Markets
Europe
The FTSE-100 finished yesterday's session 0.47% lower at 6,999.96, whilst the FTSE AIM All-Share index closed 0.12% down at 826.24. In continental Europe, markets ended in the red due to losses in airline stocks after a profit warning from EasyJet. Furthermore, investors were concerned about the future of the European Central Bank's stimulus programme. Germany's DAX and France's CAC 40 declined 0.2% each.
Wall Street
Wall Street ended marginally higher, as investors remained cautious ahead of US jobs report data to be released today. The S&P 500 edged up 0.1%, with the materials sector leading gainers and the healthcare sector dropping the most.
Asia
Equities are trading lower, as investors await US payrolls data to gauge the prospects of an interest rate hike by the Fed. Moreover, a sharp fall in the pound impacted investor sentiment. The Nikkei 225 fell 0.2%, while the Hang Seng was trading 0.5% down at 7:00 am.
Oil
Yesterday, Brent oil prices increased 1.3% to US$52.51 per barrel, while WTI prices rose 1.2% to US$50.44 per barrel.
Headlines
Economic productivity in UK touches pre-crisis high
The UK's economic productivity, which is a key indicator of living standards, has rebounded to levels before the start of the financial crisis. As per data from the Office for National Statistics, workers' hourly output in the UK in the three months to June increased 0.4% y-o-y, in line with the growth at the end of 2007. The rise was primarily due to higher employment, including more foreign migrants.
Company news
BAE Systems (LON:BA., 537.0p) - Buy
BAE Systems provided a trading update for 2016. The trading has been in line with management expectations and outlook for 2016 remains unchanged. BAE Systems expects underlying earnings per share expected to be around 5% to 10% higher than last year's adjusted underlying earnings per share of 36.6p. BAE Systems is moving well on discussions with the UK government and the Saudi Arabian government to define the scope and terms of the next five-year Saudi British Defence Co-operation Programme. The Group would pay an interim dividend of 8.6p on 30th November. BAE Systems will announce its financial results for the year ending 31st December 2016 on 23rd February 2017.
Our view: BAE Systems expects to deliver good performance in 2016. The Group made good progress in the UK working with its MoD customer on implementing the Strategic Defence and Security Review. In July, BAE Systems signed a Typhoon support partnership agreement worth £2.1bn over a ten year period. In the maritime domain, the UK Successor Submarine production programme started with first steel cut on the 5th October and around £1.3bn of funding committed for the initial production award. In surface ships BAE Systems is moving towards defining an overall Type 26 build contract. In addition, a contract is being finalised for the fourth and fifth new River Class Offshore Patrol Vessels. The outlook of the defence market remains positive in the US. BAE Systems delivered six ships under its shipbuilding contracts. The Group's export activity continues to be supported by the UK government. The Group's strategic hold over the markets is growing strong and it is expected to perform in line with the 2016 guidance. We believe BAE Systems is well placed with substantial resources and funds to deliver long-term growth. We maintain a Buy rating on the stock.
DFS Furniture (LON:DFS, 273.30p) - Hold
DFS Furniture declared its preliminary results for the 52 weeks ended 30th July 2016 (FY 2016). Gross sales increased 7.4% to £980.4m (FY 2015: £913.1m) and revenue increased 7.1% to £756.0m (FY 2015: £706.1m). Underlying EBITDA soared 5.8% to £94.4m (FY 2015: £89.2m). Pre-tax profit stood at £64.5 million (FY 2015 underlying pre-tax profit: £33.3m). Adjusted underlying EPS up 28.1% to 23.7p (FY15: 18.5p). Free cash flow generated during the period stood at £75.6m (FY 2015: £70.7m), with cash conversion ratio at 80.1% (FY 2015: 79.2%). On the operational front, the number of DFS stores in the UK & ROI increased to 109 from 105 in FY 2015. Net promoter score (NPS) (post purchase) increased to 83.9% from 78.8% in FY 2015, and established customer NPS improved to 31.2% from 21.9% in FY 2015. DFS Furniture's Board proposed a final dividend of 7.5p, taking the full year dividend to 11.0p, 18.3% higher than FY 2015.
Our view: DFS Furniture performed decently in FY 2016. The company reported an increase in revenues and profit margins. DFS remained strong on cash generation with a net debt/EBITDA ratio of 1.45x. DFS recorded double-digit growth in gross sales, profits and site traffic. The company reported a 35% growth in branded upholstery orders through DFS. Nonetheless, the uncertainties being generated by the referendum, together with the National Institute for Economic and Social Research predicting a 'evens' chance of recession in 2017; it will be difficult for DFS to avoid downgrading expectations as the year progresses. Therefore, we retain a Hold rating on the stock.
easyJet (LON:EZJ, 933.50p) - Buy
easyJet, a low-cost European short-haul airline company, yesterday released trading update for the three months ended 30 September 2016 ('Q4 FY2016') and September passenger statistics. During September, passenger traffic rose +5.2% y-o-y to 6,956,654, while load factor fell -2% to 91.1%. On a rolling basis for the past 12 months, passenger traffic rose +6.6% to 73.1 million customers and the load factor improved +0.1% to 91.6%. For the Q4, passenger traffic was 22.0 million, load factor was 93.9% and revenue per seat at constant currency decreased by -8.7% y-o-y. During Q4, capacity grew by +6.1% and cost per seat (excluding fuel) at constant currency expected to down by -1.1%. Second half unit fuel expected to decrease by £75m-£80m. For the FY2016, the Group expect pre-tax profit to lie between £490m-£495m and said that it is committed to declaring a full year dividend based on a payout ratio of 50% of post-tax income. Looking ahead, for the Q1 FY2017, the Group has already sold c.45% of seats, in line with last year, and revenue per seat to be down by similar amount to Q4 FY2016 (-8.7%). For the FY2017, the Group expect capacity to grow by c.+8%, while cost per seat (excluding fuel) at constant currency to increase by c.+1%. easyJet's CEO, Carolyn McCall commented "We have been disproportionately affected by extraordinary events this year but our excellent network, cost control and revenue initiatives and our strong balance sheet underpin our confidence in the business."
Our view: easyJet's Q4 performance was weaker than expected as the airline company saw adverse exchange rate movements post the Brexit vote continue to squeeze its profit. Total expected foreign exchange impact was revised up to c.£90m, having previously guided £55m in May and raised to £80m in July. This has resulted the Group expecting pre-tax profit to lie between £490m-£495m against consensus estimate of £475m-£596m which caused the weaker share price movement yesterday. Post the Brexit vote, however, we have seen UK consumer confidence surprising resilient and according to World Travel and Tourism Concil ('WTTC'), the Referendum will not be seen to affect the UK's tourism sector in the near term. WTCC expects the UK tourism sector to grow by +3.6% over the year, outperforming the projected global rise of +3.1%. With weaker Sterling (attracting more international travellers) and fuel prices that continue to range trade sub-US$50/bbl, the sector remain attractive. We believe easyJet is capable of continuing to navigate through the uncertain times and continue to create excellent shareholder returns. EasyJet shares suffered a bad 'knee-jerk' reaction on 24 June but, as investors have since seen, with the prospective shock of formal separation from the EU still, perhaps two-and a half years away and the economy meanwhile basking in the economic benefits of Sterling's devaluation and the Bank of England's additional stimulation, easyJet appears set to fly high for some time to come. While keeping one careful eye on the oil price, Beaufort is happy to retain its Buy recommendation on the shares based on a FY2016E P/E of 9.5x and 5.3% yield.
Morses Club (LON:MCL, 120.0p) - Buy
Morses Club declared its interim results for the 26 weeks ended 27th August 2016 (H1 FY 2017). Revenue increased 8.0% y-o-y to £47.2m, while Net loan book rose 5.0% y-o-y to £56.2m. Adjusted pre-tax profit stood at £8.6m (H1 FY 2016: £8.8m), leading to adjusted EPS of 5.3p as compared with 5.4p in H1 FY 2016. Reported pre-tax profit stood at £4.6m, as compared with £6.4m in H1 FY 2016, resulting in an EPS of 2.7p (H1 FY 2016: 3.7p). Return on assets (rolling 12 months) increased to 19.5% from 18.5% in the same period last year. The number of customers increased 2.1% to over 207,000 (H1 FY 2016: 203,000). Impairments as a percentage of revenue for the period stood at 22.5% (H1 FY 2016: 18.3%). On the operational front, the company completed three acquisitions with total gross receivables of £3.3m. Morses Club declared its maiden interim dividend of £2.7m equating to 2.1p.
Our view: Morses Club delivered good performance in H1 FY 2016. The company benefitted from its focus on credit policy and emphasis on high quality lending. Also, contributions from territory builds and acquisitions during the period added to the growth. The company's profits dropped due to tighter margins and one-off items. Morses Club made good progress in its strategic plan of using technology to maximise the customer experience and taking growth initiatives. The company's launch of Morses Club Card was a huge success with over 5,000 cards issued within the first six months of launch. The company's healthy cash position paved way for first interim dividend to shareholders. We are encouraged by Morses Club in H1 FY 2017 and look forward to further updates. Therefore, we maintain a Buy rating on the stock.
Economic news
Germany factory orders
German factory orders increased 1.0% m-o-m in August, following a revised increase of 0.3% in July, as per data from the Federal Ministry of Economy and Technology. Economists had forecasted orders to increase by 0.3%.
US initial jobless claims
Initial jobless claims in the US dropped by 5,000 to 249,000 for the week ended 1st October, the Labor Department reported yesterday. The four-week moving average fell 2,500 to 253,500 last week, the lowest level since December 1973.