Markets
Europe
The FTSE-100 finished yesterday's session 0.48% lower at 6,835.78, whilst the FTSE AIM All-Share index closed 0.14% higher at 792.06. In continental Europe, markets ended in the green, as a rally in banking stocks outweighed decline in commodity stocks. Germany's DAX and France's CAC 40 rose 0.3% each.
Wall Street
Wall Street ended in the red, dragged down by sharp losses in healthcare and materials stocks. Investors await the Fed Chair Janet Yellen's speech to gauge the prospects of an interest rate hike in the near future. The S&P 500 fell 0.5% in yesterday's trading session.
Asia
Equities are trading mixed amid ongoing volatility in commodity prices and investors' cautious approach ahead of Janet Yellen's speech on Friday. The Nikkei 225 dropped 0.3%, while the Hang Seng was trading 0.3% up at 7:00 am.
Oil
Yesterday, WTI prices decreased 2.8% to US$46.77 per barrel, while Brent oil prices fell 1.8% to US$49.05 per barrel.
Headlines
Germany's GDP expands 0.4% in Q2 2016
As per data released by Destatis, Germany's GDP grew 0.4% q-o-q in Q2 2016, in line with the preliminary estimate, after expanding 0.7% q-o-q in Q1 2016. The growth was largely due to better foreign trade and a rise in spending. Exports increased 1.2%, while imports dropped 0.1%; net trade was the highest contributor to GDP in Q2 2016. On a y-o-y basis, Germany's GDP expanded 1.8% after growing 1.9% in Q1 2016.
Company news
AstraZeneca (LON:AZN, 5,080.0p) - Hold
AstraZeneca agreed to sell its small molecule antibiotics business to US pharmaceutical giant Pfizer, Inc. As per the agreement, Pfizer would pay US$550m upfront upon completion. A further unconditional payment of up to US$175m would be made to the late-stage antibiotics business (in all markets where AstraZeneca holds rights) in January 2019 for commercialisation and development rights. In addition, Pfizer would pay up to US$250m in commercial, manufacturing and regulatory milestones, and up to US$600m in sales-related payments. AstraZeneca would also receive recurring double-digit royalties on future sales of Zavicefta and ATM-AVI in some markets. The agreement is expected to close in Q4 2016, subject to customary closing conditions.
Our view: The sale of business by AstraZeneca is in line with its plan to focus on its three main therapy areas. Recently, the company's selumetinib cancer treatment failed to meet its primary endpoint in trials. Selumetinib is being explored as a treatment option in studies in patients with differentiated thyroid cancer. The drug, combined with chemotherapy, failed to meet any of the goals sought in trials. Last month, AstraZeneca's Phase III AURA3 trial met its primary endpoint, demonstrating superior PFS compared to the standard platinum-based doublet chemotherapy. The trial assessed the efficacy and safety of Tagrisso as a second-line treatment in more than 400 patients with EGFR T790M mutation-positive. The results underpin Tagrisso as an alternative for EGFR T790M lung-cancer patients. However, AstraZeneca's new drug zirconium cyclosilicate (ZS-9) recently failed to get the US FDA's approval due to its high potassium levels. AstraZeneca paid US$2.7bn to ZS Pharma to gain access to the drug. Moreover, many of the company's drugs are in the development phase. AstraZeneca is facing challenges, with some of its key drugs approaching patent expiry. Considering the mixed outlook for the company, we maintain a Hold rating on the stock.
Carillion (LON:CLLN, 296.20p) - Buy
Carillion reported strong organic revenue growth at the interims for the six months ended 30 June 2016. The performance was led by revenue and margin growth in support services, which accounted for some 60 per cent of total underlying operating profit. Average net borrowings were similar to the 2015 full-year average of £538.9 million and in line with the Board's expectations. The balance sheet remains robust with over £1.4 billion of committed funding available to the Group. The Group reported £2.5 billion of new first-half orders plus probable orders (2015: £1.0 billion) and indicated revenue visibility for 2016 of 98% at 30 June 2016 (2015: 96%) with total orders plus probable orders of £17.4 billion at 30 June 2016 (31 December 2015: £17.4 billion) and a pipeline of contract opportunities worth £41.5 billion (31 December 2015: £41.4 billion).
Our view: The Group's first-half results are in line with expectations, led by a strong performance in the support services business, which accounted for nearly two thirds of the Group's underlying operating profit. New order intake in the first half of the year has been strong and continues to reflect the success of the Group's strategy. The interim dividend increased by 2% to 5.8p (2015: 5.7p) and the Group indicates it is on track to make further progress in 2016 with no changes to its full-year expectations. On an undemanding p/e ratio of c8.5x and a yield in excess of 5.5% we reiterate our Buy recommendation.
Costain Group (LON:COST, 371.25p) - Buy
Costain, an engineering solutions provider delivering integrated consulting, project delivery and operations and maintenance services, yesterday announced its results for the half-year ended 30 June 2016 (H1 2016). During the period, revenue advanced by +27% to £291.4m and underlying operating profit increased by +21% to £15.8m. Pre-tax profit climbed by +13% to £11.3m, consequently basic earnings per share also improved by +13% to 9.5p per share. Due to the significant investment in the Group's strategic development (including £36m acquisition of Rhead Group in August 2015), the net cash balance at the period-end stood at £69.2m (H1 2015: £126.8m). To offset this, the Group has recently increased its total banking facilities by £30m and extended the maturity of the entire facilities to June 2021. The Group also has £400m of bonding facilities. On the operational font, the Group maintained its record year-end order book at £3.9bn, up +5% year-on-year. Integration of Rhead Group is now completed and Group said it has changed nature of its service offering where 25% of the total employees now in consultancy and advisory roles. Post the period, the Group acquired SSL, a provider of technology-based solutions primarily for the highways sector, for £17m. Costain's CEO, Andrew Wyllie commented "These are exciting times as billions of pounds are being spent upgrading and renewing the country's energy, water and transportation infrastructure. Costain remains on course to deliver a result for the year in line with the Board's expectations." The Group declared interim dividend of 4.3p per share, up +15%, which will be paid on 21 October 2016.
Our view: Costain delivered a strong H1 2016 earnings performance, while building upon its record order book. This provides excellent forward visibility, with over £1.4bn of revenue for 2016 already secured (£1bn for 2017, £2.2bn for 2018) at the period end (H1 2015: £1.2m). The encouraging fact is that more than 90% of order book is repeat business, which reaffirms the quality of the Group's long-term relationships with blue-chip customers that can be expected to remain with it for the foreseeable future. Being significantly a UK-UK (labour and materials) operation, Costain is unlikely to incur a direct hit from BREXIT vote although, like others in the sector, must be considered vulnerable to a prospective wider economic slowdown. Such an outcome, however, appears some way of, which explains why the share price recovered quite rapidly post 24th June. The Group is presently working on a number of high-profile domestic contracts and has strong balance sheet for when further opportunistic acquisitions become available. The Board has expressed its confidence by hiking the interim dividend. Given a strong order book, the Group's status as preferred bidder (contracts over £400m) together with excellent visibility for the next two years, Beaufort reiterates its Buy rating on the shares.
WPP (LON:WPP, 1,780.0p) - Hold
WPP declared its interim results for the six months ended 30th June 2016 (H1 2016). During the period, revenues increased 11.9% y-o-y to £6.5bn on a reported basis. On a constant currency basis, revenues rose 8.9%, while like-for-like (LFL) revenues increased 4.3%. Net sales increased 8.1% y-o-y in constant currency terms to £5.6bn, with an LFL sales growth of 3.8%. Reported billings increased 9.3% to £25.3bn, up 6.3% in constant currency terms. The pre-tax profit slipped 40.1% to £425m, mainly due to net exceptional write-downs of £122m, mainly resulting from the investment in comScore, compared to net exceptional gains of £203m in H1 2015. The headline pre-tax profit rose 15.8% to £690m from £596m in H1 2015. The reported profit after tax was £282m, down 58.8% in constant currency. The headline-diluted EPS increased 16.7% to 39.1p, while the reported EPS dropped 56.0% to 18.9p. Net debt as at 30th June 2016 stood at £4.2bn, as compared to £3.4bn as at 30th June 2015. On the operational front, the company completed 36 transactions in H1 2016; 13 acquisitions and investments were made in new markets and 23 in quantitative and digital. A further six acquisitions and investments were made in July and August. WPP announced a dividend of 19.55p, 23% higher compared to H1 2015.
Our view: WPP delivered a good performance in H1 2015, recording higher revenues and headline profit. The company's growth was led by the Advertising and Media Investment Management division, which accounted for 45.4% of the revenues, and witnessed a 12.3% jump in revenues. In addition, WPP recorded improved results across the regions in which it operates. The company worked on its long-term plan to enter into fast-growing geographies and functional markets, completing 36 transactions during the period. These acquisitions would support WPP's existing divisions and strengthen its share in various markets. WPP increased the dividends payable to shareholders and its pay-out remains in line with the target of 50.0%. The Group has recorded an exceptional share price performance so far in 2016, with its high level of international earnings underwriting post-Brexit gains. Despite consensus beating numbers for the first half, however, even with the continuing benefits of weaker Sterling, management was not confident enough to steer full year guidance higher. Indeed, Sir Martin was clear in subsequent communications, that UK government stalling on its separation from the Eurozone could spell "death to growth". The trouble is that yesterday's results have already set higher expectations for both 2016E and 2017E, and now sitting on forward multiples of 16.7x and 15.0x there is little room left for slippage. WPP undoubtedly sets the international standard for advertising and public relations and Beaufort has been a long-term supported of the Group, but with some faint now clouds on the horizon and a price target leaving the shares less than 10% upside, Beaufort has decided to downgrade its recommendation to Hold until clear blue skies can be seen once again.
Economic news
US MBA mortgage applications
US home mortgage applications, including both refinancing and home purchase, dropped 2.1% in the week ended 19th August, after a 4.0% decline in the preceding week, the Mortgage Bankers Association said yesterday.
US existing home sales
Existing home sales in the US decreased 3.2% m-o-m to a seasonally adjusted annual rate of 5.39 million units in July, from 5.57 million units in June, the National Association of Realtors announced yesterday. The markets expected the home sales to decline to 5.51 million units.