Today's edition features:
• Karelian Diamonds (LON:KDR)
• Strat Aero (LON:AERO)
• GlaxoSmithKline (LON:GSK)
• Horizon Discovery (LON:HZD)
• Hutchison China MediTech (LON:HCM)
"Federal Reserve Chairwoman Janet Yellen may be gearing up to raise short-term interest rates at March's FOMC policy meeting after all. While Fund Futures had suggested a June rise was more likely, her optimistic note during yesterday's semi-annual testimony to Congress nevertheless meant that equity traders took the news in their stride while the US$ spike higher. Suggesting that it would be 'unwise' to delay, she painted a largely upbeat picture of the U.S. economy in her first congressional testimony since President Trump took office, noting employment gains in recent months plus higher wage growth, was "a further indication that the job market is tightening". Inflation meanwhile has moved closer to the Fed's 2% objective, while the December personal-consumption expenditures price index moved up 1.6% from a year earlier, a rate last seen in September 2014. Similarly in the UK, yesterday's January CPI figures confirmed the fastest annual rate in 30 months, driven by the Pound's tumble following Brexit, although the figure itself emerged marginally below expectations and led to a minor sell-off of Sterling as rate hike expectations receded somewhat. That said, an increasing school of thought suggests UK inflation may be allowed to rise above the BoE's own 2% CPI target and 'run hot' through most of 2017, assuming it does not breach the 3% level, for fear of Governor Carney otherwise stifling economic momentum during forthcoming Brexit negotiation. The overnight markets accordingly all made further convincing gains, with all principal US markets rising similarly, led by financials and tech stocks as both the S&P500 and NASDAQ chalked-up their sixth consecutive upward moves. Asia went even further, with the Nikkei initially leading the surge as US$:Yen touched a new monthly high, although most other bourse in the region rapidly caught up to close with similar 1% or thereabouts gains, leaving only the Shanghai Composite to end in the negative as fears regarding looming US protectionist measures were resurrected once again. Wednesday will see another large batch of macro releases, with the UK due to detail Average Earnings and Unemployment, while the EU publishes its December Trade Balance and the US delivers its Retail Sales and CPI. No significant earnings or trading updates are anticipated from UK corporates this morning, although some second-liners like Animalcare Group (ANCR.L), NEX Group (NXG.L), QinetiQ Group (QQ..L) and Tracsis (TRCS.L) are scheduled. In the absence of other significant news, London is set to follow the international trend, rising broadly from this morning's opening with the FTSE-100 seen up 20 to 25 points in early trade."
- Barry Gibb, Research Analyst
Markets
Europe
The FTSE-100 finished yesterday's session 0.14% lower at 7,268.56, whilst the FTSE AIM All-Share index added 0.24% to stand at 902.62. In continental Europe, the CAC-40 finished up 0.16% at 4,895.82 whilst the DAX was 0.02% lower at 11,771.81.
Wall Street
In New York last night, the Dow Jones rose 0.45% to 20,504.41, the S&P-500 firmed 0.4% to 2,337.58 and the Nasdaq gained 0.32% to 5,782.57.
Asia
In Asian markets this morning, the Nikkei 225 had improved 1.12% to 19,454.25 and the Hang Seng was up 1.43% at 24,042.94.
Oil
In early trade today, WTI crude was down 0.68% to $52.84/bbl and Brent was down 0.61% to $55.63/bbl.
Headlines
A third of UK lives on inadequate income, says think tank
Nearly a third of the population of Britain is living on an "inadequate" income, according to research by the Joseph Rowntree Foundation (JRF). In 2014-15, it said that 19 million people were living on less than the Minimum Income Standard (MIS). It said the problem was that household costs have been rising, while incomes have stagnated. The government has already promised to tackle the issue, after Theresa May identified those "just about managing". It said it was taking "targeted action" to raise incomes. The MIS is set by experts at Loughborough University, and is based on what members of the public think is a reasonable income to live on. Although the precise level depends on individual circumstances, a single person renting a flat outside London is said to need to earn at least £17,300 a year to reach the MIS. For a working couple with two children, living in social housing, each of the individuals need to earn £18,900 a year.
Source: BBC News
Company news
Karelian Diamonds (LON:KDR, 0.52p) Speculative Buy
Karelian Diamonds announced today that it has received a technical report on its recent diamond discovery in Eastern Finland written by Dr Karl A. Kinnunen, a diamond specialist with the Geological Survey of Finland (GTK). The diamond was recovered from one of seven till samples from the Kuhmo region and is a clear, pale-green dodecahedron (12-sided) measuring 0.8mm in diameter. Surface textures indicate slight resorption during transport suggesting that the source was >150km within the hypabyssal facies (root zone) of the kimberlite body. This rare diamond discovery coupled with high concentrations of kimberlitic indicator minerals (KIMs) in the area strongly suggest that a diamondiferous kimberlite is present and requires additional follow-up work.
Our view: This is exciting news for Karelian as finding diamonds in till samples is an extremely rare event and solidifies the potential of the area hosting diamondiferous kimberlites. The Kuhmo region of Finland hosts several previously discovered kimberlites and exhibits similar geology and geochemistry as the Arkhangelsk region in Russia, an area which hosts one of the largest diamond mines in Russia (Lomonosova). We look forward to further updates and maintain a Speculative Buy on the stock.
Beaufort Securities acts as a corporate broker to Karelian Diamonds plc
Strat Aero (LON:AERO, 0.10p) – Under Review
The international aerospace company focused on the rapidly emerging Unmanned Aerial Vehicle ('UAV') sector, yesterday announced that it has successfully raised £850,000 of new capital (before expenses) from new and existing shareholders by way of a placing of 850,000,000 new ordinary shares at a price of 0.1p per ordinary share. In addition, certain directors and a director of a subsidiary company have agreed to subscribe for 250,000,000 Ordinary Shares at the Placing Price in settlement of outstanding compensation and expenses accrued since 2015. At the same time 1,170,000,000 warrants with a two-year expiry and an exercise price of 0.225p have also been granted in conjunction with these Placings. All are subject to the passing of the resolutions to be put to the General Meeting on 21 February 2017 which was announced on 6 February 2017. It is expected that Admission of the new shares will become effective and dealings commence on or around 22 February 2017.
Our view: Taking the right steps. CEO, Ian McLure, has set about refocussing the Group's jumble of drone-related operations and participations that were thrown together by the Group's previous management. Now, more to the point, he has the funds to put his plans into action. Management has closed out the Aero Kinetics litigation as efficiently as possible in order to mitigate risks. Meanwhile, the Group's cash burn is being engineered down to a manageable level, with the 2017E level seen falling to £50k/month from some £140k/month last year. Its successful survey solutions division, Geaocurve, is increasing revenue generation and optimising operational resources; now said to be working close to 100% capacity and dominated by a growing UK environmental agency contract, it is expected to expand further in Q2'17 with a cash flow neutral position targeted for this year. Strat Aero US is reducing its organisational footprint to support current DDM solutions and existing service work, while training has moved from long-form pilot training to short form UAV solutions, initially to be marketed across Asia where MOUs have already been signed for certified franchised training. Very much as expected, however, a funding shortfall appeared since securing a short-term loan facility with Farina Investments (UK) Ltd last year, requiring it to secure new equity funding. With sufficient cash now in place to support immediate capital needs and organisational development, however, its sector opportunity is clearly set to expand significantly. ATC regulators globally, including the likes of the US's Federal Aviation Administration and the UK's Civil Aviation Authority, have been running significantly behind with UAV/UAS curve for some years now and, given the relatively low cost of entry and the vehicle has potential to create safety hazard, criminal or terrorist opportunity in national airspace. This has to change. When the regulators do catch up, new legal and operating constraints will likely squeeze out the bulk of the 'mom and pop' entities that have saturated this early stage market, leaving larger, more credible players with comprehensive, regulated offerings, like Strat Aero, to seize the longer-term opportunity. That's the upside vision but, back on earth the Group's management still must demonstrate that the steps it is now taking will bear fruit and that its model can become self-financing. Shareholders will then be able to focus back on the scale of its global opportunity and the Group's early mover advantage. Recognising the opportunity presented through the new funding together with the steep fall in Strat's share price, Beaufort is presently reviewing its 'Hold' recommendation with a view to upgrading on receipt of further positive news.
Beaufort Securities acts as a corporate broker to Strat Aero plc
GlaxoSmithKline (LON:GSK, 1,577.00p) – Buy
ViiV Healthcare, GSK'S HIV JV majority-owned by GSK, with Pfizer Inc. and Shionogi Limited as shareholders, yesterday provided a detailed study results from its Phase 3 programme evaluating the safety and efficacy of switching virologically suppressed patients from a three- or four-drug antiretroviral regimen to a two-drug regimen of dolutegravir (ViiV Healthcare) and rilpivirine (Janssen Sciences Ireland UC). At its week 48 primary endpoint, the dolutegravir and rilpivirine two-drug regimen showed non-inferior viral suppression against current antiretroviral therapy ('CAR') of three- or four-drug regimen. Virologic suppression rates were similar between treatment arms, while Virologic failure rates were slightly better for dolutegravir and rilpivirine arm at below 1%, compared to 1% in the CAR arm. No integrase strand transfer inhibitor resistance-associated mutations were reported. The studies are ongoing for 148 weeks. The use of dolutegravir and rilpivirine as a two-drug regimen for HIV-1 maintenance therapy is to date investigational and not approved anywhere in the world. The Group is planning regulatory submissions for this two-drug regimen as a single tablet during 2017.
Our view: Positive progress for ViiV Healthcare. The announcement follows positive headline results announced on 20 December 2016. The details study results are being presented at the annual Conference on Retroviruses and Opportunistic Infections in Seattle. Although share price moved marginally adverse yesterday, possibly due to investors wished to see Virologic suppression rates for two-drug regimen superior against the CAR arms, the result itself came no surprise since the December. The Group said for over 20 years, the industry believed that three or more drugs were required to maintain virologic suppression, but the study of dolutegravir and rilpivirine provide data showing suppression may be maintained with a two-drug regimen. The studies are ongoing for 148 weeks, and the Group is planning regulatory submissions for this two-drug regimen as a single tablet during 2017. GSK was entitled to approximately 80% of the core earnings of ViiV Healthcare for 2016 (allocation of the overall earnings of ViiV Healthcare to each shareholder will change based on the relative performance of the products), meaning that, if progress continues along the same lines as in 2016, this should be slightly earnings enhancing for GSK going forward. In light of the on-going developments, Beaufort maintain a Buy rating on GlaxoSmithKline with a target price of 1,750p per share.
Horizon Discovery (LON:HZD, 175.00p) – Speculative Buy
The gene editing technologies firm on Tuesday said it has signed a master services agreement with an unnamed global pharmaceutical company. Under the deal, Horizon will provide a range of in-vitro services, including custom cell line engineering, target identification and validation screening, drug combination screening, and cell-based assay services. The deal is an extension of an existing agreement and Horizon said the client is its largest customer. No financial details on the agreement were disclosed, but the customer paid Horizon £1.5 million in revenue in 2016.
Our view: Deepening its relationships with top customers. By taking a broader and more integrated approach, Horizon is able to identify areas where it can provide significant value, combined with its ability to offer unified solutions that involve a range of Group service. In this respect, Horizon is becoming an increasingly important element in the pharmaceutical industry's diagnostic process. Beaufort sees continuing sticky value for an international base of customers ranging from pharma giants to small biotech discovery companies being reflected by a sharp rise in projected 2017E sales of £35m, some 50% higher than the current period. It also sees the opportunity to deliver net profits for the first time in 2018. Beaufort retains it Speculative Buy recommendation on Horizon Discovery with a price target of 200p/share.
Hutchison China MediTech (LON:HCM, 2,137.50p) – Buy
Hutchison China MediTech ('Chi-Med'), the China-based healthcare group, yesterday announced that it has commenced the first-in-human Phase I clinical trial of HMPL-453 in Australia, with first patient being dosed on 14 February 2017. HMPL-453 is a novel, highly selective and potent small molecule inhibitor targeting fibroblast growth factor receptor ('FGFR'). FGFRs are a sub-family of receptor tyrosine kinases. Activation of FGFR signaling pathways is central to several biological processes, including angiogenesis, tissue growth and repair. Given its complexity and critical role in a number of important physiological processes, aberrant FGFR signaling has been found to be a driving force in tumor growth, promotion of angiogenesis, as well as, conferring resistance to anti-tumor therapies. There are currently no approved therapies specifically targeting the FGFR signaling pathway. On a separate news, Chi-Med also announced that the Group and its partner, AstraZeneca, will present data from the ongoing Phase II clinical trial of savolitinib in patients with papillary renal cell carcinoma at the 2017 Genitourinary Cancers Symposium. Chi-Med will announce final results for the FY2016 on 13 March 2017.
Our view: The announcement follows positive pre-clinical studies which demonstrated greater potency and better kinase selectivity against other drugs in the same class, along with a good safety profile. The Phase I clinical trial will evaluate the safety, tolerability, pharmacokinetics and preliminary anti-tumor activity of HMPL-453, in patients with advanced or metastatic solid malignancies, who have failed or are unable to tolerate standard therapies or for whom no standard therapy exists. HMPL-453 was also found to have low likelihood of drug-to-drug interaction issues and the Group currently retain all rights to HMPL-453 worldwide. The presentation for savolitinib at the 2017 Genitourinary Cancers Symposium with AstraZeneca is also a positive news. Savolitinib is a highly selective inhibitor of c-Met receptor tyrosine kinase, and has shown early clinical benefit in multiple Phase I and II studies for a number of cancers. The Group has also confirmed that Chi-Med and AstraZeneca are currently initiating a global pivotal Phase III trial, the first pivotal study ever conducted in c-Met-driven PRCC and the first molecularly selected trial in RCC. We are encouraged by the Group's progress. Chi-Med is currently enrolling patients in 25 clinical trials around the world, including 4 pivotal Phase III studies the first of which, Fruquintinib in third-line colorectal cancer, will report top-line results early in 2017. For the FY2016 financial result, the Group already provided guidance with its interims, where it stated consolidated revenues should be in the range of US$190m-US$205m with net income attributable to Chi-Med in the range US$NIL-US$5m. The balance sheet of Chi-Med is expected to be enhanced following land compensation payment from the Shanghai government to its JV, which Chi-Med will book as an estimated one-time gain on the transaction of US$38.2m in the Q4 2016. Beaufort reiterates its Buy recommendation on the shares.