Beaufort Securities Breakfast Alert: HSBC, Next, Rio Tinto, Ryanair, Venn Life Sciences



The FTSE-100 finished yesterday's session 0.17% lower at 6,634.40, whilst the FTSE AIM All-Share index closed 0.09% worse-off at 757.33. In continental Europe, markets ended mixed as concerns over the Eurozone's growth prospects outshined the rally in banking stocks. Investors digested a mixed set of corporate earnings releases yesterday. Germany's DAX rose 0.3%, whereas France's CAC 40 fell 0.2%.
Wall Street
Wall Street ended in the green, buoyed by a sharp rally in oil prices after data indicated an unexpected drop in gasoline stockpiles. Investors cheered better-than-expected US employment data for July. The S&P 500 advanced 0.3%, led by the energy sector.
Equities are trading higher, taking positive cues from the gains in Wall Street and rebound in oil prices. Investors await the announcement of the Bank of England's monetary policy decision today. The Nikkei 225 gained 1.1%, and the Hang Seng was trading 0.6% up at 7:00am.
Yesterday, WTI prices increased 3.3% to US$40.83 per barrel, and Brent oil prices rose 3.1% to US$43.10 per barrel.

UK service sector contracts in July

As per data from Markit, the UK business activity index for services declined to 47.4 in July from 52.3 in June, marking the lowest monthly drop since July 1996. This was the first decline in service activity since December 2012 and the worst one since March 2009. The agency stated the plunge was a result of uncertainty pertaining to Brexit.

Company news

HSBC (LON:HSBA, 504.0p) - Buy
HSBC declared its results for the half year ended 30th June 2016 (H1 2016). During the period, revenue dropped to US$29.5bn from US$32.9bn in H1 2015. Pre-tax profit slumped 28.7% to US$9.7bn, leading to an EPS of US$0.32 per share compared with US$0.48 per share in H1 2015. Pre-tax profit fell 28.4% to US$1.6bn in Europe and 23.9% to US$7.2bn in Asia. The retail banking and wealth management division's pre-tax profit slumped 29.1% to US$2.4bn, while earnings in the investment banking arm, known as global banking and markets, dropped 15.7% to US$4.0bn. Commercial banking pre-tax profits decreased 4.8% to US$4.3bn. HSBC announced a share buy-back of up to US$2.5bn in H2 2016 after the successful disposal of HSBC Bank Brazil on 1st July 2016. In H1 2016, HSBC removed around US$48bn of risk-weighted assets (RWA) from the business, around half of which came from Global Banking and Markets. The company's common equity tier 1 ratio increased to 12.1% from 11.9% as at 31st December 2015. Leverage ratio stood at 5.1% (H1 2015: 5.0%). HSBC's board decided to drop its target of delivering return on tangible equity of more than 10% by the end of 2017. HSBC declared a second interim dividend of US$0.10 per ordinary share, a distribution of approximately US$1,992m payable on 28th September 2016.

Our view: HSBC performed reasonably well in H1 2016. The company recorded a sharp fall in profits, negatively impacted by concerns over Brexit and slowdown in the Chinese and UK economies. The European banking sector remained under pressure, distressed by waning profit and yields amid record low interest rates and high regulatory costs. However, profits were in line with analyst expectations due to restructuring costs and weak revenues. HSBC remained focused on controlling costs and reported run-rate saves of more than US$2.0bn since the commencement of its cost-saving programme. The company lowered its RWAs, taking it more than 60% towards its target and remains on track to deliver the savings promised by the end of 2017. The share buy-back programme announced would benefit all shareholders. We note the uncertainty in the market following Brexit and volatility in the financial markets. Nonetheless, HSBC remains fundamentally strong to face the difficult conditions and continue to enhance shareholder value. Therefore, we maintain a Buy rating on the stock.
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Next (LON:NXT, 5,340.0p) - Buy
Next, a global retailer of clothing, footwear and home products, yesterday announced its trading statement for the 26 weeks ended 3 August 2016 (H1 FY2017). During the period, Total sales (including markdown) advanced by +1.8%, comprised of -0.7% fall in Retail (stores) and +5.4% rise in Directory (online), against the comparable period (H1 FY2016). Total full price sales for the H1 was -0.3% (of which, +1.5% from new space), improved from -0.9% in the Q1 as Q2 saw +0.3% growth in the full price sales. The Group said its end-of-season Sale performed well as it significantly increased the stock compared to the prior year, which was sold in retail stores. This strengthened total Retail sales, while Directory continued to benefit from overseas sales growth and improved stock availability. The Group said except for the first few days following the Brexit vote, it has not seen any impact on consumer behaviour. The Group has fully hedged all its currency exposures and confirmed there will be no impact on weaker Sterling in the FY2017. The Group also noted that the potential tariffs and other barriers from the EU after the UK's formally exited is unlikely to cause any impact as most of its stock is manufactured outside the EU and already subject to EU customs and tariffs. Looking ahead, the Group expect, based on current exchange rate, costing rates (the average value of Sterling in the overseas currencies that we buy) to be around -9% worse in FY2018 than current year, mitigated to some extent, while cost prices in FY2018 estimated to rise by less than -5% on like-for-like products. The Group narrowed its upper and lower range of its full year guidance, with total full price sales now in the range of -2.5% to +2.5%, pre-tax profit at £775m-£845m (-5.6% to +2.9%) and earnings per share in the rage of -2.5% to +6.3%. The Group will announce half year results on 15 September 2016.

Our view: Next pleased the market with its H1 results, given that the damage from slowing pre and post the Brexit consumer confidence vote had already been factored in, on top of the March and April weather hit. In fact, the weakness of consumer demand for clothing in particular, began back in October 2015. Encouraging Q2 sales were due to higher number of stock for Sale, with clearance rates slightly ahead of management's expectations. For the current year (FY2017), the Group is well positioned to cope with Sterling weakness, as it has fully hedged all currency exposures. For the FY2018, impact of weaker Sterling will be partly mitigated by factors such as pre-referendum hedging and Euro and Dollar revenues. While the consumer demand likely to remain subdued for the remainder of the year, and Q3 year-on-year performance will be challenging given last year's strong comparative, Q4 is expected to read better, subject to the winter weather this year as last year saw usually warm quarter. Having narrowed its full year guidance from the both side, but proportionally more toward the upper end, with £415m returned to shareholders year to date through share buybacks and special dividend, we see Group remain confident maintaining reasonably strong cashflow. A further £30m share buybacks will be made for the rest of the year. Beaufort reiterates its Buy rating on the shares.
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Rio Tinto (LON:RIO, 2,423p) - Hold
Rio published interims in line with consensus expectations but down significantly YoY due to weaker commodity prices and hence revenues. Despite large cost cutting measures, the fall in sales directly impacted the bottom line and underlying earnings were down 47% from $2.9b to $1.56b. However, Rio performed well operationally and remains highly cash generative with a strong balance sheet. EBITDA was $5.7b, operating cash flow after interest and tax was $3.24b and it paid a $1.9b dividend (FY15 final) in the period. The 1H16 dividend was declared as 45 US cents ($0.8b) and the total FY16 dividend is guided to be no less than $2.0b. This drop in dividend should be and was expected given lower commodity prices. Net debt was down 6% to $12.9b, a healthy number versus its cashflow, not far off 1.0x EBITDA.

Our view: A good set of results and Rio is well placed as the lowest cost iron ore producer with a strong balance sheet. Looking ahead, the direction of Rio shares is typically led by Chinese data. China's apparent steel consumption and domestic steel prices lead the seaborne iron ore price and hence Rio's profit margins. 1H16 was characterised by a Chinese credit stimulus which reinvigorated China's construction, real estate and domestic steel prices. The UK listed diversified miners (including Glencore) appeared to follow. We are now in a position where the CEO's are cautioning that 2H16 is unlikely to be as good as the first half. Their concern is that easy credit is not a sustainable policy. To quote Rio's new CEO J-S Jacques, "The credit fuelled bounce in chinese construction activity has had a positive impact on commodity markets in the first half of 2016" but "continued caution is required for the second half of 2016". Or Anglo's CEO Cutifani who last week said of 2H16 that "We expect the overall market to remain challenging and volatile." We believe this caution is not misplaced (the US economy is also weak) on the other hand mining execs cannot predict further Chinese stimulus or the impact of new easing measures from the US, Japan and Europe. Due to this uncertainty we retain our Hold recommendation, especially for longer term investors, but we worry that 2H16 may be softer than the first half.
Click here to request a call back from a broker regarding this recommendation.

Ryanair (LON:RYA, 11.71p) - Buy
Ryanair yesterday released the traffic update for July 2016. During the month, passenger traffic increased 12% y-o-y to 11.3 million customers, while load factor rose 1% to 96%. The rolling annual traffic to July increased 16% to 110.7 million customers.

Our view: Ryanair reported solid passenger traffic and load factor for July, despite the concerns of rising international terrorism and the French ATC strikes. The company became the first airline in the world to carry more than 11 million passengers in one month. The continuous rise was aided by the low fares offered by Ryanair. Moreover, this growth reaffirms the success of its 'Always Getting Better' (AGB) customer experience programme to deliver a better customer experience (the programme was introduced two years ago). Ryanair improved the areas based on customers' complaints in the first two years. The company would focus on digital acceleration and innovation, particularly through Ryanair Labs digital developments, in the third year of the AGB programme. In light of the above argument, we maintain a Buy rating on the stock.
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Venn Life Sciences (LON:VENN, 30.0p) - Speculative Buy
Venn Life Sciences (Venn) signed a new contract worth €2.8m with a European biotechnology client. As per the contract, Venn would work on phase II study in the area of immunotherapeutic treatments for multiple sclerosis involving patients in six countries across Europe, October 2016 onwards. Additionally, Venn's Interactive Response Technology (IRT) department successfully qualified as a service provider to a top ten pharmaceutical client and awarded an initial project involving 30 sites in China. Venn's IRT department centralises the randomisation of patients for Phase I to IV clinical trials and manages the logistics of these studies.

Our view: The aforementioned contract wins by Venn is a positive development. The company is aided by a good balance of repeat business, client referrals and new business wins. Vendor qualification for Venn's IRT division is key landmark and provides an opportunity to grow a global account. Venn displayed a formidable performance in 2015 and witnessed an impressive 135% growth in revenues. The acquisition of Kinesis Pharma BV in October 2015 broadened the service offering and opened up further growth opportunities. Moreover, the company expanded its client base through the successful cross-selling of drug development and late phase services. Venn stands at an interesting juncture as the business has now moved from the development phase to commercialisation. The company plans to acquire companies in Central and Eastern Europe in the wake of several opportunities in the region, at minimal costs. Venn is well funded, with sufficient cash to expand its international coverage. Overall, the company is well placed, with a strong balance sheet and enhanced contract base, to maintain its growth momentum going forward. Therefore, we maintain a Speculative Buy rating on the stock.

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