Markets
Europe
The FTSE-100 finished yesterday's session 0.45% lower at 6,693.95, whilst the FTSE AIM All-Share index closed 0.35% better-off at 758.56. In continental Europe, markets ended in the red, as investors digested results of stress tests of European banks. Poor economic data released in the Eurozone and mixed corporate earnings releases dented investor confidence. France's CAC 40 and Germany's DAX shed 0.7% and 0.1%, respectively.
Wall Street
Wall Street ended marginally lower amid sharp fall in oil prices. In addition, weak manufacturing data released in the US impacted investor sentiment. The S&P 500 fell 0.1%, with the energy sector losing the most.
Asia
Equities are trading lower, tracking the losses in global markets. Investors remained cautious in the wake of weak oil prices and central bank's decision on interest rates. The Nikkei 225 plunged 1.5%, ahead of the announcement of the government's fiscal stimulus plans. The Hang Seng remained closed due to a typhoon warning issued by the Hong Kong Observatory.
Oil
Yesterday, WTI prices declined 3.7% to US$40.06 per barrel, while Brent oil prices dropped 0.8% to US$42.14 per barrel.
Headlines
UK factory output falls sharply in July
As per Markit, UK's manufacturing PMI plunged to 48.2 in July from 52.4 in June, marking the lowest reading since February 2013. Domestic demand remained weak due to pre and post-Brexit uncertainty. In addition, a weak order book and rise in cost inflation indicate further near-term concerns for manufacturers.
Company news
Acacia Mining (LON:ACA, 578.0p) - Buy
Acacia has announced that it has continued to enhance and expand its exploration portfolio through an agreement to accelerate the earn-in on the West Kenya Joint Venture licences in Kenya. Acacia has agreed to increase its ownership from 51% to 100% in the two licences covering the majority of West Kenya project area for a consideration of US$5 million. Following the completion of the agreement Acacia has full exposure to an exciting and highly prospective land package in Kenya, including the most advanced project, the Liranda Corridor. Acacia continues to intersect high- grade gold zones at the Bushiangala and Acacia prospects along the Liranda Corridor where drilling is indicating the potential for a new gold camp. As disclosed in Acacia's 2016 Interim Results on the 22nd July, the Company has continued to drill test prospects within the Liranda Corridor, located in the northeast of the licence area. Acacia is approximately 30% of the way through a 40,000 metre drilling programme to test the structural orientation and continuity of high-grade gold mineralisation encountered on the Acacia and Bushiangala Prospects. The programme, if successful, aims to allow for the calculation of an initial inferred resource by early 2017.
Our view: We are encouraged by Acacia's continued exploration success in Kenya. The Company's systematic approach to exploration and drill targeting, as well as taking the decision to drill deeper holes early has resulted in the potential for an exciting new discovery. As a result Acacia has moved to consolidate its position in the project at this stage to ensure the shareholders will be able to fully benefit if the project continues to progress. Whilst it is in the early stage, and with a relatively small investment, we look to 2017 for an inferred resource, which could lead to a resource potentially worthy of future development. We retain our Buy stance.
Click here to request a call back from a broker regarding this recommendation.
Burberry (LON:BRBY, 1,304.0p) - Hold
Burberry acquired the remaining 15% economic interest in its China business held by Sparkle Roll Holdings Limited for £54m. The acquisition gives Burberry 100% economic interest in its business in China.
Our view: Burberry acquiring 100% interest in its Chinese business is a positive development. Burberry delivered a resilient performance for the first quarter of FY 2017, with revenues at constant currency improving by +4%. The group also confirmed that it will commence a £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, Burberry's largest market 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) in FY 2016. In FY 2017, Burberry plans to open a net three stores in China, as most of the 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 amid difficult macroeconomic trends, focusing on Chinese customers while enhancing digital activities and adapting itself to changing customer behaviour. On the other hand, comparable sales in the UK grew by a mid-single digit percentage in Q1. We expect this growth to continue as weaker Sterling is likely to attract more foreign customers. Having said this, following Brexit, based on GfK's early findings, the UK's consumer confidence index dropped to -12 in July from -1 in June, its highest monthly decline since 1990; this 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. We maintain a Hold rating on the stock.
Click here to request a call back from a broker regarding this recommendation.
GlaxoSmithKline (LON:GSK, 1,700.50p) - Buy
GlaxoSmithKline signed an agreement with Verily Life Sciences LLC (formerly Google Life Sciences), an Alphabet company, to form Galvani Bioelectronics (Galvani) to enable the research, development and commercialisation of bioelectronic medicines. GSK and Verily Life Sciences would hold a 55% and 45% interest, respectively, in Galvani. The new company would be headquartered in the UK. GSK and Verily Life Sciences would invest up to £540m in Galvani over seven years, subject to the successful completion of various discovery and development milestones.
Our view: The partnership to form Galvani is in line with GSK's plan to focus on bioelectronics. Bioelectronics medicine is a new scientific field that aims to mitigate a wide range of chronic diseases using miniaturised, implantable devices that can modify electrical signals that pass along nerves in the body, including irregular or altered impulses that occur in many illnesses. The agreement brings together health and technology firms to develop miniaturised, precision electrical therapies. Galvani would benefit from GSK's world-class drug discovery and development expertise as well as deep understanding of disease biology. It would also benefit from Verily's world-leading technical expertise in the miniaturisation of low-power electronics, device development, data analytics and software development for clinical application. Galvani would initially focus on establishing clinical proofs of concept in inflammatory, metabolic and endocrine disorders, including type two diabetes. We believe the formation of Galvani would accelerate GSK's progress in the bioelectronics field. In light of the above argument, we maintain a Buy rating on the stock.
Click here to request a call back from a broker regarding this recommendation.
Intertek (LON:ITRK, 3,545.0p) - Sell
Intertek, a global leading Total Quality Assurance provider, yesterday announced its results for the 6 months ended 1 August 2016 (H1 FY2016). During the period, revenue advanced by +13.6% to £1,203.9m while organic revenue grew by +3.1% at actual and +0.5% at constant rates against comparable period (H1 FY2015). Operating Margin fell by -1% and pre-tax profit increased by +7.3% to £149.2m. Consequently, basic earnings per share rose by +16.7 to 70.7p. Cashflow from operations fell to £145.8m from £163.6m, cash and cash equivalent at the period end was £159.3m and net debt stood at £887.2m (H1 FY2015: £268.1m). On the operational front, the Group completed one acquisition and invested £48.7m in capital investment. Products division (H1 FY2016 Revenue: 56.3%) increased revenue by +22.3% at constant rates with organic revenue growth of +5.6%. Trade division (H1 FY2016 Revenue: 22.6%) saw revenue growth of +1.1% at both aonstant rates and organic basis. Resources division's (H1 FY2016 Revenue: 21.1%) revenue declined by -4.2% in constant rates and -11% in organic basis. Intertek's CEO, André Lacroix commented "The Group has delivered double digit revenue and earnings growth leveraging our high margin and strongly cash generative earnings model. We have announced an interim dividend of 19.4p up 14.1% year on year, in line with our progressive dividend policy. We are on track to deliver our full year targets." The Group declared half year dividend of 19.4p per share, up +14.1% which will be paid on 14 October 2016.
Our view: Intertek confirmed that it is set to achieve "robust full year revenue growth at constant currency" in line with its previous guidance. The Group noted that it does not expect Brexit to have a significant impact on future growth and, to date, has instead benefitted from the weaker Sterling against most of its international trading currencies. It is true that we consider Intertek to be one of the FTSE100's Brexit winners, give that 92% of the revenue in FY2015 were derived outside the UK. Although the double-digit financial performance appears good on first sight, breaking it down into constituents however, +10.1% of the +13.6% revenue growth was derived from acquisitions while 3% came from foreign exchange tailwinds, leaving only +0.5% in the form of organic revenue growth. Given the +11% share price surged since the Brexit vote, we considered they price in the Group's recent good fortune, while a narrowing of operating margin, higher net debt and slower rate of organic growth is not. We accept that the global quality assurance industry (valued at US$250bn by the Group) creates strong business foundations, driven by increasing demand for higher quality and more sustainable products, needing to incorporate changing regulations, technological innovations, more complex supply chains, global trade flows as well as an increased focus on risk management. Yet the Resources division, particularly the Industry Services business will continue to face severe challenges from lower price of oil at least in the short-term and will likely be further impacted should the slowdown being witnessed by the major global economies compound. The shares currently traded at 21x of the FY2017 earnings which, consideration of recent share price performance is now probably asking too much. Accordingly, we recommend shareholders to lock in this performance while awaiting a better macroeconomic background. Beaufort downgraded its rating from Hold to Sell.
Click here to request a call back from a broker regarding this recommendation.
Lloyds Banking Group (LON:LLOY, 53.25p) - Buy
Lloyds Banking Group (Lloyds) noted the announcement made by the European Banking Authority (EBA) regarding the results of the 2016 EBA EU-wide stress test. The test does not contain a pass/fail threshold but is designed to be used as an input in the supervisory review process by assessing banks' ability to meet applicable capital requirements under stressed conditions. Lloyds' estimated CET1 ratio, using the CRDIV transitional rules as implemented in the UK by the PRA, starts at a pro-forma CET1 ratio of 13.0% as at December 2015. As per EBA's adverse scenario the ratio is forecasted at 10.1% as at December 2018. Lloyds' result on a fully loaded basis remains a CET1 ratio of 10.1% in 2018. The group's fully loaded leverage ratio moved from 5.2% to 4.6%. Lloyds would declare the PRA stress test results later this year.
Our view: The aforementioned EBA stress test results underpin Lloyds' strong capital and balance sheet position. The results are significantly higher than the group's minimum capital requirements. The results are mainly due to the group's de-risking measures. Last week, Lloyds reported a solid performance in the first half with robust underlying profit, a doubling of statutory profit and strong capital generation, along with good progress in its strategic initiatives. We are encouraged by Lloyds' performance in H1 2016 and positive results from the stress test. Therefore, we maintain a Buy rating on the stock.
Click here to request a call back from a broker regarding this recommendation.
Sierra Rutile (LON:SRX, 34.5p) - Under Review
The board of Sierra Rutile has recommend a 36p cash offer from Iluka Resources, the largest mineral sands company in the world, based in Australia. The acquisition requires >50% voting in favour and has received irrevocables from over 60%. Iluka has done its due diligence, so we expect the transaction to compete. We initiated coverage with a Buy recommendation and 40p target price approximately two months ago, when the shares were 22p. It was short and sweet.
Our view: This has been a decent recommendation for our clients, significantly outperforming both the wider market and the basic resources sector. The 36p price is not quite our 40p target, however valuations are as much an art as a science. Iluka has a low risk threshold (it operates in Australia) and may have negotiated a lower price for 100% cash. We are satisfied with 36p. The shares closed last night at 34.25p and although we expect the transaction to complete, this morning we put our recommendation under review.
Click here to request a call back from a broker regarding this recommendation.
Economic news
Germany manufacturing PMI
As per the data released by Markit, the final manufacturing PMI for Germany fell to 53.8 in July from 54.5 in June.
Eurozone manufacturing PMI
Manufacturing PMI for the Eurozone fell to 52.0 in July from 52.8 in June, final data from Markit showed yesterday.
US manufacturing PMI
The final Markit manufacturing PMI for the US rose to 52.9 in July from 51.3 in June, in line with the flash reading.
US ISM manufacturing PMI
US manufacturing PMI dropped to 52.6 in July from 53.2 in June, as per the Institute of Supply Management (ISM). Economists forecasted a reading of 53.0.