Markets
Europe
The FTSE-100 finished Friday's session 0.05% higher at 6,724.43, whilst the FTSE AIM All-Share index closed 0.22% better-off at 755.89. In continental Europe, markets ended in the green, fuelled by better-than-expected corporate earnings releases on Friday. Furthermore, rally in banking stocks boosted investor sentiment. Germany's DAX and France's CAC 40 advanced 0.6% and 0.4%, respectively.
Wall Street
Wall Street ended marginally higher, as investors shrugged off early losses following the release of weak GDP data in the US. Investors cheered positive corporate earnings releases by technology companies. The S&P 500 rose 0.2%, with telecommunications sector gaining the most. For the week, the markets closed 0.1% lower.
Asia
Equities are trading higher, as weak US economy data diminished the possibility of an interest rate hike. Investors digested poor manufacturing data released in China. The Nikkei 225 added 0.4%, and the Hang Seng was trading 1.5% up at 7:00 am.
Oil
On Friday, WTI prices increased 1.1% to US$41.60 per barrel, whereas Brent oil prices dropped 0.6% to US$42.46 per barrel.
Headlines
US economic growth decelerates in Q2 2016
As per the US Commerce Department, the US economy grew at 1.2% in Q2 2016, below the forecasts of 2.6%. Growth for Q1 2016 was revised down to 0.8% from 1.1%. Consumer spending grew at 4.2% in Q2 2016, the fastest since Q4 2014. However, business investment, which includes stock, supplies, equipment and buildings, fell 9.7% in Q2 2016.
Company news
International Consolidated Airlines (LON:IAG, 406.0p) - Buy
International Consolidated Airlines (IAG) declared results for the half year ended 30th June 2016 (H1 2016). During the period, revenue increased 4.1% y-o-y to €10.8bn, with passenger revenue recording revenue growth of 4.3%. Operating profit (including exceptional items) surged 42.2% to €789m. Consequently, pre-tax profit soared 47.8% to €688m, leading to an EPS of 26.8 cents compared with 15.8 cents in H1 2015. Cash and interest-bearing deposits rose to €6.6bn from €5.9bn as at 31st December 2015. Adjusted net debt fell 7.3% to €7.9bn from €8.5bn as at 31st December 2015. Adjusted gearing dropped 1% to 53% and adjusted net debt-to-EBITDAR ratio improved 0.2 to 1.7 times. Available seat kilometres (ASK million) increased 12.3% to 142,915. Seat factor gained 0.7 percentage points to 80.0%.
Our view: IAG performed strongly in H1 2016. The company recorded an increase in both revenue and profit margins despite a series of negative factors including terrorist attacks, the Brexit vote, operational disruption (including air traffic control industrial action) and adverse exchange rates. The company enhanced its operational performance and strengthened its balance sheet, with improved cash position, which remains well supported by the decreasing fuel unit costs (fell 29.8% for the year at a constant currency basis). IAG expects disruption costs of at least €80m from operational disruptions, primarily air traffic control strikes, in the second half. The company anticipates benefiting from currently planned cost initiatives from 2017. IAG has lowered planned capacity growth for H2 2016, and is currently reviewing capacity growth and capex for 2017. We note the difficult trading environment in the UK and Eurozone, but believe that IAG remains fundamentally strong to face the challenges and continue its growth momentum. Therefore, we maintain a Buy rating on the stock.
Click here to request a call back from a broker regarding this recommendation.
Pearson (LON:PSON, 882.0p) - Buy
Pearson declared results for the half year ended 30th June 2016 (H1 2016). Sales dropped 7% to £1,866m, with the North American division recording an 8% fall in sales to £1,164m. Operating loss widened to £286m from £129m in H1 2015, and loss before tax stood at £306m (H1 2015: £132m). Basic loss per share increased to 27.1p from 9.7p in H1 2015. Net debt decreased to £1,426m (H1 2015: £2,289m). On the operational front, the company made progress in simplification and change programmes announced on 21st January 2016. Pearson declared an interim dividend of 18p per share, in line with the previous year.
Our view: Pearson performed satisfactorily in H1 2016. As expected, the company recorded a fall in sales and widened losses. Pearson's sales were largely impacted due to expected declines in assessment revenue in the US and UK, which are weighted towards the first half of the year. Moreover, a change in the revenue model at Connections Education and the disposal of PowerSchool negatively impacted revenue. Nonetheless, Pearson is progressing well to simplify its business, reduce costs and position it for growth in major markets. The company informed that around 3,450 employees had already been notified of exit and it was on track to meet its £350m cost-cutting target by the end of next year. Some key changes include the creation of a global product organisation, further simplification of back-office functions such as technology and finance, and the scaling down of some of its direct delivery businesses. Pearson made investments in new digital products and services, including the New Student Experience for Wall Street English and its first online degree partnership in the UK. The company maintained its forecast for the current financial year, expecting adjusted operating profit before the costs of restructuring to be £580–620m and earnings per share to be 50–55p. In addition, if current exchange rates persist until the end of 2016, the earnings per share could increase by around 4p. Although Pearson still faces several challenges, including uncertainty around curriculum change, loss of testing contracts in the US and volatile demand in the company's fast-growing markets, we expect the company's performance to improve after the effects of the simplification plans and cost savings start. Therefore, we maintain a Buy rating on the stock.
Click here to request a call back from a broker regarding this recommendation.
Reckitt Benckiser (LON:RB., 7,322.0p) - Hold
Reckitt Benckiser ('Reckitt'), a multinational consumer goods company operating three main product categories; Health, Hygiene and Home, on Friday, provided its half year results for period ended 30 June 2016 (H1 2016). During the period, net revenue advanced +5% to £4,569m at actual exchange rate basis against the comparable period (H1 2015). On a constant exchange rate basis, net revenue climbed +4%, while on a like-for-like ('LFL') basis, it improved by +5%. Operating profit fell by -19% to £762m, due to the exceptional item charge of £319m (H1 2015: £14m). Pre-tax profit fell by -18.5% to £751m and consequently, basic earnings per share also contracted to 74.5p from 99p. On the operational front, LFL sales were positive across all geographical regions with +5% growth for the Group, driven by +9% increase in DvM (Africa, Middle East , Turkey, Asia and Latin America) region. From its product categories, Health division had witnessed +8% LFL growth, driven by a Powerbrands. Hygiene also registered good growth with LFL +5% as Dettol, one of the Powerbrands continues to perform well. Reckitt Benckiser's CEO, Rakesh Kapoor commented "Our strategic focus on structurally attractive health and hygiene categories and exciting innovation pipeline positions us well for another year of growth and margin expansion, despite the uncertain macro environment and softening consumer demand." The Group declared an interim dividend of 58.2p per share, up +16% to be paid on 29 September 2016.
Our view: Reckitt Benckiser reported a sharp fall in profit during the H1 due to an exceptional charge of £319m, of which, £300m was for compensation payments and other related costs for the health issues, including deaths caused by its humidifier steriliser product, Oxy, in Korea. Although it is worth noting that the product was withdrawn in 2011, and it was only distributed in Korea, the reputational damage in the region has been substantial, with a May edition of the Financial Times noting that Lotte Mart, one of the South Korea's largest discount chains, has suspended stocking entire ranges of Reckitt products. These exceptional charges have led Reckitt to reaffirming its full year LFL net revenue at the lower end of the +4% to +5% market range. Having said this, Reckitt's adjusted figures, which exclude exceptional items, remained strong with adjusted operating profit jumping by +13%. An improvement in adjusted operating margin by +1.8% to 23.7% was also achieved during the period, where Project Supercharge became fruitful and delivered additional cost savings. The Group has confirmed it expects further "moderate" margin expansion in H2. Though fundamentals remain encouraging, with the Group expected to see limited impact expected from Brexit, we believe current share price level, having been favoured as a defensive investments and spiking through our price target post the Brexit, now represents fair value. While awaiting for positive news, particularly should it face a more challenging macro environment and weakening consumer demand in certain key zones, Beaufort has taken the cautionary step of downgrading its rating from Buy to Hold.
Click here to request a call back from a broker regarding this recommendation.
UBM (LON:UBM, 667.50p) - Buy
UBM declared unaudited results for the half year ended 30th June 2016 (H1 2016). Revenue increased 8% to £380m and operating profit surged 43.9% to £70.8m. Consequently, pre-tax profit soared 47.6% to £51.8m, leading to a diluted EPS of 8.0p compared with 4.9p in H1 2015. Net debt at the end of period stood at £45m vis-à-vis £519.6m in H1 2015. Free cash flow stood at £81.6m and cash conversion was 114%. On the operational front, UBM completed the disposal of PR Newswire (PRN) and received £490m in proceeds. Post the completion of disposal, UBM paid £243.7m as special dividend to shareholders on 8th July 2016. The company invested £61.4m in acquisitions and announced the disposal of its Electronics Media portfolio. UBM declared an interim dividend of 5.4p (H1 2015: 5.3p), in line with the policy of interim dividend per share, representing 33% of prior year's final dividend per share.
Our view: UBM performed robustly in H1 2016 on both financial and operational fronts. The company reported an increase in both revenue and profit. The completion of disposal of PRN bodes well with the Events First strategy, following which over 80% of revenue is generated from Events. Proceeds from the sale would allow UBM to return capital to shareholders and invest in high-quality, accretive, bolt-on acquisitions for further growth opportunities. Additionally, UBM's investments and acquisitions were focused towards execution of the Events First strategy. The company's outlook for the year remains unchanged, as it expects minimal direct impact from Brexit and anticipates benefiting from a stronger dollar. UBM is one of Beaufort Securities share tips for 2016 and has performed well. Short term investors may wish to take advantage of the year-to date outperformance and lock in some profit. Speak to your broker for switch ideas. Long term investors we still retain our BUY recommendation.
Click here to request a call back from a broker regarding this recommendation.
Venture Life Group (LON:VLG, 55.50p) - Speculative Buy
Venture Life Group, an international consumer self-care company focused on developing, manufacturing and commercialising products for the ageing population, on Friday, provided a pre-close trading update for the 6 months ending 31 December 2016 (H1 FY2016). During the period, revenues are expected to advance by +40% to £6.1m against comparable period (H1 FY2015). The surge in revenue was primary due to the inclusion of 4 months revenues from Periproducts Limited, an oral care products company acquired on 4 March 2016. On the operational front, the Group strengthened its order book, markedly ahead of the comparable period and has already concluded three long-term international product distribution deals for the UltraDEX fresh breath brand. The Group's own brand portfolio also made a good progress, having concluded two new long-term distribution deals for the Benecol, once-a-day sachet product, and has signed further distribution deals in its Brands business. Venture Life has also signed an agreement to develop and manufacture a number of products for the Italian pharmaceutical company, Menarini Farmaceutica Internazionale Srl.
Our view: Venture Life's trading update reflects benefits from the acquisition of Periproducts, which added three long-term international product distribution deals, including Spain, the Group's priority market. This demonstrated strong demand for the oral care products, such as premium alcohol-free mouthwash, and toothpastes. Periproducts' UltraDEX product range are patent protected and clinically demonstrated for effective treatment of bad breath, remineralising and whitening teeth and killing bacteria that leads to plaque. It is effective in the treatment of tooth decay and gum disease. We expect UltraDEX to further secure international long-term distribution deals in coming months. With its own brand making good progress and signing development and manufacturing deals, such as the one in Italy, the Company continues to demonstrate its product and growth potential. Beaufort reiterates its Speculative Buy on the stock.