Markets
Europe
The FTSE-100 finished yesterday's session 1.12% lower at 6,700.90, whilst the FTSE AIM All-Share index closed 0.48% lower at 801.56. In continental Europe, markets ended in the red, as investors remained concerned over the prospects of an interest rate hike by the US Federal Reserve in September 2016. Germany's DAX and France's CAC 40 declined 1.3% and 1.2%, respectively.
Wall Street
Wall Street ended in the green, recovering some of the losses incurred in the previous session. The gain was due to US Federal Reserve Governor Lael Brainard expressing reservations about an immediate interest rate hike. The S&P 500 advanced 1.5%, with the telecom sector registering the highest gains.
Asia
Equities are trading higher, taking positive cues from the dovish comments of a US Federal Reserve official. Investors cheered better-than-expected economic data released in China. The Nikkei 225 closed 0.3% higher, while the Hang Seng Index was trading 0.9% up at 7:00 am.
Oil
Yesterday, WTI prices increased 0.9% to US$46.29 per barrel, while Brent oil prices rose 0.6% to US$48.32 per barrel.
Headlines
BCC cuts UK growth forecast
Citing uncertainty over the UK's Brexit negotiations, the British Chambers of Commerce (BCC) has downgraded the growth forecast for the UK for 2016 to 1.8% from 2.2%. Moreover, the agency has cut the growth forecast for the UK economy for 2017 to 1% from 2.3%.
Industrial production in China improves in August 2016
According to the National Bureau of Statistics, industrial production in China expanded 6.3% y-o-y in August 2016 after increasing 6.0% in July 2016. Production growth was higher than expected (6.2%). Furthermore, retail sales increased 10.6% y-o-y, higher than market expectations of a 10.2% rise.
Company news
MySQUAR Limited (LON:MYSQ, 4.88p) - Speculative Buy
MySQUAR, the Myanmar-language social media, entertainment and payments platform whose principal activity is to design, develop and commercialise Myanmar-focused internet-based mobile applications, yesterday announced that MyFish, the mobile game launched on 2 August 2016, has gone viral. It attracted in excess of 1.5 million registered users in its first five weeks following release. Average daily revenue in the month of August was US$800 per day, rising to a daily average of US$1,120 per day in the first 7 days of September and - three weeks earlier than forecast - to in excess of US$1,500 per day in the first few days of the 2nd week of September. MyFish's revenue in September and thereafter is expected to grow steadily as a number of additional features - which encourage gamers to pay to use them - are to be released during the next few weeks. A new mobile game, Hawk Hero ('Invincible Swords'), was also launched yesterday. The game works on both Android and IOS devices and, like MyFish, is a 'freemium' game, whereby the game is free at entry level and players are encouraged to enhance their chances with top-up payments for various features. The Group is able to drive users from one game or app to another, so Hawk Hero will benefit from the existing user base of other games and MyChat, the chat and social networking application of MySQUAR.
Our view: This news clearly demonstrates the power a large user-base social media brand, like MyChat, hands to the operator. It rapidly sucks in enthusiastic users who are still relatively new to the world of online gaming and then creates a compulsive and competitive arena from which to monetise a captive audience. Quite clearly, Myanmar is primed for the introduction of such content for which locals are now demonstrating a huge appetite. Assuming MySQUAR can sustain its current momentum through the introduction of a succession of similar freemium offers in coming months and years, then Myanmar's only wholly local language platform will retain its enviable status as the 'go-to' site in a country which is, in reality, is the world's very last major telecom frontier. Such success makes the Group's recent forecast, that it will achieve 5 million registered users across its different applications by the end of 2016, look easily within reach. The monetisation revenue stream will be leveraged through its agreement with MyPAY to increase profit margins, while management is also in negotiations for a commercial agreement with a VoIP technology provider, and both sides are working on technical integration of their respective services. The voice calling business - similar to a highly successful counterpart in Cambodia - is targeted for launch in the 4th quarter of calendar 2016. Thankfully none of these projects significantly build on operating costs, which means cash generated goes almost directly to the bottom line. This all suggests MySQUAR will more than deliver on its promises and, based on recent progress, has the very real potential to be achieving monthly break-even or better before the end of the current financial year. This is something that is unlikely to have been missed by its numerous and very cash-rich global peer group, who remains determined to continue ensnaring players in virgin territories that have successfully participated in an online user 'landgrab'. In this respect, MySQUAR now appears quite dramatically undervalued; Beaufort has set a price target of 21.0p/share and repeats its Speculative Buy recommendation.
Beaufort Securities acts as corporate broker to MySQUAR Limited
Aberdeen Asset Management (LON:ADN, 320.10p) - Buy
In an update, Aberdeen Asset Management informed that the UK's Financial Conduct Authority (FCA) had increased the Company's minimum level of required capital to approximately £475.0m from £435.0m. The change was partly driven by the removal of the benefit of insurance mitigation when modelling operational risk for the purposes of Pillar 2 of the Basel Accords on banking laws and regulation, informed Aberdeen. Pillar 2 relates to the supervisory review of a company's compliance with the minimum capital requirement. The increase was also due to the FCA's inclusion of an allowance to cover unsighted and unquantifiable risks that may emerge in addition to the risks covered by Pillar 2 requirements.
Our view: The increase (mentioned above) in the capital requirement for Aberdeen Asset Management comes in the wake of the FCA tightening its noose over asset managers. The heightened scrutiny follows the proposal for a stress test for asset managers, similar to that for the world's biggest banks. However, the Company's available capital remains comfortably above the requirement set by the FCA. Moreover, we believe that the impact of the capital requirement is already factored in the Company's share price. Therefore, we reiterate our Buy rating on the stock.
Associated British Foods (LON:ABF, 2,815.0p) - Hold
Associated British Foods ('ABF'), an international food, ingredients and retail group, yesterday provided its pre-close trading update for the 53 weeks ended 17 September 2016 ('FY2016'). The Group said operating profit will be ahead of last year, due to the strong second half underlying operating performance, ahead of expectation. The management expects full year earnings per share to be marginally higher than last year. Net debt at period end is expected to be slightly higher than last year, due to £245m purchase consideration for the Illovo minority buyout and a negative translation effect on non-sterling denominated borrowings. Revenues and operating profit for Grocery, Sugar and Ingredients division are expected to be ahead of last year, with both Grocery and Ingredients divisions further improved its margin. Sugar division has reached agreement to sell its cane sugar business in southern China. Meanwhile, Agriculture division experienced number of challenges that its operating profit expected to be slightly below last year. For the Retail division, sales at Primark for the full year are expected to be +9% ahead of last year at constant currency, helped by +2% increase due to 53rd week this year. Like-for-like ('LFL') sales on the other hand are expected to be fell by -2% due to unseasonable weather. The Group is scheduled to announce full year result on 8 November 2016.
Our view: The pre-close trading update from ABF confirmed most of its divisions are expect to deliver both revenues and operating profit, at constant exchange rate, better than in the FY2015. Grocery and Ingredients division saw an improvement in margin with latter's operating profit expected to be "substantially higher". Sugar division margins remain under pressure with the low retail sugar prices continuing, although more positively this is expected to improve in FY2017 as EU sugar stock levels have reduced and the world sugar price increased. Even its Agriculture division performed resiliently, now being expected to deliver operating profit just below last year despite challenging UK farming market. So, this left retail division to blame for disappointing shareholders, who expressed their feelings with a c.10% fall in yesterday's share price. Accounting for 42% of the Group revenues in FY2015, it delivered encouraging revenue growth of +9% at constant exchange rate and +11% at actual exchange rate for the period, partly due to increase in selling space and also an extra trading week in FY2016. Management has indicated, however, their expectations for Primark's full year LFL sales to end down by -2%, blaming warm weather last winter followed by a cold March and April. Operating profit margin looked to have remained flat, while the Group warned of a further negative hit in FY2017 coming from weaker Sterling. ABF has also noted that as a result of substantial decline in UK long-term bond yields, the Group expect a year-end deficit on the Group's UK pension scheme of some £200m compared to small surplus last year. Considering FY2016E and FY2017E P/E multiples of 27.4x and 26.4x with prospective dividend yields of just 1.24% and 1.30% respectively, together with mixed translational effects on the Group's operating profit from next year, the equity still does not look particularly cheap. Beaufort maintain a Hold rating on the shares.