Markets
Europe
The FTSE-100 finished yesterday's session 0.39% higher at 6,750.43, whilst the FTSE AIM All-Share index closed 0.66% better-off at 751.23. In continental Europe, markets ended in the green, boosted by positive corporate earnings and better-than-expected economic data in the UK. Investors awaited the monetary policy decision of the US Fed. France's CAC 40 and Germany's DAX rose 1.2% and 0.7%, respectively.
Wall Street
Wall Street ended slightly lower after the US Fed decided to keep interest rates unchanged and informed near-term risks to the economic outlook have reduced. Weak oil prices and mixed corporate earnings releases impacted investor sentiment. The S&P 500 dropped 0.1%, with the consumer staples sector losing the most.
Asia
Equities are trading lower as investors digested the US Fed's policy decision and await results of Bank of Japan's meeting. The Nikkei 225 shed 1.1%, as a strong yen exerted pressure on export-driven stocks. The Hang Seng was trading 0.3% down at 7:00 am.
Oil
Yesterday, Brent oil prices fell 3.1% to US$43.47 per barrel, whereas WTI prices dropped 2.3% to US$41.92 per barrel.
Headlines
UK economic growth picks up in Q2 2016
UK's GDP grew 0.6% q-o-q in Q2 2016, as per preliminary estimates from the Office for National Statistics. This was faster than 0.5% forecast by economists and 0.4% in Q1 2016. The growth is mainly led by the biggest upturn in industrial production since 1999, particularly in car factories and pharmaceutical firms. On y-o-y basis, GDP increased 2.2% in Q2 2016 versus expectation of 2.1%.
Company news
ANGLE (LON:AGL, 67.0p) - Speculative Buy
ANGLE, the specialist medtech company, yesterday announced that it has initiated an ovarian cancer study in the United States, in addition to its recently opened European ovarian cancer study. The US study is being led by Dr Richard Moore at the University of Rochester Medical Center Wilmot Cancer Institute (New York State). Preparation and approvals for the US ovarian cancer study (known as the ANG-003 EMBER study) have been ongoing over recent months. The study has now been formally opened and the first few patients have already been recruited. The EMBER study is designed to enrol approximately 200 women with a diagnosed pelvic mass who are scheduled to undergo biopsy, laparotomy or laparoscopic surgery at the University of Rochester Medical Center. Enrolment will continue until a total of 50 evaluable women with a histopathologically confirmed malignancy have been identified. Blood from consenting patients will be processed using the Parsortix system to harvest any circulating tumour cells (CTCs) that may be present for evaluation. The Parsortix harvests from the women enrolled into the study will be evaluated for the presence of markers associated with malignancy in ovarian cancer cells. These results will then be compared with the histopathological diagnoses post-surgery to assess their association with whether the pelvic mass is benign or malignant. Additionally, a portion of the Parsortix harvest from each patient will be stored so that it can subsequently be used for verification of the molecular markers identified in ANGLE's European ovarian cancer study (ANG-001) as being optimal for the detection of ovarian cancer CTCs harvested by the Parsortix system.
Our view: There remains a large unmet medical need to accurately discriminate benign from malignant pelvic masses before surgery. The initiation of this US study reflects ANGLE's determination to secure substantial patient data from multiple locations as soon as possible to demonstrate the effectiveness of the ovarian clinical application and support regulatory approval. It builds upon ANGLE's formal collaborations with a world-class cancer centres from where key opinion leaders are working to identify applications with medical utility (clear benefit to patients) and to secure clinical data that demonstrates that utility in patient studies. Significantly in this respect, ANGLE differentiates itself from other medtech companies claiming similar abilities. In recent months, the medical world has become aware of a number of new, innovative, but early stage, non-invasive tests (be they derived from blood, saliva, sweat, antibodies etc.) that are apparently also capable of elementary and accurate detection of cancer. The fact remains, however, that detection in the form of a simple 'most probably yes' or 'most probably no' is, in fact, of only limited use unless the test is also capable of capturing or harvesting the same cancer cells for laboratory analysis. Without this, doctors will remain unable to ascertain key information, including identifying the cancer itself along with the extent to which it is aggressive or benign and therefore how to treat it. As such, ANGLE is the only such detection technology that is capable of offering such analysis and so, in Beaufort's opinion, is much more likely to become the globally recommended standard for hospitals and associated medical institutes. Recently, the Group secured major new funding from professional investors to progress clinical studies, which are expected to be sufficient to cover the next 2 years of planned clinical studies. Assuming all goes to plan, ongoing studies of ovarian cancer should have sufficiently concluded to permit first commercial sales to EU hospitals during 1H'2017. Beyond this, FDA authorisation for metastatic breast cancer is expected to be secured through substantive studies defined by three major US-based centres. Successful conclusion here, potentially offers scope for initial North American commercial sales for MBC later in 2017. Further indications, including ovarian and prostate will seek a similar route with the FDA. Importantly also, ANGLE management is already advanced in its discussions regarding necessary reimbursement codes for medical insurance in the States. Yesterday's news was a further important step for ANGLE and Beaufort retains its Speculative Buy recommendation on the shares.
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ARM Holdings (LON:ARM, 1,675.0p) - Hold
ARM Holdings declared its unaudited financial results for Q2 2016 and H1 2016 ended 30th June 2016. Revenue increased 17% y-o-y to £267.6m in Q2 2016 and 19% y-o-y to £544.1m in H1 2016. Operating margin declined to 35.4% in Q2 2016 from 40.4% in Q2 2015. Pre-tax profit increased 1% to £95.9m in Q2 2016, leading to EPS of 6.3p, up 17% y-o-y. Meanwhile, pre-tax profit increased 5% to £208.0m in H1 2016, leading to EPS of 12.8p, up 12% y-o-y. Net cash increased to £208.5m in H1 2016 from £161.8m in H1 2015. In Q2 2016, ARM Holdings acquired Apical, a global leader in imaging and embedded computer vision, for an upfront cash payment of £237.9m and a £13.6m contingent consideration. The company signed a partnership agreement with HOPU Investment Management, a Chinese private equity firm, to launch an industry fund focused on the Internet of things (IOT), smart devices, big data and cloud computing. ARM Holdings signed 25 processor licenses by a broad range of major technology companies. It received major strategic design contracts from NASA for embedded computing, Fujitsu and RIKEN for high-performance supercomputing, and other leading organisations. ARM Holdings signed five licences for ARM Cortex-A technology for high-performance and -efficiency app processors. Post the period, ARM Holdings signed an agreement on the terms for an all-cash acquisition of its entire issued and to-be-issued capital by Japan-based SoftBank. The consideration amount for the agreement is £24.3bn. ARM Holdings declared an interim dividend of 3.78p vis-à-vis 3.15p in the same period last year.
Our view: ARM Holdings delivered a good performance in H1 2016. During H1 2016, revenue growth was driven by a 23% rise in total technology royalty revenue to £288.0m. Technology licensing revenue registered a 16% increase to £212.5m. In Q2 2016, ARM Holdings shipped 3.6 billion chips, up 9% y-o-y. Demand for ARM Holdings' technology remained robust, evident from the number of licence agreements signed by the company in Q2 2016. Strong revenue and profit generation paved the way for high dividend. ARM Holdings undertook several initiatives, including a tie-up with HOPU Investment Management, to focus on IOT, smart devices, big data and cloud computing. The company's acquisition of Apical enhances its expertise in visual computing, a rapidly advancing field, which is enabling smart buildings, augmented reality, self-driving cars and advanced robotics. Beaufort regards the recent Recommended Offer from Softbank as the end-game for one of the UK's most successful technology stories of recent years. Appearing to have carefully engineered this all-cash take-over, with buy-in from both existing customer and regulator while also combining a pleasing sop for a sensitive UK government, suggests first class execution that is unlikely to challenge by other interested or envious peers. Accordingly, with little expected arbitrage now to go for, Beaufort suggests investors might like to put their gains to better effect elsewhere in the UK market where multiple post-Brexit opportunities presently exist. Beaufort reiterates its HOLD rating on the shares.
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Burford Capital (LON:BUR, 392.0p) - Buy
Burford Capital (Burford) declared its results for the half year ended 30th June 2016 (H1 2016). Income increased 88% y-o-y to US$76.2m and operating profit rose 117% to US$61.7m. Consequently, pre-tax profit soared 135% to US$55.8m leading to an EPS of 25.52 cents, 125% higher than H1 2015. Organic cash was reported at US$99m, including US$84m from litigation finance investments. Burford declared an interim dividend of 2.67 cents for H1 2016, payable on 28th October 2016, vis-à-vis 2.33 cents in H1 2015.
Our view: Burford registered a strong performance for H1 2016 despite volatility in financial markets. It registered a sharp rise in income, primarily due to a 110% y-o-y increase in income from litigation investment to US$64.4m. Its profit more than doubled in H1 2016, enabling it to increase returns to shareholders. Demand for Burford's capital remains solid, with new commitments to investments of US$200m (H1 2015: US$81m) at an average commitment level of more than US$10m. We are buoyed by Burford's performance in H1 2016 and look forward to further updates. Beaufort places a Buy recommendation on the stock.
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Dignity (LON:DTY, 2,682.0p) - Hold
Dignity, the UK provider of funeral related services, yesterday announced its interim results for the 26 week ended 24 June 2016 (H1 FY2016). During the period, revenue and operating profit declined by -0.4% and -6% to £158m and £54.7m, respectively, against comparable period (H1 FY2015). Pre-tax profit fell -7.8% to £41.5m, consequently, basic earnings per share reduced by -7.2% to 65.9p. The number of deaths was 302,000 compared to 317,000 in H1 FY2015. On the operational front, the Group acquired six funeral locations for £5.4m, of which, five satellite locations has already opened. Post the period, the Dignity has acquired one funeral location and opened three satellite locations. On top of this, the Group also announce the acquisition of five crematoria from Funeral Services Limited (trading as Co-op Funeralcare) for £43m on 31 May 2016. Acquisition of three freehold and one leasehold crematoria is now completed and the remaining leasehold crematoria is expected to complete during September 2016. The Board confirmed that the results are in line with its full year expectations. The Group proposed interim dividend of 7.85p per share, up +10%.
Our view: Dignity performed well during the first half of FY2016, delivering results slightly ahead of the Board and market's expectations. This was helped by improved Q2 underlying operating profits (excluding profit/loss on sale of fixed assets and external transaction costs) of £0.6m year-on-year. This H1 performance was delivered, despite its comparable period experienced an exceptional rise in death count versus the long term trends (being +7% higher than the comparative period, a highest rate of change in over 60 years). This was due to surge in mortality numbers driven by dementia and Alzheimer's related deaths and respiratory diseases (including flu) among older people (source: Office for National Statistics). Management has noted on a number of occasions already, however, that FY2016 will see the rate return to trend. Comparing the H1 FY2016 figures, on the other hand, with the more normalised numbers of H1 FY2014, underlying operating profit and underlying earnings per share was approximately +22% and +45% higher, respectively. The share price, however, given its spike of +9.5% since the outcome of Brexit vote, we now consider the shares correctly valued and Beaufort downgrades its recommendation from BUY to HOLD.
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James Cropper (LON:CRPR, 887.50p) - Buy
James Cropper released a trading update for the first quarter (Q1 2017). The company reported a 9% y-o-y rise in group sales. James Cropper's paper (Paper) and technical fibre product (TFP) divisions both registered sales growth (on a y-o-y basis). Developments at the company's new subsidiary James Cropper 3D Products remain on track. The first moulding machines were successfully commissioned during the period, and customer trials were undertaken. James Cropper's capital investment plans, and recruitment and R&D activities remain unchanged.
Our view: James Cropper has started the year on a strong note. Its performance in the first quarter was in line with expectations. The company's divisions registered positive growth during the period. Paper growth was largely due to the company's focus on high-value niche markets such as packaging, creative papers and digital. TFP's performance was driven by the energy, aerospace and industrial markets. According to James Cropper, its growth plans for the year would not be affected by Brexit. The company's exposure to currency has been alleviated by growing exports, which remain a key focus for the management. TFP plans to use its manufacturing capacity to increase sales into the aerospace, green technology and defence markets. The company would continue to focus on the development of its paper product portfolio in profitable niche markets. We are encouraged by James Cropper's performance in the first quarter and expect it to meet full-year results' expectations. Beaufort places a Buy recommendation a Buy rating on the stock.
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Taylor Wimpey (LON:TW., 154.60p) - Buy
Taylor Wimpey, the UK focused residential developer, yesterday announced its half year results for the period ended 3 July 2016 (H1 FY2016). During the period, total completions (excluding joint ventures) advanced by +3% to 6,019 homes and total average selling price expanded by +5.8% to c.£238k, against the comparable period (H1 FY2015). With margin maintained flat at 19.2%, pre-tax profit jumped +12% to £266.6m. Consequently, basic earnings per share improved by +13.8% to 6.6p. Net cash balance at the period-end stood at £116.7m (end-H1 FY2015: £87.6m), and return on net operating assets improved by +2% to 25.2%. The Group operate c.78k plots of short-term landbank where over 60% sourced from the strategic land pipeline. Post the period, as at 24 July 2016, the total forward sales (excluding joint ventures) grew by +11.6% to £2,237m. Taylor Wimpey's CEO, Pete Redfern commented "We have delivered a strong operational and financial performance with continued growth in profitability, building over 6,000 new homes across the country during the first half of 2016. We remain fully committed to the Dividend Policy we announced earlier this year which will deliver increased returns to shareholders." The Group declared interim dividend of 0.53p per share, up +8.2%, to be paid on 7 October 2016. The Group announced total dividend for FY2016 to be around £356m, or 10.91p per share.
Our view: As expected, Taylor Wimpey delivered strong performance for the H1 FY2016. While management chose to echo its peers, chorusing a verse of 'whilst it is still too early to assess the longer term impact of Brexit…', it nevertheless was able to confirm that the minor rise in the average cancellation rate that immediately followed the Referendum has since returned to the previous low level and that current trading remains in line with normal seasonal patterns. Whilst the ultra-premium housing market in central London continued to slow due to the impact of various government actions (including escalating Stamp Duties plus additional levies on international corporate purchases), the continuing supply-demand imbalance, low interest rates, government incentives and a 'business-as-usual' attitude by lenders has kept customer interest high elsewhere in the UK. As an experienced housebuilder who has been operating through a viciously cyclical sector, Taylor Wimpey has enhanced its net cash position by +33.2% to £116.7m in the H1 FY2016 year-on-year, and adopting 'selective land replacement' mode in the short term land market, maintaining short-term landbank between 75-80k plots. In FY2016, total dividend (including special dividends) of c.£356m (c.10.91p per share) will be paid to the shareholders, while in FY2017, the Board anticipates paying a total of £450m (including special dividends) or c.13.8p per share, up +26.5% versus FY2016, indicating a yield of 9% (based on a 154p share price). As previously announced, the Group remain fully committed to deliver increased returns to shareholders throughout the housing cycle, which reflects the Board's continuing confidence in its future prospects. In view of the apparent 'phoney bear market' that hit the housebuilder sector hard on immediate confirmation of Brexit, its lowly rating and good visibility still makes it an obvious choice for income investors. More specifically for Taylor Wimpey, an attractive current year dividend yield (7.1%), strong balance sheet and excellent order book with c.90% forward sold for FY2016, keeps the shares on Beaufort's BUY list, having upgraded the housebuilders back to overweight a month ago.
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Tullow Oil (LON:TLW, 204.80p) - Speculative Buy
Tullow's half year results were well flagged in Tullow's announcement on 30th June 2016 and reported in our Breakfast News on 1st July 2016. The first half profit after tax was $30 million. Lower revenues on prior year as a result of lower commodity prices and reduced Jubilee production, which is the subject of an insurance claim, were partially offset by significantly lower costs and write-offs. Net debt at 30 June 2016 was $4.7 billion with facility headroom and free cash of $1.0 billion. Additional headroom of $300m added through a successful Convertible Bond issue on 6 July, further diversifying sources of debt. Mark-to-market value of oil hedges of over $300 million at 30 June 2016; 38,500 bopd of second half 2016 oil production hedged at average floor price of $74/barrel. Importantly, the TEN Project is on schedule and on budget to deliver first oil in early August. TEN will increase Tullow's group net production by c. 60% when it reaches facility capacity around the end of 2016, enabling Tullow to deleverage organically. The Jubilee field's new operating procedures are working well with second half 2016 gross production expected to average 85,000 bopd. A project to spread moor the FPSO for the long term has commenced and insurers have been notified. East Africa upstream and pipeline projects in Kenya and Uganda moving towards FEED. Kenya Early Oil Pilot Scheme, with potential to deliver 2,000 bopd by the second half of 2017, being assessed with the Government of Kenya. The successful Kenya appraisal programme underpins estimated gross recoverable resource of up to 750mmbo. Exploration and appraisal programme to restart in the South Lokichar Basin in Q4 2016. New licences signed in H1 2016 in Zambia and Guyana; pre-drilling and scoping activities under evaluation in Suriname, Guyana, Jamaica, Uruguay and Namibia.
Our view: The start of production from the TEN field in early August will be transformational for the Group allowing Tullow to significantly increase its net production and begin the process of deleveraging its balance sheet. This project has remained on schedule and on budget since the day the Plan of Development was signed and demonstrates the Company's ability to deliver complex projects of this nature. The benefits of last year's cost-cutting programme are evident in the financial results, the significant TEN capital expenditure is largely complete and good progress has been made on the Jubilee Turret Project. Tullow is therefore well placed to move forward with a restructured and more efficient business that can deliver growth from its portfolio of high quality, low cost producing, development and exploration assets. We reiterate our Speculative Buy stance.