• Alecto Minerals (LON:ALO)
• Tiziana Life Sciences (LON:TILS)
• Barratt Developments (LON:BDEV)
• Horizon Discovery (LON:HZD)
• Severn Trent (LON:SVT)
"The Fed's Patrick Harker yesterday spelt out just how complex policy on interest rates has now become. Janet Yellen's own testimony this afternoon, which is seen as key to December's FOMC decision, will have to grapple with all the new uncertainties injected by the President-elect, ranging from regressive tax cuts, booming infrastructure spending, financial deregulation and cuts in federal spending. No easy task, even if the markets appear more convinced than ever that the first hike since 2006 will be delivered next month and that this will be the first of a series of such moves over the subsequent 18 or so months as inflation climbs. The recent phase of asset repricing, nevertheless, took a breather yesterday, with all principal markets making only fractional movements. The Dow Jones broke its record run to drift into the red as financials retrenched, while momentum in technology stocks meant the NASDAQ still managed to close modestly up. Asia also put in just marginal movements across the board, as oil prices went lower on weekly data detailing a large rise in inventories, while the Bank of Japan surprised traders with its plans to buy unlimited JGBs at fixed rates in its latest daily market operation. The latter, of course, being seen as it effort to ensure domestic rates do not find themselves shackled to the US T-bill's upward movements. Today, the UK is due to release retail sales figures while the CML provides mortgage lending data; Eurozone inflation numbers are also expected this morning. Clearly the principal event of the day, however, will be Janet Yellen's Testimony on Capitol Hill which is due to commence at 10:00hrs EST and likely overshadow speeches also due from the Fed's William Dudley and Lael Brainard; the US is due to release inflation, weekly jobless claims and export statistics this afternoon as well. Another busy day for UK corporates, with earnings or trading updates scheduled from the likes of CRH (CRH.L), Great Portland Estates (GPOR.L), Johnson Matthey (JMAT.L), Kier Group (KIER.L), Premier Oil (PMO.L), Royal Mail (RMG.L), Shanks (SKS.L), Ted Baker (TED.L), TT Electronics (TTG.L) and Watkin Jones (WJG.L). The FTSE-100 is expected to open virtually unchanged."
- Barry Gibb, Research Analyst
Markets
Europe
The FTSE-100 finished yesterday's session 0.63% lower at 6,749.72, whilst the FTSE AIM All-Share index closed 0.39% higher at 809.32. In continental Europe, the CAC-40 finished 0.78% lower at 4,501.14 whilst the DAX was 0.66% down at 10,663.87.
Wall Street
On Wall Street last night, the Dow Jones shed 0.29% to 18,868.14, the S&P declined 0.16% to 2,176.94 and the Nasdaq added 0.36% to finish at 5,294.59.
Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.05% to 17,854.09, while the Hang Seng was down 0.16% at 22,244.46.
Oil
In early trade today, WTI crude was down 0.2% to $45.48/bbl and Brent was down 0.24% to $46.52/bbl.
Headlines
RBS fine fears weigh on share sale
Concerns RBS (RBS.L) may be fined between $5bn (£4bn) and $12bn in the US are preventing the government from selling shares in the bank, MPs have heard. RBS faces a settlement with the US Justice Department over claims it mis-sold toxic mortgage securities in the run-up to the financial crisis of 2008. The size of that fine is weighing on the value of the bank, said James Leigh-Pemberton, the head of the body that manages the public's stake in RBS. Mr Leigh-Pemberton, the chairman of UK Financial Investments, told MPs that financial markets had speculated on the size of the settlement.
Company news
Alecto Minerals (LON:ALO, 0.06p) – Speculative Buy
Alecto has published an update on the Matala financing situation. By way of background, Alecto has been in advanced discussions since late 1Q with a Chinese group for vendor financing of its flagship gold mine project in Zambia. However, the process has taken longer to complete, partly due to a new Zambian president and partly due to the slow and cautious investing process of the Chinese side. Today's update says that a key step has been achieved in that process, with the Zambian government allowing the lender security over the Matala asset, which makes risk insurance available. The next step involves finding a local "institution" to on-lend the Chinese funds (the institution needs to be guaranteed -presumably to protect against the funds disappearing). Once step 2 is in place Alecto management expect to close financing and break ground in 1Q17.
Our view: Management and investors are having to remain patient here. While some onlookers may question whether the Chinese funding will ever arrive, these are real entities spending time and money on this process. Note also that management and its partners have experience successfully sourcing mine finance from China. Although not guaranteed, we believe the Chinese funding will come through.
Keras Resources (LON:KRS, 0.52p) – Speculative Buy
Keras Resources announced today it has commenced initial drilling on its 100% owned Klondyke gold project located in the Pilbara Region of Western Australia. With its planned 600m drill programme management aims to confirm targets for resource drilling to begin in early 2017 and add to the existing JORC-compliant inferred resource of 5.6Mt grading 2.08g/t Au. The current resource is confined to only 2km of the 7.5km strike length of the main shear zone. Detailed mapping of the greater Klondyke area has identified visible gold in chip samples, extensive old workings and expansive shear zones. In addition, Keras has the right to mine the contiguous Haoma tenements covering some 650ha with discovery potential based on high grade historical drill results including 3m grading 17.58g/t Au, 4m grading 59.48g/t Au and 11m grading 7.23g/t Au.
Our view: We are encouraged with the on-going development and potential for additional resources at Klondyke. Additional resources could potentially elevate Keras to a stand-alone owner-operated gold miner in Western Australia. We look forward to further updates on Klondyke drilling and mapping programmes. In the meantime, we maintain our speculative buy on the stock.
Tiziana Life Sciences (LON:TILS, 220.00p) – Speculative Buy
Tiziana, the clinical stage biotechnology company developing targeted drugs for cancer and autoimmune diseases, yesterday announced new data from animal studies demonstrating the potential of its novel oral therapy with foralumab (NI-0401) for NASH, diabetes and other life-threatening inflammatory diseases. Most significantly, Tiziana's foralumab is the only fully human engineered anti-CD3 monoclonal antibody (mAb) in clinical development to date. Highlights include (i) Oral efficacy in humanised mouse models with foralumab (NI-0401), being a major milestone and a potential breakthrough for treatment of NASH and autoimmune disease, (ii) Unique oral technology that stimulates the natural gut immune system and potentially provides a therapeutic effect in inflammatory and autoimmune diseases with virtually no toxicity and (iii) Positive therapeutic effects of foralumab were consistently demonstrated in animal studies conducted by Prof. Kevan Herold (Yale University). Further animal studies conducted by a member of Tiziana's Scientific Advisory Board, Prof. Howard Weiner, in his laboratory at Harvard University also supports the potential of oral treatment with foralumab. His recent publication that was contained in the Journal of. Autoimmunity provides additional support to this novel approach utilising a murine anti-CD3 mAb (OKT3) in mouse models. "Our data suggest that oral treatment with anti-CD3 mAb induces an anti-inflammatory response through induction of regulatory T cells (Tregs)," noted Prof. Weiner, "This proof of concept of foralumab in humanized mice demonstrates that this approach could be used successfully in humans as well."
Our view: Until recently it has been generally accepted that despite the convenience and appeal of oral therapies, immunotherapies could not be administered orally because they would be degraded and inactivated by the harsh conditions in the gastrointestinal tract. This new data, however, demonstrates oral efficacy in animals with foralumab, representing a major milestone and potential game-changer for the treatment of NASH and autoimmune diseases. The study just completed demonstrates that oral administration works consistently in pre-clinical models with human immune cells. It suggests that oral CD3-specific mAb has the potential to become an entirely novel approach for the treatment of currently unmet needs. The addition of Milciclib to its portfolio, alongside the acquisition of Foralumab back in 2014, gave Tiziana two phase II candidates. Tiziana remains on-track to progress its lead candidate in its Bcl-3 programme into clinic in later this year or early 2017. £12.8m (gross) funding was raised in FY2015, followed by a total of £0.88m in the form of Convertible Loan Notes ('CLN') and £0.3m through warrants so far in the current year, which demonstrates shareholder confidence in the Group's ongoing projects. Beaufort retains its Speculative Buy recommendation on Tiziana Life Sciences.
Barratt Developments (LON:BDEV, 469.50p) – Buy
Barratt Developments yesterday issued a trading update in respect of the period from 1 July to 13 November 2016. Highlights detailed overall market conditions remaining healthy, with the Group said to be trading well since the start of the new financial year. A sales rate of 0.74 (2015: 0.71) net private reservations per active outlet per average week was achieved during the period, with total forward sales (including joint ventures) up by 4.3% to £2,654.3m (2015: £2,544.6m) representing 11,733 plots, with wholly-owned forward sales strongly up by 19.5% to £2,466.1m (2015: £2,062.9m). In common with other UK housebuilders that have recently also provided investors with updates, Barratt confirmed it was experiencing robust consumer demand, driven by an undersupply, good mortgage availability and a supportive Government policy environment, including Help to Buy. Similarly also, the Group saw London market conditions at higher selling prices remaining more challenging, although in an effort to mitigate these risks Barratt has taken pricing action on a number of sites in the region. Other actions to de-risk London delivery, include an exchanged build-and-sale agreement on a bespoke development of 39 apartments for a total value of £47m. As had been previously announced the Board has proposed a record dividend payment of £248m payable on 21 November 2016. The FY16 total dividend payment, including the special and interim dividend, amounts to 30.7 pence per share (2015: 25.1 pence per share) equating to a total of £308m.
Our view: Barrett's overall trading and outlook remains in-line with market expectations. It expects to deliver further good progress on the operating front during 2017, with modest growth in wholly-owned completions while remaining on track to achieve its target of a minimum ROCE of 25%. The Board is focused on delivery of a 20% gross margin for FY17, notwithstanding the fact that high-end London market continues to present some headwinds. Importantly in this respect, the land market remains attractive and the Group continues to secure operational land opportunities that at least meet its minimum hurdle rates in terms of both gross margin and ROCE. No change has been proposed to the generous capital return plan, which was announced in September 2014 and continues to deliver attractive future cash returns through an ordinary dividend of one third of earnings and a special dividend of £400m in aggregate, with made or planned payments of £100m, £125m and £175m over the three years to November 2017. Trading on a sector average valuation, with a 2017E P/E multiple of 9.9x, a yield of 7.3% and a price/NAV of 1.52x, Beaufort keeps the shares on a Buy rating for both income and value investors. While retaining an overweight stance on the UK housebuilding sector, Taylor Wimpey remains Beaufort's top pick.
Horizon Discovery (LON:HZD, 124.00p) – Speculative Buy
Horizon Discovery ('Horizon'), the world leader in the application of gene editing technologies, yesterday announced that it has entered into partnerships with 3 leading Chinese diagnostic kit developers. Under the terms of the agreements, Horizon will provide its HDx Reference Standards for novel Next Generation Sequencing ('NGS') assay development, clinical trials, and ultimately for inclusion as in-kit controls under Original Equipment Manufacturer ('OEM') agreements. Agreements provide upfront payment for use as quality controls in their assay development and clinical trial programmes, with typical revenues expected from each programme in the "mid- to high five figure (sterling) range". Assays in China are under obligation by the Chinese FDA not to make any changes in the format of the test for a period of 5 years from approval, and so Horizon is in discussions with each developer to provide Reference Standards as in-kit controls for a minimum of 5 years post-clearance. Cleared assays under such agreements would provide Horizon with expected revenues in the "six figure (sterling) range per annum". Each developer is anticipated to develop 3-4 assays per year over the next several years with Horizon providing Reference Standards for each. The first assays are anticipated by partners to be approved in 2018. Horizon's CEO, Dr. Darrin Disley commented "Our dedicated emerging markets team, under the leadership of Dr. Liangshen Wei, is establishing the relationships and status necessary to succeed in this large, growing, but complex market. Today's announcement is a validation of this effort as we establish Horizon as the preeminent provider of Reference Standards to China, initially for NGS applications and soon expanding to other genomic assays and immunohistochemistry."
Our view: This is further good news for Horizon, marking its entry into the Chinese clinical diagnostics market, while further demonstrating its brand reputation and technology. Horizon will receive an upfront payment amounting to a "mid- to high five figure" and also captures potential for a recurring revenue in the "six figure" range/year upon the developer receiving regulatory approval due to Chinese FDA not permitting submitted assays to be altered. Once approved by the Chinese FDA, such NGS diagnostic assays will be used to identify which patients might benefit from receiving novel targeted therapies to treat their solid and liquid tumours and thereby create significant cost and time saving potential for the clinics/hospitals. Horizon also said it is now being approached for additional partnerships with potential to add as many as 20-30 further opportunities. China is one of the world's fastest growing markets with strong double digit growth rates that are expected to reach US$10bn by 2021, according to DPI Research. The Group has continuing to build up its momentum and now has successfully entered a new major, long-term market with potential to become an industry benchmark provider in China. In light of these developments, Beaufort reiterates its Speculative Buy rating on the shares.
Severn Trent (LON:SVT, 2,186.00p) – Buy
Severn Trent, a leading UK water company provides clean water and waste water services, yesterday announced that the Boards of Severn Trent and Dee Valley have reached agreement on the terms of a recommended acquisition of the entire issued and to be issued voting and non-voting ordinary share capital of Dee Valley by Severn Trent Water, valuing it at approximately £78.5m (1,705p per voting shares and 1,601p per non-voting shares). Dee Valley is a licensed water undertaker suppling drinking water to approximately 125,000 domestic and business customers in northeast Wales and in northwest Cheshire. Severn Trent believes acquisition is a "natural fit" as Dee Valley operates in neighbouring areas of Cheshire, England and North Wales to Severn Trent and it is confident that it is possible, through the application of Severn Trent's operating model, to achieve economies of scale and lower cost of financing for the operations of Dee Valley. The Acquisition is expected to be earnings accretive from completion.
Our view: This is a positive move for Severn Trent, as Dee Valley operates in a neighbouring geographical location. By enlarging its asset base, Severn Trent is confident of its ability to operate Dee Valley more efficiently using both its economies of scale and lower cost of finance. The announcement came after Ancala Partners, an established infrastructure investment manager, and Dee Valley reached agreement to be acquired on 21 October 2016, on the basis of 1,550p per voting shares and 1,455p per non-voting shares. Following yesterday's announcement, however, the Dee Valley Board withdrew its earlier recommendation. The revised offer, approving Severn Trent's higher proposal, now values Dee Valley at a premium to the previous offer with Severn Trent also committing to share half of any wholesale cost efficiencies achieved with Dee Valley's customers. For the year ended 31 March 2016, Dee Valley Group generated revenue of £23.1m and an operating profit of £6.6m. Considering synergies, efficiencies and the boost to earnings post-completion, we believe the acquisition makes a good fit for Severn Trent. The shares are valued at FY2017E and FY2018E P/E multiples of 21x and 20.4x along with dividend yield of 3.7% and 3.8%. Beaufort reiterates its Buy rating on Severn Trent in anticipation of them reversing the sharp price decline experienced over the past six weeks.