Markets
Europe
The FTSE-100 finished yesterday's session 0.70% higher at 6,914.71, whilst the FTSE AIM All-Share index closed 0.38% higher at 779.92. In continental Europe, markets ended sharply higher, as oil prices improved after Saudi Arabia's top energy official hinted at freezing oil production. Investors cheered strong corporate earnings released yesterday. France's CAC 40 and Germany's DAX rose 1.2% and 0.9%, respectively.
Wall Street
Wall Street ended in the green amid a rally in oil prices and positive corporate earnings of retailers. Additionally, better-than-expected economic data released boosted investor sentiment. The S&P 500 advanced 0.5%, led by the energy sector.
Asia
Equities are trading higher, ignoring weak economic data from China. Improvement in oil prices and a rally in global equities boosted investor confidence. The Nikkei 225 gained 1.1%, and the Hang Seng was trading 0.9% up at 7:00 am.
Oil
Yesterday, Brent oil prices increased 4.5% to US$46.04 per barrel, while WTI prices rose 4.3% to US$43.49 per barrel.
Headlines
China's industrial output grew 6.0% in July
As per the National Bureau of Statistics, industrial production in China increased 6.0% y-o-y in July after growing 6.2% in June. The reading was below the market expectations of a 6.2% gain. Retail sales rose 10.2% y-o-y, lower than the expectations of a 10.5% surge and below the 10.6% growth recorded in June. The weak data further increased concerns of slowdown in China's economy.
Company news
DFS Furniture (LON:DFS, 258.90p) - Hold
DFS Furniture (DFS) announced a post-close trading update for the financial year ended 30th July 2016 (FY 2016). Revenues for FY 2016 increased 7% y-o-y and revenue for H2 2016 rose 7% from the second half of 2015. DFS established a successful store-in-store concept for Dwell to occupy store warehousing space for retail use in the DFS estate. This accelerated the retail space conversion programme and Customer Distribution Centre (CDC) openings. A total of 11 CDCs are currently operational and a further 8 are expected to open by FY 2017. Free cash flow has remained strong, with net debt slightly less than 1.5x EBITDA at the end of FY 2016. The board of DFS hopes to announce a progressive final dividend in line with the guidance of an overall payout of 45–50% of post-tax profit for the whole year. DFS would declare its preliminary results on 6th October 2016.
Our view: DFS shares saw a possibly overdue 'relief rally' yesterday, following release of its post close trading update. Figures were slightly ahead of expectations and just like, say, the UK housebuilders and other consumer exposed sectors, reported that it had yet to see any real impact from Brexit. On the basis of present consensus 2017E earnings of 23.8p, implying a 10.7x multiple, and expectation of delivery of a 12.0p full year dividend, implying a 4.7% yield, the shares do not look particularly expensive. But in reality, the clouds are gathering and there can be no denying that strong headwinds now pushing against the Group are almost certain to get stronger before they subside. The simple fact is that activity in the housing market, particularly transactional volumes in both new and second hand dwellings, is a key driver for DFS. It is a strong reflection of prospective consumer confidence. Yesterday, the Royal Institute of Surveyors confirmed that its members were reporting falling activity levels in all regions, with July house prices growing at their slowest pace in three years, a sharp drop in sales and a record low number of properties being advertised; a survey of over 300 agents also suggests they expect key London prices to fall over the next year. The uncertainties being generated by the referendum, together with the National Institute for Economic and Social Research predicting a 'evens' change of recession in 2017, it will be difficult for DFS to avoid downgrading expectations as the year progresses. In the light of this, Beaufort has moved its recommendation from Buy to Hold, while advising overweight holders to take advantage of yesterday's rally to lighten holdings.
Hastings Group Holdings (LON:HSTG, 212p) – Buy
Hastings, a general insurance provider, yesterday announced its interim results for the 6 months ended 30 June 2016 (H1 2016). During the period, gross written premiums advanced by +28% to £360.6m, net revenue climbed +27% to £282.7m and operating profit rose +20% to £70.8m, against comparable period (H1 2015). Pre-tax profit grew +452.7% to £51.4m, in absence of major finance costs. Consequently, basic and diluted earnings per share improved by +400% to 6.5p. On the operational front, the Group's live customer policies increased by +17% to 2.2 million and market share of UK private car insurance rose to +6.2%. In home and telematics, live customer policies increasing by +67% and +73% respectively, as the Group benefitted from continued growth in price comparison website penetration. Calendar year loss ratio was 74.0%, while solvency II coverage stood at 156% (31 December 2015: 156%). Hastings' CEO, Gary Hoffman commented "We remain well positioned to deliver continued profitable growth in 2016; the increases in premiums we've written will continue to earn through over the life of the policies, and we've seen no significant changes to the premium and claim inflation trends since the period end. We are firmly on track to meet, or beat, all of our targets." The Group declared interim dividend of 3.3p per share.
Our view: Hasting delivered excellent set of result for the first half of 2016, on track to meet or even exceed all of the promises management made at the time of the IPO. The Group has recorded strong operating profit, increased by +20% to £70.8m and paid out 50%-60% of adjusted post-tax profit as an interim dividend. Calendar year loss ratio of 74% was below the target range of 75%-79% but this, along with net debt leverage multiple of 1.9x (31 December 2015: 2.1x) and 2.5 million customers by the end of 2017 are well on track, according to the Group. Hastings's business model of agile, digital and data-driven approach focusing on price comparison website, correctly attracting customers, evident from increased number of customers and market shares. The Group's confidence towards meeting or exceeding its IPO targets, as well as strengthening balance sheet through profitable, cash generative operations, we believe Hastings remain attractive. The shares currently trades on a forward P/E multiple of just 13x which remains a steep discount to the broader sector's 16x rating. Coming with a 4% prospective 2016E yield, Hastings should be of interest for investors seeking both capital gains and income. The shares can also be regarded as 'defensive-play' in this uncertain time as changes in macroeconomic condition unlikely to impact the insurance need for motors and households. Additionally, its products are provided exclusively in the UK, meaning the Group is 'Brexit-proof'. Beaufort repeats its Buy recommendation on Hastings.
Old Mutual (LON:OML, 216.90p) - Buy
Old Mutual declared its interim results for the half year ended 30th June 2016 (H1 2016). During the period, gross sales increased 3% y-o-y to £16.0bn. Adjusted operating profit dropped 22% to £708m, leading to adjusted operating EPS of 8.0p compared with 10.3p in H1 2015. IFRS pre-tax profit fell 11% to £608m, and IFRS after-tax profit attributable to equity holders of the parent increased 1% to £284m. Return on equity stood at 11.5% (H1 2015: 15.0%). Adjusted net asset value (NAV) per share increased 8% to 193.3p. Net client cash flow soared 43% to £2.0bn. Net client cash flow, excluding Rogge, stood at £3.5bn, while the number of customers increased 10% to 19.4 million. Funds under management (FUM) increased 5% to £342.7bn. The company had a solvency II surplus of £1.5bn as on 30th June 2016, representing a solvency II ratio of 129% (1st January 2016: 138%). On the operational front, Old Mutual is making progress on the separation of business into four different units: Old Mutual Emerging Markets, Old Mutual Wealth, Nedbank Group and OM Asset Management. The company expects to complete the process by the end of 2018. On 9th August 2016, the company agreed to sell Old Mutual Wealth Italy to ERGO Italia, owned by Cinven, for a consideration of €278m in cash, plus interest to completion. Old Mutual proposed an interim dividend of 2.67p, up from 2.65p in H1 2015.
Our view: Old Mutual delivered good performance in H1 2016, despite the ongoing volatility in the markets. The company recorded an increase in FUM, adjusted NAV and profit attributable to equity holders. The company's Old Mutual Emerging Markets (OMEM) division reported solid operational performance led by the South African life business. Old Mutual is making steady progress with regard to splitting its business into four units. As part of its efforts to prepare the new units for independent operations, the company is redesigning its head office. The company is expected to reduce its headcount by ~50% by year-end, which would yield £10m in run rate savings from 2017. The spin-off would liberate each unit from the cost pressure and other constraints associated with the parent company, and ensure better access to capital markets to fund growth. This would also allow markets to value them appropriately, with direct regulatory arrangements. Furthermore, the separation would improve shareholder value in the long run. Old Mutual has commenced H2 2016 in line with the management's expectations. The company plans to invest in its South African operations to strengthen its market position. In light of the above argument, we maintain a Buy rating on the stock.
Poundland (LON:PLND, 224.0p) - Sell
The boards of Steinhoff International Holdings N.V. and Poundland announced the revised and final terms of a recommended cash offer, pursuant to which Steinhoff shall acquire the entire issued and to-be-issued share capital of Poundland. As per the revised offer, 225 pence in cash will be paid for each share held by a Poundland shareholder. In addition, Poundland shareholders will receive a final dividend of two pence per share (announced on 16th June 2016), which will be paid on 23rd September 2016 to the shareholders on the register at the close of business on 9th September 2016. Under the previous offer, announced on 13th July 2016, Steinhoff had offered 220p per share, plus 2p as dividend. The revised offer of 227p represents a 43.4% premium to the closing price per Poundland share of 158.25p on 13th June 2016 and a 15.8% premium to the closing price per Poundland share of 196p on 12th July 2016. The revised offer values Poundland at £610.4m vis-à-vis £597m as per the 13th July 2016 announcement.
Our view: The update mentioned above highlights the revised cash offer received by Poundland. The Company is facing challenges in the UK market as organic growth profits decline and shoppers appear bored with the repetitive high street format. Therefore, equity holders would be relieved to get away with a clean break. Given the management has donated its holdings; Steinhoff's equity pot is nears a blocking minority, suggesting that the company would honour the terms and conditions outlined in the offer. Warburg Pincus originally floated Poundland on the London Stock Exchange for 300p per share in early 2014; right now a 227p price is also expected to be accepted by 17.5% holder, Elliot Funds. Beaufort recommends shareholders similarly accept the cash offer or alternatively sell now in the open market, given that the equity offers minimal arbitrage and that the funds might be put to better use elsewhere.