$1.25bn compared with US$3.89bn in H1 2015. The decline in cost profit is mainly due to the impact of lower oil and gas realisations on the upstream result. Net cash provided by operating activities was US$3.9bn for Q2 2016 and US$5.8bn for H1 2016 compared with US$6.3bn for Q2 2015 and US$8.1bn for H1 2015, respectively. Underlying operating cash flow for Q2 2016 before pre-tax Gulf of Mexico payments stood at US$5.5bn. Net debt at the end of the period stood at US$30.9bn compared with US$24.8bn at the end of H1 2015. Net debt ratio was 24.7% as at 30th June 2016 vis-à-vis 18.8% a year earlier. For H1 2016, capital expenditure on an accruals basis was US$8.1bn (organic capital expenditure was US$7.9bn) compared with US$9.1bn for the same period in 2015 (organic capital expenditure totalled US$8.9bn). Earlier this month, BP gave its final estimate of all costs related to the 2010 oil spill and informed that expected liabilities would total US$61.6bn. BP declared an interim dividend of 10 cents per ordinary share which is expected to be paid on 16th September 2016.
Our view: BP’s performance in H1 2016 was satisfactory. The company’s results were impacted by low oil prices and weak refining margins. Nonetheless, BP progressed well on restructuring and cost reduction plans, with the company reporting significant savings during the period. BP remains on track for the development of its next wave of material upstream projects. Market fundamentals continue to suggest that the combination of robust demand and weak supply growth would move global oil markets closer into balance by the end of the year. The Brent oil market price averaged US$46 per barrel in Q2 2016 compared with US$34 in Q1 2016 and US$62 in 2015. Meanwhile, BP merging its Norwegian business with that of Det Norske is a positive step. The combined industrial experience and strength of both companies would help Aker BP in growing into a huge exploration and production unit. As the company steadily improves cost, we expect it to adjust further within its financial frame despite low oil prices. In the light of this and the partial recovery in oil prices anticipated during H2 2016, we maintain a Buy recommendation on the shares.
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GKN, the global engineering group, yesterday announced results for the 6 months ended 30 June 2016 (H1 FY2016). During the period, on a statutory basis, sales advanced by +17% to £4,237m with +2% organically, while pre-tax profit declined -14% to £182m largely due to lower mark to market valuation of foreign exchange contracts. Earnings per share consequently fell by -4% to 9.5p. At the period end, the Group’s net debt stood at £918m (31 December 2015: £769m) and the total deficit on post-employment obligations amounted to £2,101m (31 December 2015: £1,558m). On the operational front, the Group said integration of Fokker Technologies acquired on 28 October 2015 is progressing well and remain on track. GKN is focused on cutting fixed costs, and set to achieve annualised savings of £30m from 2017, with a £35m one-off cost of optimisation programme charges in the H2. GKN Aerospace, the tier one supplier of airframe and engine structures, landing gear, electrical interconnection systems, transparencies and aftermarket services, saw organic growth of +2% with strong commercial sales growth, though margin was down by -1.5%. GKN Driveline, the supplier of automotive driveline systems and solutions, increased organic sales by +5% with flat margin. GKN Powder Metallurgy, the manufacturers of precision automotive sintered components, components for industrial and consumer applications and metal powder, witnessed organic sales growth in line with market, down -1%. GKN Land Systems, the supplier of power management products and services, also registered decline in organic sales growth by -6% due to challenging agricultural and construction equipment markets and the ceasing chassis contracts. GKN’s CEO, Nigel Stein commented “This is a good set of first half results with GKN continuing to make underlying progress in line with our expectations. GKN is in good shape with excellent technology and strong positions in the aerospace and automotive markets. We expect 2016 to be another year of growth, helped by currency translation and Fokker.” The Group declared interim dividend of 2.95p per share, up +2% which will be paid on 19 September 2016.
Our view: GKN performed in line with management’s expectation. The acquisition of Fokker Technologies turned fruitful, contributing £369m to sales and £28m to trading profits for the H1 FY2016. Although it has tightened the GKN Aerospace margin slightly, organic growth was achieved amid flat overall market growth. The Board also expect GKN Driveline and GKN Powder Metallurgy divisions continue to surpass the market growth. Given challenging agricultural and construction equipment markets for GKN Land Systems persists, we believe the Group is making a right decision to allocate its capital and focus towards improvement of productivity in their core aerospace and automotive divisions going forward. GKN sees limited impact from the Brexit in the medium term and confirmed it is expecting an “another year of growth” helped by Fokker Technologies and currency tailwinds in the FY2016. With these core divisions (91.8% of the H1 FY2016 sales) exhibiting satisfactory performances, we believe GNK remains well-positioned to achieve further growth in its global markets. Beaufort retain a Buy rating on the stock.
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Man Group (LON:EMG, 112.80p) - Hold
Man Group declared its interim results for the half year ended 30th June 2016 (H1 2016). Funds under management (FUM) dropped to US$76.4bn from US$78.7bn as at 31st December 2015. The group reported net inflows of US$1.0bn in H1 2016 compared with net outflows of US$2.6bn in H1 2015. Gross sales during the period slipped to US$9.8bn from US$10.5bn in H1 2015. Adjusted pre-tax profit slumped to US$98m from US$280m in H1 2015. Therefore, adjusted diluted EPS fell to 4.9 cents from 13.9 cents in H1 2015. The group had surplus regulatory capital of around US$470m after adjusting for the interim dividend, H1 2016 profits, and other reserve movements. Man Group declared an interim dividend of 4.5 cents per share (H1 2015: 5.4 cents per share). Luke Ellis would succeed Manny Roman as Chief Executive Officer with effect from 1st September 2016.
Our view: Man Group performed poorly in H1 2016, hurt by challenges in the global investment management industry. The group recorded a fall in FUM due to investment losses. Man Group’s pre-tax profit slumped to nearly a third compared to that in H1 2015, as performance fees took a hit from investment losses during a difficult period for hedge funds. Man Group lowered the dividends payable to shareholders owing to its weak results. The group plans to spend the surplus capital on acquisitions. The outlook for the industry remains bleak and especially vote on Brexit has added to the uncertainty and dampened investor confidence. In view of the difficult market conditions in the near term, we maintain a Hold rating on the stock.
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Provident Financial (LON:PFG, 2748.0p) - Hold
Provident Financial (Provident) declared its interim results for the six months ended 30th June 2016. During the period, revenues increased to £571.6m from £555.3m in H1 2015. Pre-tax profit increased 48.9% to £165.4m, leading to an EPS of 86.0p, 39.2% higher than that in H1 2015. Annualised return on assets improved 0.1% to 15.7%. Vanquis Bank generated a pre-tax profit of £99.8m in H1 2016 vis-à-vis £86.7m in H1 2015. The bank recorded growth in customer numbers and average receivables (up 6.5% and 12.3%, respectively) against unchanged credit standards. The Consumer Credit Division (CCD)’s pre-tax profit increased 14.5% to £43.5m. Moneybarn registered 44.7% increase in pre-tax profit to £13.6m. Provident’s total funding capacity stands at £458m. The company has declared an interim dividend of 43.2p compared with 39.2p in H1 2015.
Our view: Provident delivered excellent performance in H1 2016. All three divisions performed strongly, resulting in higher margins for Provident. Vanquis Bank continued to register good growth, supported by increased direct mailing activity that resulted in higher new booking volumes. CCD and Moneybarn also recorded increase in profit levels and improvement in annualized return on assets. Provident’s cash position is strong and remains fully funded until May 2018. The company made progress in developing the further lending and digital capability at Satsuma. However, we note that there appears to be a slowdown at Vanquis Bank, which has been the main driver of growth in recent years. Also, Brexit has a substantial impact on capital markets. Growing uncertainty in the UK might slow growth, and increase unemployment and inflation. These factors may negatively impact Provident’s business growth. In light of the mixed outlook going ahead, we maintain a Hold rating on the stock.
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SABMiller (LON:SAB, 4410.0p) - Hold
The Board of SABMiller notes the announcement by AB InBev that it has made a revised and final offer for the entire issued and to be issued share capital of SABMiller. The Board of SABMiller confirms that on 22 July 2016 its Chairman had a conversation with the Chairman of AB InBev about AB InBev's offer for SABMiller in light of recent exchange rate volatility and market movements. There was no discussion or agreement about the terms of yesterday's Revised Offer. The Revised Offer comprises an all-cash offer of GBP 45.00 per share in cash and a partial share alternative, available for approximately 41% of the SABMiller shares, consisting of 0.483969 unlisted shares and GBP 4.6588 in cash for each SABMiller share. The Board of SABMiller confirms that last week it engaged Centerview Partners to provide additional financial advice alongside that of its existing financial advisers. The Board will continue to consult with shareholders and will meet in due course formally to review, having regard to all facts and circumstances, the Revised Offer and a further announcement will be made thereafter.
Our view: It is our view that the offer is best accepted bearing in mind yesterday’s additional offer and so on balance we reduce our recommendation from BUY to HOLD, despite the positive trading statement last week. Indeed, there may be an advantage in selling if a profitable FTSE 350 with a decent yield appeals, especially those affected on the downside perceived to be a Brexit loser. Speak to your Broker who will be able to advise of a number of potential switches.