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Beaufort Securities Breakfast Alert: Ferrum Crescent, Hummingbird Resources, SerVision and Barratt Developments

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"The Dow Jones notched up its 9th consecutive all-time high last night, buoyed by Du Pont shares spiking on the news that it is likely to win conditional approval for its proposed US$130bn merger with Dow Chemicals. By comparison the S&P 500 and NASDAQ closed with fractional losses, as Fed Minutes appeared to keep the expectation of a hike at the next two-day FOMC meeting stating on 15th March alive, while slipping commodity prices also saw mining stocks under pressure. Asia was weaker across the board, although a range-bound the Nikkei recovered most of its early losses after the Yen weakened against the US$ following the BOJ's Kiuchi voicing concern over Trump's reflationary and growth programmes; the region's other principal bourses fell more convincingly albeit on relatively light volumes. London continued to be dominated by individual corporate stories, with stronger than expected earnings reports emerging from Lloyds Banking Group (LON:LLOY), Barratt Developments (LON:BDEV)and UBM (LON:UBM) keeping the main indices pointing upward, while Unilever (ULVR.L) also spiked higher as its management responded to a view that it is 'not a case of if, but when' Heinz will return with a second merger proposal by increasing its guidance for margin growth and promising to capture value for shareholders more quickly. Traders also warmed to the second estimate of UK GDP from the ONS showing that growth advanced 0.7% sequentially in the fourth quarter, slightly faster than the 0.6% growth estimated on January 26th and higher than level achieved in the third quarter. Indeed, firm consumer sentiment, continuing low interest rates and a weak pound are now suggesting consensus expectations of just 1.4% for 2017 could now be slightly too low, although a beady eye is still being kept on the inflationary effects of higher input costs. Other than the CBI Distributive Trades Survey for February and CML Mortgage lending numbers, there is little significant macro news due from the UK today, although a large batch of US data, ranging from Initial Jobless, Housing Prices and the Chicago Fed National activity Index, will be accompanied by a speech from the Fed's Dennis Lockhart. A large number of UK corporates are due to release earnings or trading updates this morning, including Barclays (LON:BARC), BAT (LON:BATS), Centrica (LON:CNA), Glencore (GLEN.L), Howdens (LON:HWDN) and RSA Insurance (LON:RSA). With most portfolio managers already having positioned themselves ahead of the President's next major announcement, which is expected to come with next Tuesday's State of the Union Address, London is seen opening quietly unless that emerges any significant surprises from scheduled corporate releases, leaving the FTSE-100 between flat and 5 points firmer in early trade."
- Barry Gibb, Research Analyst

Europe
The FTSE-100 finished yesterday's session 0.38% higher at 7,302.25, whilst the FTSE AIM All-Share index gained 0.03% to stand at 909.47. In continental Europe, the CAC-40 finished up 0.15% at 4,895.88 whilst the DAX was 0.26% higher at 11,998.59.
Wall Street
In New York last night, the Dow Jones rose 0.16% to 20,775.6, the S&P-500 fell 0.11% to 2,362.82 and the Nasdaq shed 0.09% to stand at 5,860.63..
Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.25% to 19,364.19, while the Hang Seng lost 0.35% to 24,117.35.
Oil
In early trade today, WTI crude was up 0.88% to $54.06/bbl and Brent was up 0.86% to $56.32/bbl.

Headlines
Barclays reports rise in full-year profits
Barclays (LON:BARC) has reported a rise in profits after making "strong progress" in restructuring. The bank reported a profit before tax of £3.2bn for 2016, up from £1.1bn the year before. Its reorganisation has included the sale of its Africa business. Barclays has also been selling off other parts of the business which the bank deems "non-core", and it said it would bring forward the closure of the unit dealing with this by six months. Chief executive Jes Staley said the "non-core" unit would close on 30 June. "We are now just months away from completing the restructuring of Barclays, and I am more optimistic than ever for our prospects in 2017, and beyond," Mr Staley said.

Ferrum Crescent (LON:FCR, 0.19p) – Speculative Buy
Ferrum Crescent announced today encouraging exploration results on its Toral zinc project in NW Spain. Detailed mapping, sampling (soil, rock chip and channel) and remodelling work has yielded positive zinc mineralisation results. Channel samples returned 0.9m grading 10.5% Zn on the main structure within Adit 49 and a 1.2m channel sample returned 1.2% Cu and 6.5% Zn in Adit 54. Soil sampling has identified a continuous 2km long by 150m wide zinc-in-soil anomaly with values up to 1.4% Zn. New styles of mineralisation have been identified associated with shear-related structural repetition and multiple structures sub-parallel to the main structure. Cross-cutting faults are associated soil anomalies and sulphide mineralisation. As a result, Ferrum is planning a 13 drill hole programme for Q2 2017 focusing on shallow untested targets within the main anomalous zone. Currently, Toral has a combined (Indicated & Inferred) resource of 8.7Mt with a weighted average grade of 10.7% (Pb + Zn).

Our view: The past three months has yielded positive exploration results on the Toral project. We are encouraged with the high zinc grades from channel samples on the main structure as well as the potential for different styles of mineralisation throughout the project area. Ferrum has acquired a significant amount of data from previous explorers and have used this dataset to develop a new approach towards mineralisation at Toral. We look forward to the Phase 1 drill programme results in the coming months focusing on near-surface mineralisation for the first time. In the meantime, we maintain our Speculative Buy on the stock.

Hummingbird Resources (LON:HUM, 26.00p) – Speculative Buy
Hummingbird Resources, the gold exploration and development company with assets in Mali and Liberia, announced today that it has appointed Kevin Moxham as General Manager for its Yanfolila gold project in Mali, where mine construction is currently underway. Mr Moxham is a well experienced mining engineer with over 30 years of effective management and commissioning of mining projects in West, East and South Africa. Most recently, Mr Moxham was General Manger and Head of Operations at Newmount Golder Ridge where we oversaw the commissioning and production of the 9Mtpa Akyem gold mine in Ghana. He has also held numerous senior roles at Barrick, Gold Fields, Lonmin Platinum Mines and Anglo American.

Our view: Having secured project funding, mining and construction contractors and now a well-qualified GM, Hummingbird can now focus on full-scale construction at Yanfolila. The appointment of an experience GM to manage the operations at Yanfolila is key as the company looks beyond immediate construction to commissioning. We are encouraged with the progress being made and look forward to production by the end of 2017. In the meantime, we maintain a Speculative Buy rating on the stock.

SerVision (LON:SEV, 5.50p) – Speculative Buy
SerVision, the leader in mobile live video streaming over wireless and cellular networks, yesterday announced that a US based investment fund, Cascade SVP, LLC, has subscribed US$2.0m of new capital through 14,089,084 ordinary shares of 1.0p each in the capital of the Group at a price of approximately 11.4p per share. The proceeds will be used as working capital purpose and for debt repayments. Under the terms of the subscription, Cascade will transfer US$1.0m in 5 business days, on receipt of 7,044,542 SerVision shares, while the second tranche of US$1.0m is to be transferred in 90 days on receipt of a further 7,044,542 shares. In addition to the US$2.0m subscription, Cascade have been granted an option to invest up to a further US$4.0m in two tranches; the first option period runs until 20 October 2017, with an option price of approximately 10.2p per share, and the second option period runs until 29 September 2018, with an option price of approximately 9.3p per share. The Options are conditional upon shareholder approval. SerVision's CEO, Gidon Tahan, commented "The Company has been under capitalised in recent years and this significant boost to our financial strength will allow us to pursue a number of opportunities around the world that, if converted into new customers, will help the Company to become cash flow positive". Cascade's Director, Craig Flashner, commented "The worldwide mobile DVR market is growing dramatically and we believe that SerVision has superior technology in this market. In addition, we believe there is significant potential in their relationship with Mobileye, which opens access to their customers worldwide".

Our view: Very positive news for SerVision! A subscription price of 11.4p represents a significant premium to Tuesday's closing price of 2.75p, or 315% higher, valuing the Group at c.£14.4m against just a £3.5m market capitalisation the previous day . Following the completion of the subscription, Cascade will be a second largest shareholder of the Group, holding c.10% of the issued share capital. Moreover, should Cascade choose to exercise its Options in their entirely, its total holdings will rise to c.27%, assuming no other new ordinary shares are issued in the meantime. The proceeds will be used for scheduled repayment of its facility with CSS Alpha (BVI) (US$215,000 at an interest rate of 1.0% per month plus other fees repayable in May 2017) and YA II PN Ltd (US$786,500 as at H1, at an interest rate of 12% per annum plus other fees repayable in July 2017) as well as for working capital purpose. SerVision has been demonstrating its products, IVG400-N system, a high definition mobile video gateway system, fulfils the industry needs and standards through extensive trial period with various customers, such as Skills Motor Coaches Ltd and City of Cardiff Council Transport Department which led to a new purchase order in December 2016. SerVision's IVG400-N system permits viewing of 'live' camera feeds, whether travelling in the UK or in Europe, along with the ability to download quality footage directly via the mobile network. This can ensure increased protection, while insurers are provided with supporting CCTV evidence of any incidents within a matter of minutes of them occurring and potentially lower the cost of policies that otherwise are disadvantaged by lack of irrefutable evidence. This new capital will significantly strengthen SerVision's balance sheet "for several years" according to the CEO, giving comfort to its customers, enabling the Group to grasp global opportunities in heavy-duty bus market (e.g. Transit Buses, Coaches, Shuttle Buses, and School Buses) which estimated to grow at CAGR +8.6% from 2015 to 2022 according to Frost & Sullivan. This is also backed by the long-term fundamentals of encouraging public transport against private vehicles, as well as increasing population. Although value of each contract remains modest, its large addressable market meaning new customer orders and follow-on orders will likely to see the volume piling up. In the light of positive news along with the Board's expectations of improved trading in 2017, Beaufort retains its Speculative Buy rating on the shares.

Barratt Developments (LON;BDEV, 517.00p) – Buy
Barratt Developments, a FTSE100 UK housebuilder, yesterday announced results for the 6 months ended 31 December 2016 ('H1 FY2017'). During the period, revenue fell by -3.2% to £1,816.2m as total completions dropped by -5.8% to 7,180 plots, against the comparative period. Gross margin however, improved by +2.1% as average selling price increased by +3.8% to £263,800, which resulted profit from operations to advance by +7.4% to £324.0m. Operating margin also improved by +1.7% leading to pre-tax profit rose by +8.8% to £321.0m. Basic earnings per share hence increased by +8.4% to 25.9p. ROCE improved by +1.5% to 27% and net cash balance significantly enhanced to £196.7m, up +712.8%. The Group recorded a net private reservation rate of 0.68 (2015: 0.66) per active outlet per week, and operated from an average of 374 outlets (including JV's) (2015: 386). Barratt said it has made a good progress on new site openings, launching 83 new developments (including JV's) (2015: 63) during the period. The Group declared an interim dividend of 7.3p per share, up +21.7%, to be paid on 19 May 2017.

Our view: Barratt delivered a strong result for H1 FY2017, reflecting confidence with yet another hike in its dividend payout. As previously noted, total completions dropped by 5.8% due to lower activity in London, primarily reflecting its planned build programme which focusses on wholly owned sites. This, however, was more than offset by the record completions outside of London, which were at their highest level in 9 years. Despite the reduction in revenue, pre-tax profit came ahead of the previous guidance of +7% growth, supported by +3.8% increase in average selling price and change in mix. Reflecting the Board's confidence in the business going forward, the Group hiked its interim dividend by +21.7% and announced improvement and extension of its Capital Return Plan with dividend cover re-set at 2.5x (from 3x) and special dividends of £175m in November 2017 (total return FY2017: £395.5m) and November 2018 (total return FY2018: £402.5m). Post the period, net private reservations per average week stood at 290 (2016: 280), resulting in average net private reservations per active outlet per average week of 0.77 (2016: 0.76). The total forward sales (including JV's) as at 19 February 2017 was at record £3,018.2m, up +17.0%, and the Group said it is on track to meet its full year outlook. Barrett is lowly rated, trades on a modest premium to net assets and provides excellent income – which, despite providing quite exceptional forward visibility, suggests their share prices already discount the imminent arrival of a severe cyclical downturn. This is the reason Beaufort has been and remains overweight in the sector, with Taylor Wimpey as its key pick. The recently published Housing White Paper reaffirmed the government's committed to increasing housing supply, with affordable housing at high on its political agenda. The market continues to see high customer demand, good mortgage availability, along with low interest rates and government policy such as Help-to-Buy. The shares are cheap, being valued on a 2017E P/TNAV of 1.5x, with a P/E multiple of 9.4x, along with dividend yield of 7.2%. Beaufort remains overweight of the UK housebuilding sector and keeps Barratt Developments on its Buy list.

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