Markets
Europe
The FTSE-100 finished yesterday's session 0.52% lower at 6,745.97, whilst the FTSE AIM All-Share index closed 0.01% lower at 791.23. In continental Europe, markets ended mixed after poor manufacturing data from the US and Eurozone. Weak oil prices exerted pressure on energy stocks. Germany's DAX fell 0.6%, while France's CAC 40 was unchanged.
Wall Street
Wall Street ended broadly flat, as investors remained cautious ahead of the non-farm payrolls report. The release of weak manufacturing data and a drop in oil prices hurt investor sentiment. The S&P 500 was unchanged, with utilities leading four sectors lower and information technology gaining the most.
Asia
Equities are trading mixed, as investors are waiting for key US jobs data, the strength of which could determine the timing of the Federal Reserve's next rate hike. The Nikkei 225 closed broadly flat, while the Hang Seng was trading 0.4% up at 7:00 am.
Oil
Yesterday, Brent oil prices decreased 3.4% to US$45.45 per barrel, and WTI prices dropped 3.4% to US$43.16 per barrel.
Headlines
UK's manufacturing sector picks up pace in August
As per Markit, the UK's manufacturing PMI rose to 53.3 from 48.3 in July, the highest reading in 10 months. The sharp rise was mainly due to the weakening of the pound after the Brexit vote, which boosted exports.
Company news
HSS Hire Group (LON:HSS, 80.0p) - Hold
HSS Hire Group (HSS Hire) declared results for the 27-week period ended 2nd July 2016 (H1 2016). The group reported a 13.5% y-o-y rise in revenue to £166.2m and an 11.1% y-o-y increase in adjusted EBITDA to £32.1m for H1 2016. Adjusted earnings per share stood at 0.10p in H1 2016 (H1 2015: loss per share of 2.27p). Reported pre-tax loss narrowed to £9.8m in H1 2016 from £14.1m in H1 2015. Loss per share declined to 6.62p in H1 2016 from 10.51p in H1 2015. As at 2nd July 2016, HSS Hire Group’s net debt was £238.7m, £20.6m higher than at the end of 2015. The utilisation rates for the core business increased to 50% from 48% and for the specialist business rose to 76% from 73%. On the operational front, HSS Hire remains on track to complete the construction of its new National Distribution and Engineering Centre (NDEC) in 2016. The group declared an interim dividend of 0.57p, similar to the level announced for H1 2015, payable on 6th October 2016.
Our view: HSS Hire registered a good performance for H1 2016. The group reported a sharp rise in revenue, driven by gains in earnings from key accounts and services. HSS Hire reported a 41% rise in revenue from key accounts and a £6.5m increase in earnings from existing key accounts. The group received £12.0m worth of revenue from new key accounts. HSS Hire has a net promoter score (NPS) of 42, which is in the top third of the TNS NPS Benchmark. The group’s focus on capital and operational efficiencies led to an increase in the utilisation rate and an improvement in EBITDA margin. HSS Hire‘s steps to simplify operating structures within its core, powered access and power within England and Wales, would lead to cost reduction and sales efficiencies. Moreover, the new NDEC would enable the optimisation of the existing network and a reduction in the number of distribution centres. Moreover, trading in Q3 2016 ha started ahead of Q3 2015, in line with management expectations. We are encouraged by HSS Hire Group’s progress in H1 2016 and would like to monitor further progress. Meanwhile, we maintain our Hold rating on the shares.
Horizon Discovery (LON:HZD, 168.50p) - Speculative Buy
Horizon Discovery (Horizon) entered into a co-development and commercialisation agreement with Ventana Medical Systems (Ventana) Inc., member of the Roche Group. The agreement covers the development, manufacture, and commercialisation of cell line derivative materials for use as immunohistochemistry (IHC) reference standards in cancer tissue diagnostics. As per the terms of the agreement, Ventana has the option to commission projects from Horizon, wherein Horizon would develop the applicable cell lines and associated derivative reference standard materials. Horizon would retain the primary responsibility of commercialising the reference standards and serve as the primary distribution channel to end customers in the growing tissue diagnostics market. This would provide Horizon additional ongoing revenue streams. Ventana would hold the option to co-distribute any developed reference standards.
Our view: The above-mentioned agreement is a positive development for Horizon. Based on the project requirements, Horizon would co-develop and commercialise IHC reference standards with Ventana to support assay development. IHC reference standards provide histologists, assay and platform developers, with reference standards that can be used as renewable and consistent points of reference when optimising and monitoring the performance of their assay. Horizon's reference standards would now be used increasingly in the IHC market. This is in line with Horizon's plan to embed OTS products into established and emerging workflows, thereby delivering consistent revenue streams at high margins. In light of Horizon's ongoing developments, we maintain a Speculative Buy rating on the stock.
McColl's Retail Group (LON:MCLS, 170.0p) - Hold
McColl's Retail Group, the UK's second largest multiple convenience retailers operating the convenience and newsagent sectors, yesterday provided trading update for the 13 week ended 28 August 2016 ('Q3 FY2016'). During the period, revenue advanced +1.8% and like-for-like ('LFL') sales fell by -1.8%, against the comparable period (Q3 FY2015). For the year-to-date, revenue grew +2% and LFL decreased -2%. The Group increased number of convenience store to 953 at the period end and said it is on track to meet the target of 1,000 convenient stores by the end of December 2016. On 13 July 2016, the Group announced acquisition of 298 convenience stores from the Co-operative Group Limited for the consideration of £117m in cash. McColl's CEO, Jonathan Miller commented "2016 continues to be a year of significant progress in delivering our convenience strategy. This was particularly demonstrated by our transformational acquisition of 298 convenience stores from the Co-op announced on 13th July 2016. We are making good progress with the approvals and our preparations ahead of the transition of these stores during 2017."
Our view: Beaufort met McColl's management back in July following their half-year announcement plus acquisition of 298 Co-op stores. At that time, management expressed their optimism regarding their proposed "transformational" acquisition and other strategies to improve their LFL performance. The Group's newsagents and standard convenience stores remain under pressure as sales of 'traditional categories' such as tobaccos and newspapers continue to fall. The Group's strategy is to shift its product range more toward food-to-go and other fresh food offerings, having converted 32 newsagents to food and wine stores. The opening of 3 Subway franchises during the period (plans for another 3 by the year-end) and its 550th Post Office are encouraging. Yesterday's Q3 result showed sign of improvement, with year-to-date LFL sales slightly better at -2.0% from -2.2% at the half year. According to the management, the acquisition of Co-op stores has provided 5 years of programmed acquisition/expansion that McColl's otherwise would have undertaken piecemeal. The management appear excited about the potential benefits it brings to the Group, including economies of scale, store locations, gross margin and market share (including new opportunity to expand into Northern Ireland region). These stores are profitable and an overall positive effect on the Group's performance should be evident post the completion of transaction during 2017. The warmer weather in July and August has helped sales of foods and drinks, and according to recent report from GfK, the UK's consumer demand improved to -7.0 in August from -12.0 in July marking, the highest monthly rise since June 2015. This is also backed by growth in both UK retail and LFL sales in July, as reported by the Office of National Statistics and the British Retail Consortium. But having noted all the positives, major UK food retailers continue to struggle amid cost inflation (mainly wage), food price deflation and intense competition, resulting in like-for-like revenue declines for the past couple years. With reduced dividend payout ratio (60% to 50%) following the announcement of acquisition, the key focus now must be how the Group going to cope with debt reduction, investment (capex) and the dividend payments. The shares trade on a FY2016E P/E of just 10.8x, but this cannot be considered cheap until shareholders have greater confidence in the Group's ability to continue to service its dividend promises. Beaufort reiterates its Hold rating on the shares.
Morses Club (LON:MCL, 114.0p) - Buy
Morses Club, the UK's second largest home collected credit lender, yesterday provided a trading update for the 26-week period to 27 August 2016. It confirmed performance for the period had remained strong and in line with expectations. Total credit issued increased by 16% to £66m compared to the same period last year, reflecting new territory builds, strategic growth initiatives and acquisitions; driven by this, customer numbers increased by 2.4% to approximately 208,000 as at 27 August 2016. Impairment for the period remained at the lower end of the management's target range. The gross loan book remained level against last year, however the proportion attributable to the Group's highest tier customers increased by 6% compared to 29 August 2015. This reflects the success of the Group's credit policy to focus on higher quality lending. The Group also confirmed release of its interim results for the 6-month period ended 27 August 2016 will be on Thursday, 6 October 2016 and that it will declare its maiden dividend (to be paid in Q4 2016) on that date.
Our view: Continuing strong business momentum demonstrates the resilience of the Group's business model in challenging economic environments. Post IPO, the Group might be expected to both gear-up and increase its role in the sector's ongoing concentration. Provident Financials' Consumer Credit Division, for example, is 440% geared, compared with just 130% for Morse, suggesting that the latter retains the opportunity to profitably relax its strictly managed balance sheet; operating in a highly fragment environment that is being forced to rapidly consolidate due to regulatory pressures, Morse also routinely finds accretive acquisitions available, priced at around 70% of gross book, that are still big enough 'to make a difference'. With a highly established position in the UK home collected credit sector Morses might additionally be expected to become a net beneficiary of Brexit, given that one result of effecting Article 50 is likely to be seen in mainstream lenders further tightening their underwriting criteria. It should also continue to make progress with its strategic growth initiatives, ensuring it takes advantage of the opportunity that new technology injects into the industry, in terms of greater interaction, flexible provision of credit and ease of access. The shares have performed reasonably well since May's IPO, but given the quality of management and visibility offered, a 2016/17 P/E multiple of just 10.3x along with almost a 5.7% yield (compared with Provident's 2016E of 17.5x and 4.3%) suggests it remains something of a bargain. Beaufort awards Morses Club a Buy rating with a 135p price target.
Tissue Regenix (LON:TRX, 20.25p) - Speculative Buy
Tissue Regenix gained medical coverage in an additional 10 States covered by the Medicare jurisdiction National Government Services (NGS) for the use of DermaPure®. The new coverage has helped to add 7.5 million Medicare beneficiaries to the existing list. Tissue Regenix has now secured Medicare reimbursement in 47 States, which amounts to 93% of traditional Medicare beneficiaries.
Our view: Tissue Regenix expanding medical coverage for the use of DermaPure® is positive news. DermaPure® utilises Tissue Regenix's patented dCELL® Technology, allowing for a regenerative approach to wound healing. It finds multiple applications in the treatment of chronic and acute wounds, such as diabetic foot ulcers, venous leg ulcers, and surgical and trauma wounds. Greater coverage across the States would allow physicians to access and employ the unique dCELL® Technology, which has the potential to offer superior clinical and economic outcomes. Recently, Tissue Regenix reported results for the financial year ended 31st January 2016. During the year, the company made significant progress both in the commercialisation and regulatory pathways across key focus areas. The performance of DermaPure® in its first commercialised year exceeded Tissue Regenix's expectation. As a result, the management is confident regarding the company's outlook as it progresses with a number of line extensions in numerous clinical applications. In light of these overall developments, we maintain a Speculative Buy rating on the stock.
Economic news
Germany manufacturing PMI
As per the data released by Markit, the final manufacturing PMI for Germany dropped to 53.6 in August, from 53.8 in July, in line with flash estimate.
Eurozone manufacturing PMI
Manufacturing PMI for the Eurozone fell to 51.7 in August from 52.0 in July, lowest level in three months, final data from Markit showed yesterday.
US initial jobless claims
Initial jobless claims in the US increased 2,000 to a seasonally adjusted 263,000 for the week ended 27th August, the Labor Department reported yesterday. Economists expected the claims to increase to 265,000. The four-week moving average fell 1,000 to 263,000 last week.
US manufacturing PMI
The final Markit manufacturing PMI for the US dropped to 52.0 in August from 52.1 in July.
US ISM manufacturing PMI
US manufacturing PMI slipped to 49.4 in August from 52.6 in July, as per the Institute of Supply Management (ISM). Economists forecasted a reading of 52.0.