Today's edition features:
• Aberdeen Asset Management (LON:ADN)
• AFC Energy (LON:AFC)
• Amryt Pharma (LON:AMYT)
• easyJet (LON:EZJ)
"The overnight markets retreated somewhat as risk appetite appeared to wane. Traders are a little tired of waiting for the Fed’s much anticipated move that is due to take place with the FOMC meeting of March 14th- 15th, while also becoming a little wary of Mr Trump’s latest seemingly unfounded wiretapping allegations against his predecessor Barack Obama. Those wary of a Eurozone calamity potentially just around the corner were also frustrated by the pollsters’ favourite, Alain Juppé, yesterday stating “I confirm once and for all that I will not be candidate for the presidency of the Republic”, which seemingly points to a run-off election between Marine le Pen and Emmanuel Macron on May 7th, with all that could mean should the far-right National Front succeed to power. All three principal US indices fell for the second day, with financials the worst-performing sector in the S&P 500, losing 0.7% as one of the among the biggest sector winners in the postelection rally, bolstered by President Donald Trump's promises to enact pro-business policies, gave back some of their past six consecutive weeks of gains. U.S. government bonds meanwhile slipped as investors anticipated the coming Fed move, taking yields on the benchmark 10-year Treasury note to 2.494%, from 2.492% on Friday. Asia by comparison ended mix to firmer, with the ASX reversing early declines to trade up even though the mining-heavy index was weighed down by softer commodity prices, hitting the like of BHP Billiton and Rio Tinto; elsewhere, the two main Chinese indies firmed fractionally, leaving just the Nikkei to close with minor losses as safe haven investors bought Yen while shorting the Euro, mindful that recent economic data may provide the ECB with the excuse it needs to commence tapering of its huge bond-buying programme during the second quarter. UK Chancellor, Phillip Hammond’s first and final spring budget, due at 12:30hrs on Wednesday, is not expected to show any fireworks. Calm confidence, no give-aways and raised economic growth expectations are now much anticipated, with him expected to keep most of his ‘powder dry’ in anticipation of heightened uncertainty as the government prepares to invoke Article 50 by the end of the month. The BRC retail sales figures released first thing this morning were a little disappointing, falling back in February, with annualised LFL down 0.4%; release of the Halifax House Price Index is also due later this morning, with the EU also publishing its Q4’2016 GDP numbers followed by US Trade Balance figures and release of the Redbook this afternoon. But the most important single data-bite of the week will undoubtedly be this Friday US Jobsdata, given that strong numbers will almost certainly underwrite a move by the Fed. UK corporates due to provide earnings or trading updates include Direct Line (DLG.L), Just Eat (JE..L), Intertek (ITRK.L), PureCircle (PURE.L), PaddyPower Betfair (PPB.L), McCarthy & Stone (MCS.L) and SQS (SQS.L). London equities have opened marginally higher this morning, with the FTSE-100 trading 7 points up at 08:23."
- Barry Gibb, Research Analyst
Markets
Europe
The FTSE-100 finished yesterday's session 0.33% lower at 7,350.12, whilst the FTSE AIM All-Share index added 0.06% to stand at 915.60. In continental Europe, the CAC-40 finished down 0.46% at 4,972.19 whilst the DAX was 0.57% lower at 11,958.40.
Wall Street
In New York last night, the Dow Jones fell 0.24% to 20,954.34, the S&P-500 lost 0.33% to 2,375.31 and the Nasdaq shed 0.37% to stand at 5,849.18.
Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.29% to 19,323.82, while the Hang Seng firmed 0.46% to 23,704.46.
Oil
In early trade today, WTI crude was down 0.15% to $53.12/bbl and Brent was down 0.23% to $55.88/bbl.
Headlines
Vauxhall's fight for survival begins
Carlos Tavares, the man who will determine the future of Vauxhall workers, downplayed the threat to more than 4,000 Vauxhall workers - but he chose his words very carefully. The head of PSA insisted that the new combined company would have an opportunity to set new internal benchmarks for performance. They will allow plants to be compared and improve. Production commitments expire in 2021 for Ellesmere Port and 2025 for Luton. After that it will be every plant for itself in a battle for jobs. The combined company will have 24 factories and everyone at the Geneva motor show agrees that is a few too many. Several senior executives who asked not to be named had the same message. Consolidation is good because it's the best way to take out overcapacity. That has to happen and that means plants will close and jobs will go. In this inevitable fight for survival, the UK starts at a disadvantage according to most executives here. Uncertainty over Brexit and the terms of trade with Europe is one handicap. The fall in sterling is another. Although labour costs have gone down, the price of the 75% of parts for a Vauxhall Astra that come from Europe has gone up. Having said that, Mr Tavares said that in the event of a "hard" Brexit, it may be more - not less - important to have manufacturing in the UK.
Source: BBC News
Company news
Aberdeen Asset Management (LON:ADN, 298.3p) – Hold
The Boards of Standard Life plc and Aberdeen Asset Management PLC announced yesterday that they have reached agreement on the terms of a recommended all-share merger of Standard Life and Aberdeen. The combined group will in due course be branded to incorporate the names of both Standard Life and Aberdeen and the Combined Group will be headquartered in Scotland. Keith Skeoch, CEO of Standard Life, and Martin Gilbert, CEO of Aberdeen, will become co-CEOs of the Combined Group. Under the terms of the Merger, holders will be entitled to receive 0.757 New Shares in exchange for each existing Aberdeen share. Based on this exchange ratio and the Closing Price of 378.5 pence per Standard Life Share on 3 March 2017 (being the last Business Day prior to the date of this Announcement), the Merger values each Aberdeen Share at 286.5 pence and Aberdeen's existing issued ordinary share capital at approximately £3.8 billion. Following completion of the Merger, Aberdeen Shareholders would own approximately 33.3 per cent. and Standard Life Shareholders would own approximately 66.7 per cent. of the Combined Group on a diluted basis. Aberdeen Shareholders will be entitled to receive an interim dividend of up to 7.5 pence for the six-month period ended 31 March 2017, scheduled to be paid in June 2017 (subject to approval by the Board of Aberdeen). The Boards of Standard Life and Aberdeen believe that the Merger will ‘Harness Standard Life's and Aberdeen's complementary, market leading investment and savings capabilities which would deliver a compelling and comprehensive product offering for clients covering developed and emerging market equities and fixed income, multi-asset, real estate and alternatives.’
Our view: Both Keith Skeoch and Martin Gilbert have always been clear that their ambitions were to run world-class investment companies and that this would be achieved through continued investment in diversification and growth, coupled with a sharp focus on financial discipline. Yesterday’s merger is positive news for their clients, bringing together the strong and reasonably complementary investment capabilities of each firm to tackle the challenges facing UK active managers, while re-positioning the business to meet the evolving needs of clients and customers. It brings financial strength, diversity of customer base and global reach to help ensure the enlarged business has the cost structure to compete effectively on the global stage. Indeed, when Beaufort analysts last met with Martin Gilbert at the end of November 2016, they were left with the impression that a sizeable transaction was being ‘cooked’, although their ‘guess’ was that it was going to be a value-creating merger or acquisition of a sizeable US-based asset manager with significant management of Treasuries and other fixed income instruments. Beaufort also believed that such a deal would be sufficient to allow Aberdeen to retain its current dividend, which is key considering the shares were largely being recommended on the basis of income. Hence its decision to retain its Buy recommendation. Yesterday’s news was not exactly of this shape. In fact, one might even suggest the two Scottish operations are embracing one-another due to weaknesses inherent in both their core franchises, with both suffering consecutive quarterly outflows across all asset classes (Aberdeen has had no less than 15 in fact) and poor relative returns. Whether it will be possible to reverse this trend, particularly given investors’ rising preference to buy index, rather than managed funds, is not clear. Ramming such similar operations together, however, will clearly accrue major cost synergies, with a 25% to 26% reduction in Aberdeen’s cost base allowing 2018E earnings to spike by an estimated 14% net, having assumed an accompanying hit on revenues during the period. A combined group free cash flow of around £900m/year should also provide comfort for those seeking good income visibility going forward. Aberdeen shares have, however, spiked quite sharply upward over the past month, presumably with increasing investor hope of a significant deal being announced in the relatively near-term. What they got yesterday was good, but it could have been better. Early celebrations, on details of the proposed dividend payments and possible cost savings faded somewhat, however, with shareholders recognising that those holding Aberdeen in the hope of holding-out a speculative ‘take-over’ premium are now going to be disappointed and that the larger group emerging from this deal will still have many of the same fundamental problems that exist in separate entities. Having touched its 310p/share price target yesterday, Beaufort downgrades Aberdeen asset management from Buy to Hold.
AFC Energy (LON:AFC, 13.12p) – Speculative Buy
AFC Energy (‘AFC’), the industrial fuel cell power company, yesterday announced that it has received Group’s first commercial sale order for its small-scale alkaline hydrogen fuel cell system from PowerHouse Energy Plc. AFC said delivery is subject to all parties satisfied with the Order, as well as successful recommissioning of PowerHouse’s G3-UHt unit (ultra-high temperature waste gasification system), expected to be in the Q4 2017. AFC Energy’s CEO, Adam Bond, commented “Powerhouse Energy's order confirmation today for its first small scale fuel cell system builds on a number of significant opportunities AFC Energy is developing internationally for its fuel cell systems. It further evidences the growing number of opportunities for AFC Energy right here in the UK where growth in and momentum behind the hydrogen economy is becoming increasingly real”.
Our view: This is a positive news for AFC. If PowerHouse’s G3-UHt unit is successful, its modular and distributed power generation from waste technology has the potential to be expanded to a number of additional locations in the UK, as well as internationally. AFC will retain the rights to access test data from the integrated system as it relates to the fuel cell once commissioned on an on-going basis. Last month, AFC announced its intension to raise up to approximately £8.1m via a mixture of placing, subscription and an open offer to support commercialisation. The New Ordinary Shares will represent approximately 20.6% of the enlarged share capital of the Group, and the issue price of 10p/share (c.40% discount to the closing price on 13 February 2017) not surprisingly resulted in a sharp fall in AFC’s share price. The Group however, has confirmed it raised £6m through placing & subscription and stated the open offer to raise £2.1m was oversubscribed by some 57%. These are expected to be admitted to trading on 9 March 2017. With strengthened cash position, the Group will be able to pursue its commitment to technical development, commercial and strategic relationships. The key progress to watch this year will be Group’s JV with Italy's De Nora, and its collaboration with Peel Environmental Limited. The Board believes its JV with De Nora will deliver a technology platform that further enhances the commercialisation timeline and potential for success in the alkaline fuel cell space. While collaboration with Peel to assess the techno-economic feasibility of the UK's largest hydrogen fuel cell precinct, of which, a positive outcome could see the development of the UK's largest stationary fuel cell project and also one of the largest in the world, confirming a growing transition towards a hydrogen based power, for which AFC will have played important role. Given the positive progress AFC Energy is making, Beaufort reiterates its Speculative Buy rating on the shares.
Amryt Pharma (LON:AMYT, 19.00p) – Speculative Buy
The pharmaceutical company focused on best-in-class treatments for rare and orphan diseases, yesterday announced the completion of discussions with the Food and Drug Administration (‘FDA’) and European Medicines Agency (‘EMA’) regarding the design of its pivotal phase 3 clinical trial for AP101. This molecule is a potential treatment for Epidermolysis Bullosa (‘EB’). EB is a rare genetic skin disorder that leads to exceptionally fragile skin and children with the disorder are often referred to as “Butterfly Children”. The global market for a treatment in EB is estimated to be in excess of EUR 1.3 billion. With regulatory authority discussions now completed with FDA and EMA and the design of the clinical trial established, Amryt is on track to commence the phase 3 trial at the end of March. Amryt has also agreed to conduct some further non-clinical studies in parallel with this phase 3 study. INC Research has been appointed as the contract research organisation for the phase 3 study, and approximately 30 clinical trial sites in 15 countries have already been pre-qualified. Adult and paediatric patients with EB will be enrolled into a randomised double blind placebo controlled trial. A total of 164 evaluable patients will be treated for a 90-day blinded period. The proportion of patients with completely healed target wounds within 45 days will be evaluated as the primary endpoint. Secondary endpoints include the time to achieve wound healing and changes in pain and pruritus (or itch). An important component of the phase 3 study is an independent data monitoring committee that will conduct an un-blinded interim efficacy analysis after 50% enrolment. The potential outcomes of this interim analysis include continuation of the study unchanged, discontinuation of the study for futility, or an increase in the number of patients in the study to preserve adequate statistical power.
Our view: This is very positive news! Reaching this critical development milestone is an important step forward for Amryt. AP101 received marketing approval for the treatment of partial-thickness wounds from the European Commission in January 2016. But agreement with the regulatory authorities for its phase 3 study in EB was a precursor to commencing its pivotal study, which it now expect will enrol its first patients in the coming weeks. There remains substantial unmet need for drugs which can address the symptoms and significant progress can now be made toward a potential treatment this review. Working with INC Research, Amryt believes an adaptive approach to study sample size will help to ensure that it achieves a reliable assessment of the potential benefit of this new skin healing treatment for the orphan designated disease. Having patent grants in the US and in Europe, as well as other territories including Japan, Canada and Australia, the Board estimates its global EB market opportunity to be in excess of EUR 1.3 billion. Amryt's other earlier stage product, AP102, is focused on developing novel, next generation somatostatin analogue peptide medicines for patients with rare neuroendocrine diseases, where there is also a high unmet medical need, including acromegaly and Cushing's disease. AP102 was recently granted orphan designation in the US in acromegaly by the FDA. While it is true that the London equity markets have few other ‘rare diseases’ focussed development groups against which Amryt might be compared, the clear tax and development advantages offered has created a complete sub-sector of such companies listed on the US’s NASDAQ. Elementary comparison amongst these of their respective clinical development suggests a significant and unwarranted valuation gap. Beaufort retains its Speculative Buy recommendation on Amryt Pharma plc.
easyJet (LON:EZJ, 962.5p) – Buy
easyJet, a low-cost European short-haul airline company, yesterday provided a traffic update for February 2017. During the month, passenger traffic increased by +8.2% year-on-year to 5.3 million customers, while the load factor improved +1.6% year-on-year to 92.0%. The rolling 12 months traffic to February rose +6.8% to 75.3 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: easyJet reported strong passenger traffic and load factor data for February, despite the shorter month and strong comparative last year (February 2016: passenger traffic +9.8%). This follows January’s strong +11.0% growth in passenger traffic and +1.2% improvement in load factor. At the Q1 FY2017 results announced on 24 January 2017, easyJet performed in line with guidance, supported by the higher revenue due to currency movements and expanded passenger numbers, although it has warned that the weakness of Sterling is expected to impact easyJet’s full year pre-tax profit by around £105m. Looking ahead, subject to normal levels of disruption, the Group reiterated at the time of Q1 results that it planned to grow seat capacity by up to +9% in the FY2017, while it continues to target a -3% decline in total cost per seat at constant currency including fuel for the full year, and a +1% increase in cost per seat excluding fuel at constant foreign exchange rate. The Group said it remains committed to flat cost per seat excluding fuel at constant currency in the FY2019 against FY2015. Revenue per seat for the H1 is expected to decline by “high single digits” due to the timing of Easter and the Berlin terrorist attack. Adjusting for this, underlying revenue per seat decline is expected to improve in the Q2 compared to the Q1, supported by strong demand across all European markets. Considering the successful lean cost programme, strong forward booking (c.56% of expected bookings in Q2 secured by 24 January 2017), and strong balance sheet, Beaufort retains its Buy rating on the shares given a FY2017E earnings multiple of 12.7x and 3.9% yield while, of course, still remaining sensitive to any international knocks that may spike oil prices and economic/political uncertainties.