Markets
Europe
The FTSE-100 finished yesterday's session 0.58% higher at 6,868.51, whilst the FTSE AIM All-Share index closed 0.28% higher at 790.97. In continental Europe, markets ended in the green as investors cheered positive economic data released in the Eurozone. Additionally, advances in mining and financial stocks lifted the market. Germany’s DAX and France’s CAC 40 rose 0.9% and 0.7%, respectively.
Wall Street
Wall Street ended higher on upbeat US new home sales data and improvement in oil prices. Investors await Fed Chair Janet Yellen’s speech on Friday. The S&P 500 advanced 0.2%, with the materials sector gaining the most.
Asia
Equities are trading mixed as investors remained cautious ahead of the Fed Chair’s speech later this week. The Nikkei 225 gained 0.6%, supported by a weak yen. The Hang Seng was trading 0.8% down at 7:00 am.
Oil
Yesterday, WTI prices increased 2.2% to US$48.10 per barrel, while Brent oil prices rose 1.6% to US$49.96 per barrel.
Headlines
Leaving European Union to weaken Scotland’s economy
The Scottish government stated leaving the European Union (EU) would weaken Scotland’s economy by £1.7–11.2bn by 2030, depending on the new trade relationship adopted by Britain. Scotland has had good trade relations with the EU, accounting for around £12bn exports in the EU in 2014, which represents 42% of its total exports.
Company news
Harvest Minerals (LON:HMI, 15.50p)– Speculative Buy
Harvest has published results from the agronomic and metallurgical testwork conducted at the Maximus prospect, part of its Arapuá fertilizer project in Minas Gerais, Brazil. All results were well within the required specifications with no toxic elements present. Solubility tests based on 2% citric acid (close to the natural acidity levels in the area) were also positive ranging from 50.40% to 53.36% for P2O5 and from 90.99% to 95.00% for K2O. Likewise, the metallurgical test work returned positive results indicating that high-grade potash material can be up-graded using a simple, low-cost wet sieving process. Management has elected to make an application for its Direct Application Natural Fertiliser (DANF) to be classified as a soil remineraliser initially and then as a Potassium and Phosphorus fertiliser. As such, Harvest believes the accreditation could have long-term marketing benefits and broaden the potential client base.
Our view: The test results are significant for the Harvest, confirming the quality of the potential direct application natural fertiliser. Whist the scoping study numbers demonstrated that Arapuá has potential to be very profitable, the product’s sale price had a considerable range from $15/t to $120/t with a production cost of $7.3/t. The above results should help narrow the sale price range. Harvest expects the environmental permit to be approved in the next few weeks followed by the trail mining permit. In the meantime, we maintain a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Harvest Minerals plc
Kier Group (LON:KIE, 1,248.80p) – Buy
Kier Group, a leading property, residential, construction and services group, announced the following new framework awards for its Construction division. All of the frameworks have been secured since the Group's trading update on 4 July and they provide a long-term pipeline of potential contract awards:
- A place on the four-year £4bn Department of Health Procure22 framework as one of six principle supply chain partners which commences in October. Kier Construction is a leading provider in the health sector having delivered over £170m of health projects over the last twelve months.
- The Company has also secured a place as one of five suppliers on two five-year construction frameworks worth up to £750m at Gatwick Airport. The frameworks cover building and civil engineering projects up to £10m as well as a smaller works framework for building projects up to £1.5m. The award reflects Kier's increasing profile in the aviation sector with a place recently secured on the framework at Glasgow airport focused on infrastructure improvements.
- Thirdly, Kier Group has secured a place on the two-year £500m University of Cambridge Framework to provide a range of facilities including laboratories, teaching and lecture spaces and sport facilities. This construction framework provides opportunity to build on our established working relationship with the University.
Our view: Kier Group was a participant on the Department of Health Procure21 framework so it to have secured its success in securing a place on the Procure22 is excellent news, and Liberum tell me Kier Group secured over £950m on the Procure 21 framework over 4 years. The other two framework agreements continue to demonstrate Kier’s success across different sectors. Trading at less than 11x and with a 2017 yield in excess of 5.5% we continue to rate Kier Group as a Buy
National Grid (LON:NG., 1,080.50p) – Buy
Ofgem announced its response to the proposed income adjusting event filed by National Grid in May 2016. The filing was about the recovery of up to £113m of additional costs to contract the Black Start capability with Drax and Fiddler's Ferry and meet its obligations across the country. Ofgem decided that National Grid would recover £95m of the additional costs, and its exposure is limited to a maximum of £18m. This reflects full recovery of the Fiddler's Ferry contract and 70% recovery of the Drax contract after applying the sharing mechanism.
Our view: The news is disappointing for National Grid. The company was hoping to pass on all costs to suppliers and generators, so it could be reimbursed. Ofgem decided that only a part of the amount would be passed, and the rest would be borne by National Grid. Last week, Ofgem also proposed to scrap some of the power and gas projects undertaken by National Grid. However, the company reported an excellent performance in FY 2016 on the financial and operational fronts. National Grid benefitted from the electricity price difference in Britain and continental Europe, which lifted trading volumes on its network. The company grew robustly in the UK and generated savings of more than £330m for customers in the first three years of regulated price control (RIIO). The company made substantial progress with rate filings in New York and Massachusetts. The value-added metric, which reflects the key component of value delivery to shareholders, was strong; the value added during the year totalled £1.8bn or 47.6p per share. National Grid is selling the majority stake in its UK gas distribution business. After the sale, the company expects to deliver higher growth and maintain a strong balance sheet to fund its investment programme. In light of the above argument, we maintain a Buy rating on the stock.
Persimmon (LON:PSN, 1,870.0p) – Buy
Persimmon, one of the largest UK housebuilders, yesterday announced its half-year results for the 6 months ended 30 June 2016 (‘H1 2016’). During the period, legal completions advanced by +6% to 7,238 new homes against the comparable period (H1 2015). With average selling price rose by +6% to £205,762, revenue increased by +12% to £1.49bn. The Group’s pre-tax profit jumped by +29% to £352.3m as underlying operating margin improved by +3.3% to 23.8%. Consequently, basic earnings per share also grew by +19% to 92.0p. Net free cash generation for the period was £229.9m (H1 2015: £190.7m) and net cash at 30 June 2016 climbed to £462.0m (2015: £278.0m). On the operational front, Persimmon secured 7,108 plots of new land across its 38 sites during the period, bringing consented land bank to 93,519 plots. Within this, 2,856 plots (40% of the new plots acquired in H1) was converted from the strategic land bank. Current forward sales amounted £1.75bn, +2% ahead of last year. Persimmon’s CEO, Jeff Fairburn commented “The Group is now trading through the traditionally slower summer weeks but customer demand remains encouraging and we anticipate a good autumn sales season. We are confident that our long term strategic focus will continue to deliver strong returns for our shareholders”. The Group has paid its fourth surplus capital payment under the Capital Return Plan of £338.3m (or 110p per share) on 1 April 2016. The next payment of 110p per share is scheduled for early July 2017.
Our view: A strong half year performance along with a confident management statement, while shareholders continue to enjoy exceptional income from the Group’s transparent capital return plan. Persimmon delivered an excellent performance for the first half of 2016, against the backdrop of a housing market that appears to have quickly regained its confidence following Brexit. Other than in the premium, central London residential sector, there has been no significant loss of buyer enthusiasm in the face of a continuing supply shortages, ultra-low interest rates with good mortgage availability and generous government subsidies. Right now, in fact, the UK’s major housebuilders continue to enjoy an almost a perfect operating environment. Yesterday’s management conference call confirmed excellent forward visibility, with numbers of visitors per site per week and private sales being c.+20% and +17%, respectively, against last year. The second half of the year tends to be seasonally slower (with last year reporting c.-19% drop in average private sale reservation rate), so there should be no surprise if 2016 shows a similar pattern, although directors still anticipate a “good autumn sales season” with further “modest” growth in H2 operating margin being effectively underwritten by its investment in “high quality land bank”. Persimmon’s Board has significant experience and understanding of a housing markets that, in the past, has been viciously cyclical. This particular leopard most certainly has not changed its spots and sometime in the not too distant future a sharp downturn will be upon us once again. Quite clearly, however, such an eventuality is still two or more years away and Persimmon, like others in the sector, has already adopted a more prudent approach to strategic land acquisition and strengthened its balance sheet, while sticking rigidly to ten year Capital Return Plan (for which the Board increased total pay-out by +45% in February to 900p per share). Given that this comes with a 2016E PE multiple of just 9.3x, the market appears to be already discounting much tougher times ahead. In reality, however, the investors will not be in a position to anticipate a damaging inflationary spike or dive into recession until the outcome of Article 50 negotiations are well advanced. Clearly, that could be as much as three years from now. For now, Persimmon remains set to deliver “high quality growth” while offering high returns to rank the shares for income investors. Beaufort reiterates its Buy rating on the shares.
Economic news
Germany manufacturing PMI
As per the data released by Markit, the preliminary manufacturing PMI of Germany for August fell to 53.6 from 53.8 in July. This was in line with the market expectations.
Eurozone manufacturing PMI
Manufacturing PMI for the Eurozone declined to 51.8 in August from 52.0 in July, preliminary data from Markit showed yesterday. The markets expected a reading of 52.0.
US manufacturing PMI
The preliminary Markit PMI for the US stood at 52.1 in August, from 52.9 in July. The markets expected a reading of 52.6.
Eurozone consumer confidence
The gauge of Eurozone consumer confidence dropped to -8.5 in August from -7.9 in July, the European Commission stated yesterday.
US new home sales
New home sales in the US rose 12.4% to a seasonally adjusted annual rate of 654,000 units in July, the Commerce Department said yesterday. The annualised sales figure for June was revised down to 582,000 from the previously reported 592,000. Economists had expected new home sales to drop to an annualised rate of 580,000.