Markets
Europe
The FTSE-100 finished yesterday's session 0.85% lower at 6,958.09, whilst the FTSE AIM All-Share index closed 0.11% worse-off at 824.70. In continental Europe, the CAC 40 index ended the day 0.14% lower at 4,534.59 and the DAX closed 0.44% down at 10,709.68.
Wall Street
In New York overnight, the Dow Jones gained 0.17% to stand at 18,199.33, the S&P-500 lost 0.17% to end the session at 2,139.43 and the Nasdaq fell 0.63% to 5,250.27.
Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.46% to 17,311.57, while the Hang Seng shed 1.25% to 23,034.08.
Oil
In early trade today, WTI crude was up 0.02% to $49.28/bbl and Brent was up 0.18% to $50.07/bbl.
Headlines
Samsung operating profit plunges 30% in wake of Note 7 fiasco
South Korean technology giAnt Samsung has seen profits plunge after the recall of its Galaxy Note 7 smartphone. Operating profit between July and September fell 30% from a year earlier to 5.2tn won ($4.6bn, £3.8bn) - the lowest level in two years. The world's largest smartphone manufacturer stopped making the Note 7 after reports of them catching fire. Meanwhile the firm's shareholders have backed Samsung heir apparent Lee Jae-yong joining the board. He is grandson of the firm's founder Lee Byung-chull. and the son of Samsung chairman Lee Kun-hee. The appointment is being seen as a big major step towards his overall control of the family-run group. But Mr Lee's appointment has raised some questions from critics who say he has not held any major role at the firm and was taking a place on the board through birth rather than by merit.
Company news
Sierra Rutile (SRX.L, 31.50p) – Under Review
Sierra Rutile published an update yesterday setting out the status of the Iluka transaction. Both parties appear to remain committed to the acquisition and the 36p takeover price remains unchanged. The Sierra Leone capital gains tax demands have been met by Sierra Rutile's largest shareholder (an undisclosed sum will be paid subject to completion). But the outstanding issue is the German Antitrust Authority enquiry where there is no news, and no hint of which way it will go.
Our view: It is positive news that Pala have committed to settling the capital gains tax issue and that 36p remains the price. With both sides apparently committed, completion depends on the German authorities. We have our recommendation and price target Under Review.
Sierra Rutile plc is a client of Beaufort Securities
Bunzl (LON:BNZL, 2,197.00p) – Hold
Bunzl plc, the international distribution and outsourcing Group, yesterday announced a trading statement for the period since 30 June 2016. Management confirmed that overall performance was consistent with expectations at the time of the half year results announcement in August. At constant exchange rates, Group revenue for the third quarter has increased by 7%, with 3% contributed by acquisitions and 4% due to the impact of additional trading days relative to the comparable period last year. Underlying revenue for the quarter was at a similar level to the third quarter last year. It also noted that the recent weakening of Sterling has had a significant positive impact on the reported results for the third quarter. The Group also announced that it has completed three further acquisitions in the UK, Ireland and the Czech Republic. These were: (i) Tri-Star Packaging Supplies, which is based near London and has three other branches in England and Scotland, is principally engaged in the distribution of food packaging and foodservice products as well as some cleaning & hygiene consumables. It supplies a variety of end user customers, including 'food-to-go' retailers, contract caterers and food processors, throughout the UK. Revenue in 2015 was £28 million; (ii) Kingsbury Packaging is located in Limavady, Northern Ireland and supplies food packaging related products to convenience stores and food retailers in Ireland. Revenue in 2015 was £5 million; and (iii) Blyth, a Prague based distributor of a broad range of personal protection equipment to a variety of end user customers throughout the Czech Republic and Slovakia. Revenue in 2015 was CZK182 million (c. £5 million). The acquisition of Silwell, which was announced on 30 August 2016, has been completed.
Our view: No surprises here. Flat organic growth was in-line with expectations, while additional trading days and M&A takes constant currency sales growth to 7%, as expected. Neither has there been any significant change in Bunzl's financial position during the period while the Group continues to have substantial funding headroom available. Growth through acquisitions remains an important part of the ongoing strategy of Bunzl. Indeed, the purchase of both Tri-Star and Kingsbury has further expanded Bunzl's foodservice and food retail product offerings in the UK and Ireland, extending its customer base in these important market sectors, while the acquisition of Blyth represents Bunzl's first step into the safety sector in the Czech Republic to complement existing operations in central Europe. With an active pipeline and ongoing discussions taking place, the Group expects to make further acquisitions over the coming months. Bearing this in mind, the shares now reflect the positive impact of post Brexit Sterling depreciation, yet appear not to have adequately factored in the higher price of securing such meaningful 'bolt-on' opportunities. While a sophisticated management approach will ensure shareholders do not overpay for such opportunities, 2017 could possibly find target companies become harder won. On this basis, having outperformed the FTSE250 by 20% over the past year, while trading on 21.3x 2017E earnings, followed by 20.6x for 2018E suggests the shares are now up with events. Beaufort is a long-term supporter of Bunzl shares, but nevertheless downgrades its recommendation to Hold at this time.
Lloyds Banking Group (LON:LLOY, 55.88p) – Buy
Lloyds Banking Group, a leading UK based financial services group, yesterday provided results for 3 months ended 30 September 2016 ('Q3 FY2016'). During the period, total income advanced by +1% to £4,275m and underlying profit dropped by -3% to £1,912m. Statutory pre-tax profit on the other hand has fallen by -15% to £881m due predominately to additional £1bn put aside for PROVISION OF payment protection insurance ('PPI'). This has resulted earnings per share to fell to 0.2p (Q3 FY2015: 0.8p). For the 9 months ended 30 September 2016, total income remained flat at £13bn, comprised of net interest income of £8.6bn, up 1% with improved margin of 2.72%, and other income down -2% to £4.5bn. Underlying profit fell -4% to £6.1bn but statutory pre-tax profit increased by +52% to £3.3bn due to lower PPI provision of £1bn compared to £1.9bn in 9 months ended 30 September 2016. The Group reduced operating costs by -2% at £6bn. Lloyds' CEO, António Horta-Osório commented "The outlook for the UK economy remains uncertain, however the strength of the recovery in recent years means the UK is well positioned. The Group's transformation and successful execution of strategy, along with its competitive advantages in costs and risk, also position us well for the future and to achieve our goal of becoming the best bank for customers and shareholders."
Our view: Lloyds reported slightly disappointing third quarter, having put aside a further £1bn provision for PPI compensation which was higher than the expectated, following the claims deadline extension to June 2019. This impacted its statutory pre-tax outcome to end -15% lower than the same period last year. On top of this, Q3 numbers was not encouraging, given the widening of impairment by -30% and, more significantly, the effects of adverse market movements which resulted in its defined benefit pension schemes moving from a surplus of £430m to a deficit of -£740m. Although, the negative impact on defined benefit pension schemes was more than offset by favourable annual result for held-to-maturity gilts, while the Group reclassified a total of £20bn value within the liquidity portfolio as 'available-for-sale' from 'held-to-maturity' previously. This has resulted common equity tier 1 (CET1) ratio of 13.4% (30 June 2016: 13%). Net interest margin for Q3, however, was down by -1.9%, representing a +2.72% increase for the 9 months period which remains encouraging given the BoE lowering its base rate by 25 basis points in early August. The balance sheet continues to be strong year-on-year with £70bn cash and balances at central banks (compared with end-FY2015: £58bn). Looking ahead, the Group reaffirmed its full year FY2016 guidance of a net interest margin at around 2.70%, cost:income ratio of 49.3%, asset quality ratio less than 20 basis points while continuing to generate around 160 basis points of CET1 capital before dividend. Year-to-date, the Group maintained 'strong' asset quality and improved balance sheet despite continuing economic uncertainties. While estimating the shares trade on a FY2016E and FY2017E P/E multiple of 7.6x and 8.8x, together with dividend yield of 5.4% and 6.2%, Beaufort retains its Buy rating on Lloyds Banking Group shares.
Meggitt (LON:MGGT, 427.70p) – Buy
Meggitt, a leading international company specialising in high-performance components and sub-systems for aerospace, defence and energy markets, yesterday announced that Meggitt Sensing Systems has won a US$48m contract to supply Health and Usage Monitoring System ('HUMS') for Guangzhou Hangxin Avionics Co Ltd ('Hangxin'). Hangxin is the largest Chinese aviation engineering company providing maintenance, repair and overhaul services to airlines, and the programme lifetime contract covers the design, development and delivery of on-board hardware - vibration sensors, data acquisition and processing electronics - and ground station software for detailed data analysis and after sales support for its Avicopter AC313/SJ and AC352 helicopters. HUMS promotes the safe running of aircraft by minimising cabin vibration and detect impending failures through monitoring the health of engines, cabin, drive train and rotor gearboxes. It also enables predictable and cost-effective maintenance. The deliveries of HUMS will commence in 2019 with sales of up to 500 units of each platform have been forecast over the next 20 years.
Our view: Meggitt's contract win clearly showcases strength of its product offering. The Group has over 60 years of experience in engine health monitoring and expertise in designing the extreme environment sensors and electronics needed to monitor modern aircraft engines. HUMS's lightweight, modular electronic processing units and sensors can monitor more equipment under extreme conditions seen by, for example, firefighter helicopters (AC313/SJ), and providing more cost-effective and predictable maintenance. In August, Meggitt reported its Interim results for the 6 months ended 30th June 2016, in which they reported revenue rising +11%, helped by favourable foreign currency movements, with a strong order intake for the second half. In the view of continuous development and contract wins, Beaufort maintains its Buy rating on the shares.