Markets
Europe
The FTSE-100 finished yesterday's session down 0.34% at 7,274.83, whilst the FTSE AIM All-Share index rose 0.15% to 909.18. In continental Europe, the CAC-40 finished up 0.49% at 4,888.76 whilst the DAX was 1.18% higher at 11,967.49.
Wall Street
In New York last night, the Dow Jones rose 0.58% to 20,743.0, the S&P 500 firmed 0.6% to 2365.38 and the Nasdaq gained 0.47% to 5865.95.
Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.07% to 19,368.01, while the Hang Seng rose 0.77% to 24,147.73.
Oil
In early trade today, WTI crude was up 1.24% to $54.06/bbl and Brent was down 0.44% to $56.91/bbl.
Headlines
Lloyds boosted by lower PPI payments
Lloyds Banking Group has reported a 158% increase in annual pre-tax profits to £4.24bn as a result of a reduction in payment protection insurance (PPI) provisions. Provisions for PPI declined from £4bn to £1bn. However, underlying profits fell to £7.9bn, down from £8.1bn. The UK government's stake in Lloyds has now fallen below 5% and it has said it wants to return the bank to full private ownership this year. On Tuesday HSBC reported a $7.1bn (£5.7bn) pre-tax profit for 2016, down 62% on the $18.9bn reported a year earlier. The government spent £20.3bn to acquire a 43% stake in Lloyds at the height of the financial crisis.
Company news
Bezant Resources (LON:BZT, 1.74p) – Speculative Buy
Bezant announced that the Filipino Department of Environment and National Resources has notified Bezant that its Mankayan project sits in a watershed and is therefore subject to potential cancellation. Bezant has the opportunity to show why this is not the case, although fighting this battle could be an expensive process. This is part of a programme by the DENR which affects 74 other mine development licences supposedly in a watershed. It follows a similar programme of closing open pit mines which had environmental 'irregularities'.
Our view: This is disappointing news but not a massive surprise given the DENR's recent form under the new president. Bezant had already written down Mankayan to zero and returned 8p per share to shareholders in 2013 (money it received from Gold Fields) so overall the Filipino project has been a success and profitable. We retain our Speculative Buy recommendation based on Bezant's core projects in South America, notably the platinum in Colombia.
Beaufort Securities acts as corporate broker to Bezant Resources plc
Prairie Mining (LON:PDZ, 27.18p) – Update
Prairie Mining has announced excellent results from an infrastructure study of Debiensko (its 100% owned coking coal project) which show a capital cost of only $10m to deliver water, power, road and rail for commercial scale coking coal production. This extremely low capital cost is the result of historical production at Debiensko (pre-2000) and infrastructure investments by the previous owner. For example Debiensko already has a rail siding which connects directly to the national rail network. During the recent analyst site visit we saw freight wagons travelling along the rail only a few hundred yards from the new wash plant location.
Our view: Debiensko is a premium hard coking coal project with valuable infrastructure already in place, the most important of which is rail with sufficient spare capacity. Having rail so close saves large amounts of capex and avoids permitting challenges. It also links Debiensko to the European steel industry, much of which is within a 200km radius and currently relies on imports of coking coal from overseas. There are very few if any new coking coal projects with the same infrastructure benefits as Debiensko. In some ways it is akin to a mine expansion project, except where the best coal seams are still available for extraction. Plus it sits in the middle of one of the largest coking coal markets.
Beaufort Securities provides Investor Relations services to Prairie Mining plc
Galliford Try (LON:GFRD, 1,503.77p) – Buy
The housebuilding, Partnership & Regeneration and Construction group yesterday delivered a strong first half performance with profit before tax up 19% to £63.0 million, EPS up 19% to 61.9p and interim dividend up 23% to 32.0p reflecting management’s confidence in the full year outlook. Galliford’s net debt of £113.8 million (H1 2016: £95.7 million) at period end was in line with expectations, having seen the balance sheet further strengthened with £450 million bank facility extended to 2022 on same terms, plus a private debt placement of £100 million 10 year fixed-rate notes, in order to add flexibility and diversity of lenders. Group strategy to 2021 targets sustainable growth and strong returns across all three of its businesses, with targets include 60% growth in profit before tax to FY 2021, a five year CAGR on dividend of at least 5% and a return on net assets in FY 2021 of at least 25%. Linden Homes continued to make significant progress with operating margin rising to 18.2% (H1 2016: 17.0%), while revenue rose 12% to £407.6 million (H1 2016: £362.7 million) from 1,491 unit completions, 1,319 units net of joint venture partner share (H1 2016: 1,357 and 1,171 respectively). 2021 financial targets include 4,750 - 5,000 units per annum, revenue of £1.25 billion - £1.35 billion and operating margin of 19% - 20%. Operating margin of 3.4% (H1 2016: 3.0%) for the Partnerships division were driven by planned increase in proportion of higher margin mixed tenure revenue. A 16% increase in total sales currently reserved, contracted and completed to £92 million (H1 2016: £79 million) was achieved with the contracting order book up 6% at £925 million (H1 2016: £875 million). Construction delivered revenue of £742.0 million (H1 2016: £738.6 million), with cash balance of £110.8 million (H1 2016: £154.7 million) reflecting delayed cash flows on some legacy projects. Its operating margin of 0.4% (H1 2016: 1.2%) continues to be constrained by the resolution of legacy contracts, while margins on new projects support improving divisional returns in future years. The order book remains solid at £3.4 billion (H1 2016: £3.7 billion), as the business continues its disciplined approach to contract selection.
Our view: Solid performance now backed by additional growth planning. Robust demand and pricing in residential markets, benefit both Linden Homes and Partnerships & Regeneration, driving good sales rates while the land market remains benign in all regions. Linden Homes continues to achieve margin improvement, including much improved overhead efficiency. Partnerships achieved a higher proportion of mixed tenure development revenue, resulting also in first-half margin growth. Construction is making steady progress in resolving legacy contracts, and the contribution from newer work is encouraging, demonstrating that the underlying business is strong. Order books for the first two are at record levels and, although Construction is lower than the prior year, the quality is now making progress. Improved debt facilities have further strengthened the balance sheet, providing financial flexibility to underpin the Board’s strategy for growth out to 2012. Indeed, the business model fits well with government planning detailed in the recent Housing White Paper that cites the need to accelerate the build-out of new builds both for sale and rental, making management targets out to 2021 achievable. In fact, it will be something of a surprise if the housebuilding sector as a whole does not take the hint by deciding to ramp up output by building on its heavy landbank, with a view to closing in on Westminster’s annual targets or fact more punitive future measures. This increased activity could even create two or three bonanza years for shareholders, who may be rewarded through additional special cash distributions. So even through there are various clouds gathering on the horizon of this highly cyclical sector, the good times still appears to have some time to roll. Despite having rebounded strongly post-Brexit to recover the highs being achieved 18 months ago once again, the shares still offer good value based on a 6.2% current year yield while trading on a price/book of 1.8x. Galliford Try remains on Beaufort’s buy list.
InterContinental Hotels Group (LON:IHG, 3,887.92p) – Buy
InterContinental Hotels Group, a global organisation with a broad portfolio of hotel brands, yesterday announced its preliminary results for the year ended 31 December 2016 (‘FY2016’). During the period, on a reported basis, revenue fell by -4.9% to US$1,715, operating profit grew +4.0% to US$707m and adjusted earnings per share rose +16.2% to 203.3 US cents, against the comparative period (FY2015). On an underlying basis, revenue advanced by +4.6% to US$1,582m, operating profit grew adjusted +9.5% to US$702m and adjusted earnings per share increased by +23.1% to 203.1 US cents. Net debt at the period-end stood at US$1,506m (FY2015: US$529m). On the operational front, the Group opened 40,134 rooms and closed 17,367 rooms, bringing total number of rooms to 767,135 rooms, up +3.1%. The Group also signed 75,812 rooms into the pipeline (representing over 500 new hotels) during the year, bringing total pipeline rooms to 230,076, where c.45% is currently under construction. InterContinental Hotels’ CEO, Richard Solomons commented “Despite the uncertain environment in some markets, we remain confident in the outlook for the year ahead, as well as our ability to deliver sustainable growth into the future”. The Group declared a final dividend of 64.0 US cents, bringing full year dividend to 94 US cents, up +11%, to be paid on 22 May 2017. The Group also proposed a special dividend of US$400m (equating to 202.5 US cents per share) to be paid on the same day (22 May 2017).
Our view: The Group performed well in FY2016, delivering pre-tax profit, adjusted earnings per share and dividend all ahead of the markets consensus analysts’ estimates. The strong results were supported by +1.2% rise in prices while enjoying record occupancy levels, leading to +1.8% improvement in revenue per available room (‘RevPAR’). Regionally, RevPAR in the Americas increased by +2.1% (rate +2.0%) while rising by +1.7% in Europe (rate +1.4%). In Greater China, RevPAR grew by +2.2% despite rates declined by -2.2%, although this eased in Q4 to -0.7%. In AMEA, RevPAR fell by -0.2% with -0.8% rate decline, as it suffered from weak Middle Eastern spending due to declining oil prices. Fee revenue (i.e. revenues excluding owned & leased hotels, managed leases and significant liquidated damages), which accounts for 89% of the Group’s underlying take, also increased by +4.4% with a margin improvement of +3.3% (CER: +2.5%) to 48.8% through strategic cost management. Although Group’s net debt has almost tripled to US$1,506m, due to special dividend payments of US$1.5bn in May 2016, this was partially offset by the benefits of translational amounting to US$205m. The period-end net debt to EBITDA level stands at 1.9x (2.4x on a proforma basis assuming payment of the special dividend), which remains within the Group’s target range of 2.0x to 2.5x. The Group declared +11% hike in its full year dividend, together with US$400m a special dividend, follows last May’s exceptional US$1.5bn payment. Such sums being enabled by the Group’s strong free cashflow generation of US$646m, up +39% year-on-year, along with management’s confidence in its ability to sustain long-term growth. The shares are valued at a FY2017E P/E multiple of 21.4x with dividend yield of 2.1% before specials. Having surpassed consensus in 2016, with similar growth expected for the current year, along with its commitment to shareholder returns, Beaufort seed no reason to change its recommendation. Beaufort retains its Buy rating.