The FOMC’s Monetary Policy Statement, which is due at 19:00hrs GMT, will likely be today’s principal talking point. Not that any change in the discount rate is anticipated, but traders will be listening acutely for any suggestion as to when the first of 2017’s three anticipated hikes might kick-off. This will be particularly sensitive for the US$, which yesterday slid to its lowest level against the international basket since Trump’s election was seen to drive the currency to a 14-year high in November. While there may be some truth in the idea that month-end rebalancing by forex traders somewhat weighed on the Dollar, suggestions from President Trump that Japan and China are devaluing their currencies to boost international trade, while a US trade advisor tells the FT that Germany benefits from a ‘grossly undervalued’ Euro, hints that there are some early signs of panic in the White House. Yet the reality of Trump’s rallying call ‘America First’ is founded on inward looking, reflationary and protectionist policies, which are destined primarily to power the US$ ever upward, and something that even Donald might find he can do very little to stop. The damage inflicted on the Mexican Peso after its government drew swords with the President was a clear warning to all US trading partners, but most particularly China, of troubles ahead. Reflecting on this, the Dow Jones remained yesterday’s main casualty, with the other principal US indices closing with just fractional movements. Catching up following the Lunar New Year break, the Hang Seng fell quite sharply, reflecting also news that China’s Manufacturing PMI fell for the second straight month in January. Elsewhere in Asia, the Nikkei recovered from an early setback to close slightly in the positive, while the ASX gained as commodity plays and financials marginally firmed. Other than the Nationwide Housing Prices index, there is little UK macro data due today, although January Markit Manufacturing PMI figures cover most EU territories, including Great Britain. At 10:00hrs GMT, the European commission is also due to release its Economic Growth Forecasts, while later a large batch of US statistics, including ISM Manufacturing, Construction Spending and Vehicle Sales for January, precede this evening’s Fed decision. UK corporates due to release earnings or trading updates include AG Barr (BAG.L), Low & Bonar (LWB.L) and TalkTalk (TALK.L). With the US$ now trading off yesterday’s lows, London equities are expected to recoup some of yesterday’s losses, with the FTSE-100 seen rising some 30 points during opening business. Investors will also be keeping a weary eye out for reports from the Commons this morning, with as many as 100 MPs reportedly planning to vote against a law to trigger Article 50 - Barry Gibb, Research Analyst
Markets
Europe
The FTSE-100 finished yesterday's session 0.27% lower at 7,099.15, whilst the FTSE AIM All-Share index closed 0.18% better-off at 883.58. In continental Europe, the CAC-40 finished down 0.75% at 4,748.90 whilst the DAX was 1.25% lower at 11,535.31.
Wall Street
In New York on Friday, the Dow Jones fell 0.54% to 19,864.09, the S&P-500 lost 0.09% to 2,278.87 and the Nasdaq was up 0.02% to finish at 5,614.79.
Asia
In Asian markets this morning, the Nikkei 225 had risen 0.53% to 19,142.14, while the Hang Seng was down 0.8% to 23,173.1.
Oil
In early trade today, WTI crude was down 0.19% to $52.71/bbl and Brent was up 0.85% to $55.70/bbl.
Headlines
Cross-country commuters to save 'hundreds of pounds'
Passengers using cross-country train routes could theoretically save up to £260 a journey, under a trial scheme to simplify fares. The Rail Delivery Group (RDG), which represents train operators, says the 16 million fares currently on offer are "baffling" for passengers. It wants to ensure passengers are offered the cheapest possible fares. The trial from May will particularly benefit people travelling between Scotland and south-west England. A traveller buying an off-peak return from Wick, in northern Scotland, to Par, in Cornwall, can currently pay up to £342.50, although in practice few people pay that amount. However, by buying six separate fares for each leg of the journey, passengers can pay as little as £80 for the same trip. The RDG says the potential saving of £262 will soon be offered to customers automatically. CrossCountry Trains, an operator taking part in the trials, may eventually offer savings on other routes as well.
Source: BBC News
Company news
Ariana Resources (LON:AAU, 1.65p) - Speculative Buy
Ariana Resources, the gold-silver exploration and development company operating in Turkey, today announced the receipt of an operational forestry permit for the Kizilcukur project, located 50km via road from the Kiziltepe mine site. Kizilcukur is located outside of the Red Rabbit joint venture with Proccea Construction and is owned 100% by Ariana. The forestry permit along with the mining licence (approved on 18 November 2015) will enable production from Kizilcukur. If Kizilcukur is developed as a satellite deposit, management estimates an additional 18 months of production for the Kiziltepe mine from three shallow open-pits. Ariana plans to commence trail mining during 2017 and stockpile ore at Kiziltepe for potential future processing. The trial mining exercise will provide the base for an internal feasibility study looking at Kizilcukur as a potential for high grade material.
Our view: Receipt of the forestry permit for Kizilcukur allows Ariana to proceed with its plan to develop potential satellite deposits which could significantly increase the reserve base and extend the life of mine beyond the current eight years at Kiziltepe. Kizilcukur has a JORC-compliant (2012) combined resource (Indicated and Inferred) of 307,900t grading 2.11g/t Au and 73.4g/t Ag with the potential for additional resources upon further drilling. We look forward to further updates as the company proceeds with its trial mining plan at Kizilcukur. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Ariana Resources plc
Savannah Resources (LON:SAV, 5.87p) - Speculative Buy
Savannah Resources announced today that it has completed drilling at the Ravene deposit in Mozambique which forms part of the Mutamba/Jangamo heavy minerals sand project being developed by Savannah and Rio Tinto as part of a consortium agreement (see RNS 11 October 2016). The drill programme comprised 107 drill holes for a total of 2,914m over a strike length of 21km. A 1000m x 500m grid was used to infill existing holes previously drilled by Rio. Sample results are expected in February and will be used to estimate a maiden resource estimate over the Ravene deposit which will be incorporated in to a scoping study. The Mutamba project comprises the Jangamo, Dongane and Ravene deposits and has a resource estimate of estimate of 3.5Bt grading 3.8% total heavy minerals (THM), containing 81Mt of ilmenite, 2.2Mt rutile and 3.8Mt of zircon (covering the Jangamo and Dongane deposits only). Savannah holds a 10% interest in the joint project with the right to earn up to 51%, subject to key milestones being met.
Our view: Results of the infill drilling programme should help Savannah define high-grades zones within the Ravene deposit and add to the existing mineral resource estimate for the Mutamba project. We look forward to sample results and an Inferred resource estimate for Ravene as well as the completion of the scoping study in the near future. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Savannah Resources Plc
CityFibre Infrastructure Holdings (LON:CITY, 52.00p) - Speculative Buy
The leading designer, builder, owner, and operator of fibre optic infrastructure in UK towns and cities, yesterday announced a preliminary trading update for the year to 31 December 2016. Management confirmed financial results are expected to be in line with expectations, with revenue in excess of £15.0 million and adjusted-EBITDA of approximately £2.5 million. The Group delivered a record performance in the period, adding 5,063 new connections, with initial contract value of £75.5 million. This compares to 1,100 connections and ICV of £23.0 million in the year to 31 December 2015. Of the connections added during the period, 58% were organic new sales. It also significantly increased its number of connected premises served to 3,962, from 1,200 in the prior period, having 3,383 kilometres of network assets in use, up from 743 kilometres at the end of 2015. Service provider relationships totalled 54 at period end, up from 41 at the end of 2015.
Our view: Excellent progress! Set to deliver a strong second half acceleration, 2016 was a transformational year for CityFibre. Having started the period with a step change acquisition, which significantly scaled its operational footprint across the UK, this was followed up by rolling out a commercialization campaign to deliver over 1,700 connections on the acquired assets. September’s acquisition of the Redcentric network assets plus further organic development, took the UK city footprint to 42 by the beginning of 2017. With a number of significant new orders recently signed including a 25-year national dark fibre network migration for Gamma, a 5-year 63-site contract with partner Pinaci Solutions, a 7-year 33-site public services network in Sterling and a 5-year 150-site commitment from partner BtL, there is no suggestion momentum is slowing. Now the largest wholesale infrastructure provider next to Openreach, Cityfibre has created a platform for future growth. Facilitating current work programmes suggests net debt will continue to rise sharply over the next two years, possibly approaching the Group’s current market capitalisation by 2019E, but by this time annual revenues should have spiked up to around £50m, according to Beaufort estimates. Moving to first positive EBITDA of around £2.5m in 2016E, a figure three times as large might be expected for the current year, following which a first modest net profit is being targeted. Recurring, relatively low maintenance business with sticky customers provides excellent forward visibility. Assuming revenues rise to some £90m within 5 years, which should be capable of producing a 60% EBITDA margin, DCF methodology suggests a current value closer to 75p/share. Beaufort retains its Speculative buy recommendation on Cityfibre.
Joules Group (LON:JOUL, 220.49p) - Buy
Joules Group PLC, a British premium lifestyle brand, yesterday announced its interim results for the 26 weeks ended 27 November 2016 (‘H1 FY2017’). During the period, revenue advanced by +16.2% to £81.4m, comprised of +15.8% increase in Retail revenue and +17.1% growth in Wholesale revenue, against the comparable period (H1 FY2016). Underlying EBITDA rose by +19.6% to £10.9m, boosted by +0.4% improvement in EBITDA margin to 13.4%. Underlying pre-tax profit grew by +19.9% to £7.5m, resulting underlying basic earnings per share to climb by +17.5% to 6.8p. Net cash at the period-end stood at £1.6m (H1 FY2016: £0.1m). On the operational front, the Group opened 10 net stores, taking total stores to 107 at the period-end, with 3 franchises (H1 FY2016: 4). The Group had a customer database of 2.3 million, with active customer base (a registered customer who has made a purchase within the last 12 months) of 922,000, up +30% year-on-year (end-FY2016: 824,000). Joules’ CEO, Colin Porter commented “Joules has continued to perform well during the first half of the financial year with strong growth delivered across the brand's distribution channels and target markets. This significant progress reflects the quality and design of our products and the growing demand for the Joules brand, both in the UK and internationally. The Board remains confident in the brand's continued development both in the UK and internationally.” The Group declared a maiden interim dividend of 0.6p, to be paid on 6 April 2017.
Our view: Joules performed well during H1 FY2017, as had been foreshadowed in its pre-close trading update (7 December 2016). Revenue for both Retail and Wholesale channels increased during the period. Retail revenues were boosted by both strong e-Commerce (up +30.3%) and store (up +11.2%) sales, where store sales benefitted from a net 10 new store opening, while e-Commerce channel saw success from enhanced customer acquisition and retention activity, improved inventory availability and its content-rich, mobile optimised website (re-launched a year ago). Wholesale revenues continue to benefit from strong international wholesale activity, where the Group recorded over +50% growth. International revenue (Retail & Wholesale) increased by +39.3% and now stands at 10.6% of the Group total (H1 FY2016: 8.8%). Post the period, Joules’ key Christmas trading (7 weeks to 8 January 2017) performed strongly with revenue up +22.8% year-on-year. Management said it is on track to meet the Board's expectations for the full year. Although the weaker Sterling-driven cost inflation, increasing wage pressures, potential general inflation and any subsequent reduction in disposable income/consumer confidence will impact the entire UK retail sector, the Group has mitigated some of these concerns by hedging its expected US Dollar requirement for the FY2017 and FY2018 (the majority of Joules’ product purchases are US Dollar denominated). The Group’s continued strong revenue growth was particularly encouraging, given disciplined promotional activity. This, combined with distribution efficiencies and a favourable product mix within international wholesale, resulted in a gross margin improvement of +1.01% to 55.5%. We believe Joules’ strong brand footprint and expanding loyal and active customer base will continue to drive its momentum forward. The Board has demonstrated its confidence by also declaring a maiden dividend of 0.6p per share, its first dividend since the IPO. In view of the overall progress, Beaufort reiterates its Buy rating on the Shares.
Motif Bio (LON:MTFB, 26.60p) - Speculative Buy
The clinical stage biopharmaceutical company specialising in developing novel antibiotics, yesterday announced that its last patient has finished the treatment phase in REVIVE-1, the Phase 3 clinical trial investigating the safety and efficacy of iclaprim in patients with acute bacterial skin and skin structure infections (‘ABSSSI’). REVIVE-1 is a 600-patient double-blinded, global, multicentre trial, in patients with ABSSSI that compares the safety and efficacy of an 80mg intravenous dose of iclaprim with 15mg/kg intravenous vancomycin. Treatments were administered every 12 hours for 5 to 14 days. Data read-out is expected in the second quarter of 2017. Data read-out for REVIVE-2 is anticipated in the second half of 2017. Successful completion of the two REVIVE trials is expected to satisfy both US FDA and EMA requirements for regulatory submission for intravenous iclaprim in the treatment of ABSSSI.
Our view: Opportunity for a significant near-term re-rating! Yesterday’s news release confirmed exactly what the management has been exhaustively telling the market for months now. It is now realistic to expect first data from REVIVE-1 (which will likely to be limited to the key safety and efficacy stats for fear of compromising findings from REVIVE-2) shortly, probably early in the second quarter. To get an idea of the significance of this news, the simplest thing to do is to check out what happened to Motif’s US peer, Achaogen, Inc. (NASDAQ: AKAO). On the 12th December 2016, this highly comparable clinical-stage biopharmaceutical company developing novel antibacterials addressing multi-drug resistant gram-negative infections, announced that its lead product candidate, plazomicin, had met the objective of non-inferiority compared to meropenem for the U.S. Food and Drug Administration and achieved superiority for the European Medicines Agency primary efficacy endpoints in the Phase 3 EPIC registration trial. The shares more than tripled on the news. But given the damage inflicted on Motif’s valuation subsequent to achieving its NASDAQ listing plus accompanying discounted equity raise, the upside potential appears to be significantly more than this. Indeed, for Beaufort, the best comparative remains Paratek Pharmaceuticals (NASDAQ: PRTK) which is presently valued at more than 5x that of Motif. Given that a successful REVIVE-2’s data readout, expected in the second half of 2017, will satisfy the requirement for regulatory submission for intravenous iclaprim for treatment of this skin indication, the idea of a first milestone payment being received from a ‘Big Pharma’ non-US commercialisation partner before the year end is not unrealistic. Neither is the expectation of first US sales appearing the following year, considering the NDA filing will be rushed through immediately following Revive-2 along with its eligibility for fast track approval. Beyond this, there genuinely appears little to hinder development of this platform molecule into a multi-billion dollar opportunity across multiple indications, particularly in the light of the US’s recently released 21st Century Cures Act which, amongst numerous other key provisions intended to simplify and accelerate the discovery, development and delivery of new medicines, specifically provides for a new “limited population” approval pathway for antibiotic and antifungal drugs intended to treat serious or life-threatening infections. Beaufort has included Motif Bio Plc in its ‘Tips for 2017’ portfolio, awarding the shares a Speculative Buy recommendation together with a price target of 110p/share.
Prairie Mining (LON:PDZ, 28.45p) - Speculative Buy
Overnight, Prairie Mining published a maiden 301 million tonne resource for its recently acquired Debiensko hard coking coal project. This follows yesterday's analyst site visit to the property. Seven London and Munich based equity analysts attended including a representative from Beaufort. We were very impressed by Debiensko's infrastructure, its stage of development, resource, coal quality and management team. We anticipate positive feedback to the UK, Australian and European markets as a result. The site visit marks the beginning of a concerted marketing effort by Prairie which should lead to heightened awareness and interest in the stock.
Our view: Prairie's two projects are probably equally important to the investment case. Jan Karski (aka Lublin) is a very large high quality thermal coal project next door to one of, if not the most profitable coal mine in Poland. Debiensko is probably the only late stage hard coking coal project in Europe. The c.300Mt resource shows it has scale while operating costs at the neighbouring mines demonstrate it should have a 65%+ operating margin at the current spot price. There is also an improving macro situation. Europe imports 80% of its coking coal requirements and Poland produces 80% of its electricity from coal. Yet European coking coal and Polish thermal coal production are both falling. With Jan Karski (thermal/semi-soft coking) and Debiensko (hard coking) Prairie is extremely well positioned to take advantage of these developments, although note that neither project depends on strong coal prices. As the market becomes aware of the Prairie story, we expect the shares to perform well.
Severn Trent (LON:SVT, 2,275.50p) - Buy
Severn Trent, a leading UK water company provides clean water and waste water services, yesterday provided a trading update for the 3 months ended 31 December 2016 (‘Q3 FY2017’). The Group said Q3 operational performance has been strong that it expects net customer Outcome Delivery Incentive (‘ODI’) rewards to beat the previous guidance of £15m. The Group now expects ODI to “at least meet or exceed the level achieved last year” of £23.2m (at 2012/2013 prices). The Group also confirmed that it continues to perform in line with expectations and there has been no material change to other technical guidance. Severn Trent’s CEO, Liv Garfield commented “We are pleased with our third-quarter performance which is testament to the hard work and dedication of our colleagues. While there remains much to do, we are making progress towards our goals of providing an outstanding customer experience, best-value service, and environmental leadership.” Severn Trent will announce its FY2017 preliminary results on 23 May 2017.
Our view: This is a positive move for Severn Trent. ODI is a regulatory condition under which companies are incentivised to outperform the permitted regulatory return. The Group continued to work to improve its ODI through, for example, further multi-skilling in the contact centres to enhance customer service, and initiatives geared to improving and sustaining reductions in leakages, pollutions and flooding. As a result of those plans, the Group has now revised upward its £15m target for FY2017, and said it will reach or surpass the £23.2m recorded last year. Any outperformance in ODIs (as well as totex, financing and other) will translates into Return on Regulatory Equity (FY2016: 8.4%), a key indicator of the underlying performance of the regulated business. Beyond this, Severn Trent also confirmed that it remains committed to delivering £670m totex efficiency target across current AMP6 regulatory period (2015-2020) and achieving the “lowest possible cost of finance” for its business. The shares are valued at FY2017E and FY2018E P/E multiple of 21.5x and 20.8x along with dividend yield of 3.7% and 3.8%. We believe Severn Trent has the scope to continue outperforming the ever-tightening regime of industry regulator, Ofwat. In view of the progress being made, Beaufort reiterates its Buy rating on the shares.