Today's edition features:
• Hutchison China MediTech (LON:HCM)
• WPP (LON:WPP)
"Risk? What risk? Gold, the ultimate hedge against global uncertainty and rising inflation, on Friday fell to its lowest level since mid-February as a previously resilient market buckled under the rising expectation of an imminent hike in US interest rates. Fed Chair, Janet Yellen, added to such expectations on Friday predicting the pace of tightening was likely to accelerate in 2017. So what should we be worried about? Most certainly, inflation is back all around the globe, even in Japan, the most obvious economy beset with a long-term declining trend. The big question now is whether it will stick around and what damage could it do? It marks a turnaround from a year ago, when the word 'deflation' was closer to economists' lips. And historically, it has taken nine months for currency weakness to show up in inflation readings, which is the concern that possibly forms a recurring nightmare for Governor Carney and the reason why the markets a likely to be surprised with his aggression when he finally attacks the problem, even if he is brave enough to defer his first move into 2018. Asia probably is less concerned, given that pressures will moderate this year as the effects of government stimulus fades and Beijing turns its attention to damping-down asset bubbles. What about politics? Europe is, of course, the loose cannon here. Beaufort's formal opinion is that while the Eurozone is living on borrowed time, its calamity is more likely be the major talking point of 2018, rather than this year. Significantly, a poll released on Friday ahead of France's first round of its Presidential election on 23rd April, suggests Mr. Juppe could win the first round with 26.5%, ahead of Emmanuel Macron on 25% and Ms. Le Pen on 24%, although market researcher Odoxa notes that all three candidates are within a three-point margin of error. Should it be wrong, of course, a win for the National Front would likely accelerate the Eurozone's anticipated implosion, with the 27 counties then possibly separating into two separate lists of members; one being a 'Greater Germany' which would sustain some form of the Euro, the other being 'Club Med', whose members instead are forced to revert to their legacy currencies, suffering effective 20% plus devaluations in the process. Sitting aloof from all this right now is Chancellor Hammond who, basking in the glow of Sterling's Brexit-enforced devaluation, is preparing to reveal a sharp rise in this year's economic forecasts at Wednesday's Budget. He is expected to say that growth is set to rise above 2% in 2017. Although clearly not preparing for any significant give-away at this time, a near £12bn improvement in public borrowing compared with his Autumn Statement reflects surprising momentum over the past six months, even if February's weak service sector data released last week did look ominous. This morning, London is seen edging slightly lower, with the FTSE-100 expected down 5 to 10 points in opening trade, following just fractional gains amongst the US's three principal indices on Friday. A lacklustre Asia mostly put in modest gains, despite the Chinese government cutting its growth target to its lowest level in over two decades, although the Nikkei did fall into sharply the red after missiles being tested by fractious neighbour, North Korea, fell into its territorial waters. The only important macro data due to release today comes from the EU, which will publish its Sentix Investor Confidence survey for March and the US which provides Factory Orders for January. The UK is due to release earnings or trading updates this morning from second-liners including Devro (DVO.L), Harworth Group (HWG.L) and Plant Impact (PIM.L), although the traders will be more urgently seeking confirmation regarding weekend leaks that Aberdeen Asset Management (ADN.L) and Standard Life (SL..L) have agreed terms for a merger."
- Barry Gibb, Research Analyst
Markets
Europe
The FTSE-100 finished Friday's session 0.11% lower at 7,374.26, whilst the FTSE AIM All-Share index added 0.19% to stand at 915.02. In continental Europe, the CAC-40 finished up 0.63% at 4,995.13 whilst the DAX was 0.27% lower at 12,027.36.
Wall Street
In New York on Friday night, the Dow Jones rose 0.01% to 21,005.71, the S&P-500 gained 0.05% to 2,383.12 and the Nasdaq added 0.16% to stand at 5,870.75.
Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.46% to 19,379.14, while the Hang Seng firmed 0.29% to 23,621.86.
Oil
In early trade today, WTI crude was down 0.54% to $53.04/bbl and Brent was down 0.47% to $55.64/bbl.
Headlines
Peugeot-Citroen agrees deal with GM to buy Vauxhall-Opel
The French company that owns Peugeot and Citroen has struck a 2.2bn euro (£1.9bn) deal to buy General Motors' European unit, including Vauxhall. PSA Group and GM announced the sale ahead of a press conference in Paris. The deal has raised fears of job losses at Vauxhall's UK factories, which employ 4,500 workers. With GM's Opel and Vauxhall operations, PSA would become Europe's second largest carmaker, behind Volkswagen but overtaking Renault-Nissan. In a statement, Carlos Tavares, chairman of PSA's managing board, said: "We are confident that the Opel/Vauxhall turnaround will significantly accelerate with our support, while respecting the commitments made by GM to the Opel/Vauxhall employees." GM chairman and chief executive Mary T. Barra said she believed the deal would put Opel and Vauxhall "in an even stronger position for the long term".
Source: BBC News
Company news
Hutchison China MediTech (LON:HCM, 2,282.50p) – Buy
Hutchison China MediTech ('Chi-Med'), the China-based healthcare group, on Friday announced the positive top-line result for FRESCO, a Phase III Pivotal Registration Trial of fruquintinib in Patients with Locally Advanced or Metastatic Colorectal Cancer. The trial met its primary endpoint by demonstrating statistically significant increase in overall survival ('OS'), in the patients treated with fruquintinib compared to placebo. Moreover, fruquintinib has also showed a statistically significant improvement for a key secondary endpoint, progression-free survival ('PFS'), while there was no new or unexpected safety issues identified. Full detailed results are subject to ongoing analysis and are expected to be disclosed at an upcoming scientific meeting in mid-2017. Chi-Med said it is progressing to submit a new drug application ('NDA') for fruquintinib to the China Food and Drug Administration in mid-2017. Chi-Med's Chairman, Simon To, commented "Well over a decade of effort and investment has now paid-off with these compelling Phase III top-line results. They reinforce fruquintinib's potential to address major unmet clinical needs for patients in both China and around the world. They also open the way to our submitting a NDA on fruquintinib around the middle of this year". Chi-Med is scheduled to announce its final results for the FY2016 on 13 March 2017.
Our view: The announcement was positive news for the Group and investor. The FRESCO trial is for patients with locally advanced or metastatic colorectal cancer who have failed at least two prior systemic antineoplastic therapies, including fluoropyrimidine, oxaliplatin and irinotecan. There are currently no drugs available in third-line colorectal cancer in China, with patients only treated with best supportive care as standard. Colorectal cancer is the second most common type of cancer in China, with approximately 380,000 new patients per year, according to CA Cancer Journal for Clinicians 2016. Globally, there was c.1.5 million new patients in 2015, which are estimated to increase to c.1.7 million patients per year by 2020, according to Frost & Sullivan. If Chi-Med is able to achieve NDA approval for fruquintinib, the drug has potential to significantly enhance the patients' quality of life. Furthermore, the success of the FRESCO trial is expected to be well-publicised as the Board believe this is one of the first home-grown, China-discovered and developed, mainstream innovation in the field of oncology, demonstrating China's resources, capability and perseverance to emerge as an innovator in the global oncology field. In addition to the colorectal cancer trial, fruquintinib is also being studied in China for non-small cell lung cancer (Phase III) and as combined therapy (Phase II). Other studies will also be initiated soon, include combined therapy for gastric cancer (Phase III) in China and new studies in the US. Chi-Med has 8 small molecule drug candidates in over 30 clinical studies worldwide, including 4 pivotal Phase III studies. 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. In light of the Group's positive progress, Beaufort reiterates its Buy recommendation on the shares.
Ryanair Holdings (LON:RYA, EUR14.26) – Buy
Ryanair, a low-cost European short-haul airline company, on Friday provided a traffic update for February 2017. During the month, passenger traffic increased by +10% y-o-y to 8.2 million customers, while the load factor improved +2% y-o-y to 95%. The rolling annual traffic to February rose +14% to 119.1 million customers. Passenger traffic represents the number of earned seats flown, while load factor represents the number of passengers as a proportion of the number of seats available for passengers.
Our view: Ryanair reported strong passenger traffic and load factor data for February, driven by lower fares and the continuing success of its 'Always Getting Better' customer experience programme. These strong statistics follow last month's +17% increase in passenger traffic and +2% improvement in load factor. Ryanair accordingly, said its Q4 load factors is achieving slightly higher than expected, and revised FY2017 passenger traffic to 120 million from 119 million customers previously guided (FY2016: 106.4m). At its Q3 FY2017 result announced last month, having suffered with lower than expected fares in Q3, the Group has repeated its "cautious" outlook for the remainder of FY2017, although given it delivered better than expected ex-fuel unit cost saving of -6% (previously guided c.-3%), management reiterated its FY2017 profit after tax guidance of €1.30bn-€1.35bn, subject to normal levels of disruption. In Q4, the Group expect average fare to fall by c.-15%, and upgraded full year ex-fuel unit cost saving to c.-4% (previously guided c.-3%). For the FY2018, Ryanair stated that the challenging pricing environment is expected to continue, which the Group hopes to tackle by boosting passenger traffic and further reducing unit costs. The management also said at its Analyst's conference call that it expects load factor to stabilise at around 93% to 93.5%, going forward. The Group has hedged over 85% of FY2018 fuel at an average price of US$49bbl which is set to deliver fuel savings of c.€65m in coming year. Beaufort is encouraged by the Group's ability offering lower fares while still retaining its net profit guidance. The key differences for Ryanair is its capability to continue lowering its unit costs, while delivering "lowest passenger costs" amongst its EU peers, at the time of traffic growth and when competitors are "forecasting flat or rising" costs. This gap between Ryanair and its rivals will enable Group to maintain momentum and continue winning market share. In view of this, Beaufort retains its Buy rating on Ryanair.
WPP (LON:WPP, 1,759.00p) – Buy
The world's largest advertising agency holding group released 2016 preliminary results on Friday. It detailed another record year, aided by strong currency tailwinds particularly in the second half, with billings up 16.0% at £55.245 billion, up 5.5% in constant currency and 3.3% like-for-like. Direct revenue was up 17.6% at £14.389 billion, while constant currency revenue was +7.2%, like-for-like revenue up 3.0%. Net debt reported at £4.131 billion at period end, an increase of £920 million on same date in 2015, with average net debt in 2016 at £4.340 billion against £3.562 billion in 2015, primarily reflecting the weakness of sterling, although the average net debt to EBITDA ratio remains under 1.8x, almost in the middle of the Board's target range. Dividends per share of 56.60p were declared, up 26.7%, reaching the recently targeted pay-out ratio of 50% one year ahead of schedule, rising from 47.7% last year. Management also noted that net new business of £4.360 billion (US$6.757 billion) in the year continued the good overall performance seen in the first nine months, albeit slower than the previous year. This outcome was above budget, but also demonstrated a relatively slow start to 2017, with January like-for-like revenue up only 1.5% and net sales 1.2% higher, against strong comparatives last year. The statement went on to guide shareholders regarding WPP's outlook for the current year, stating "continued tepid economic growth and recent weaker comparative net new business trends, the budgets for 2017, on a like-for-like basis, have been set conservatively at around 2% for both revenue and net sales, but with a headline operating margin target improvement on net sales of 0.3 margin points, in constant currency".
Our view: WPP is one of the most obvious blue-chip beneficiaries of Trumponomics. Recognising this, the shares had outperformed the FTSE100 by 10% over the past 3 months. So, Preliminaries announced on Friday suggesting a rather 'tepid' start to 2017, after having reported like-for-like 2016 revenues, which excludes the impact of currency and acquisitions, up 3.0%, with the fourth quarter up just 0.5%, the weakest quarter of the year, was a touch disappointing. Nevertheless CEO, Sir Martin Sorrell plays a prudent game and should still deliver at least 30bp constant currency margin gains which, along with an equity buyback of the order of 2.5%, should provide investors with over 10% EPS growth while also collecting a 50% dividend payout. Importantly, at this stage, a significant Brexit-inspired slowdown for 2017 does not look on the cards, while the impact of hits from major accounts such as VW are already priced in. The full Trump-effect, however, has not been. Even if the US's political and economic cycles must move at markedly different speeds, major corporates worried about running behind the curve can be expected to kick new initiatives off as soon as the campaign pledges for increase fiscal spending are seen to materialise. With not much short of 40% net sales exposure to North America, a further 2017E US$ boost of, perhaps, 7% can be expected. According to Beaufort estimates, this will enable the Group to book a 37bp margin advance to its headline 2017E, although determination to retain market share could possibly see such gains as much as halved in subsequent years. The Department of Justice's broad investigation into agencies' production contracts may reinforce regulatory oversight into triple bidding procedures, but this is ultimately likely to create more of a flow bottleneck than a margin squeeze. Limited net impact is seen for what is a relatively small contributor to Group revenues in any case and the sentiment impact is fully priced in. Based on 2017E and 2018E EPS estimates of 127p and 137p, with DPS of 62.5p and 67.5p respectively, WPP is now trading on a current year P/E multiple of 14.1x, a EV/EBITDA of 10.6x, with a yield of 3.5%. The shares are too cheap given the exceptional quality of its operations when near revolution in its principal trading location is set to spike significant new economic growth.