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Beaufort Securities Breakfast Alert: Balfour Beatty plc, Jubilee Platinum PLC, Karelian Diamond Resources Plc, J Sainsbury plc

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Today's edition features:

• Jubilee Platinum (JLP.L)

• Karelian Diamond Resources (KDR.L)

• Balfour Beatty (BBY.L)

• J Sainsbury (SBRY.L)

 

"Following Thursday’s celebrations, confidence flagged somewhat in the overnight markets. European and Asian equities had raced higher yesterday on the back of a more dovish than expected tone from Janet Yellen, a recovery in mineral/commodity prices and a firm rejection of populism from the Dutch election. The Stoxx Europe 600 rose 0.7% to its highest close since December 2015, led by mining and oil companies, while the internationally-traded Hang Seng spiked back to levels not seen for two summers. By mid-afternoon, however, the US$ had retreated on slower rate-increase expectations, as Donald Trump revealed plans to slash environmental and foreign aid budgets to fund increased military spending. In his first budget, the President outlined proposals to cut more than US$10bn from the Department of State and USAID, an agency which works to fight poverty across the globe. His ‘America First’ draft meanwhile set aside US$639bn for the Department of Defense, a US$52bn year-on-year increase and the largest since Ronald Reagan was in office, while trimming the Department of Health and Human Services' funding by 18% (US$15.1bn) and education by 13% (US$9bn). These big numbers rather took the puff out of US equities, as analysts pointed to the Health-care sector as the obvious loser given increased expectation of higher regulatory costs and cuts in federal funding, while Energy stocks also suffered as US crude prices retreated below US$50 once again. This meant the three principal US equity indices ended fractionally mixed after a rather anticlimactic session as Treasury Secretary, Steve Mnuchin, insisted the Trump Administration did not want a trade war but was determined to rebalance unfair international trading relationships. Investors may hear more from him on this later today, when he attends a gathering of the world’s G20 finance chiefs. Asian equities ended similarly mixed with mostly just small moves, as traders foresaw new pressure from Mnuchin to boost the value of what his President considers deeply unvalued currencies. Yesterday was also the Bank of England’s turn to surprise a little. Not that it changed its base rate, but the fact that one official dissented in favour of higher borrowing costs while others hinted it might not be long before they do the same. This unexpectedly hawkish signal comes as Theresa May prepares to trigger divorce talks by the end of this month, while inflation is almost certain to breach the BoE’s target 2% level in the first half and possibly exceed its projected 2.4% peak in the second. That said, market consensus remains for no change to UK rates throughout 2017 while sensitive Brexit negotiations get underway, even if it was enough to see the Pound recover a little and Gilt yields rise. UK macro releases due today are limited to the BoE Quarterly Bulletin, while the EU produces January Trade Balance and Construction Output figures. The US is scheduled to release Industrial Production, Capacity Utilisation and the Michigan Consumer Sentiment Index. UK Corporates due to report earnings or trading updates include Sthree, Berkeley Group, Goodwin and Investec. Traders will also be listening out for any feedback from the meeting scheduled for President Trump and Chancellor Merkel in the company of various of Germany’s industry giants; the US$65bn trade deficit and apparently engineered weakness of the Euro will likely be the focus points. Such a mixed bag of sentiment drivers is likely to mean London equities open unconvincingly this morning, with the FTSE-100 giving back some of yesterday’s gains after having rallyied to a new record close. The index is seen down 10 points in opening trade."

- Barry Gibb, Research Analyst

 

Markets

Europe

The FTSE-100 finished yesterday's session 0.64% higher at 7,415.95, whilst the FTSE AIM All-Share index added 0.65% to stand at 925.26. In continental Europe, the CAC-40 finished up 0.56% at 5,013.38 whilst the DAX was 0.61% higher at 12,083.18.

Wall Street

In New York last night, the Dow Jones fell 0.07% to 20.934.55, the S&P 500 dropped 0.16% to 2,381.38 and the Nasdaq gained 0.01% to 5,900.76.

Asia

In Asian markets this morning, the Nikkei 225 had fallen 0.38% to 19,515.27, while the Hang Seng firmed 0.34% to 24,369.88.

Oil

In early trade today, WTI crude was up 0.18% to $48.84/bbl and Brent was up 0.1% to $51.79/bbl.

 

Headlines

MPC member calls for interest rates to rise

UK interest rates should be raised, despite risks in the economy, according to a member of the Bank of England's rate-setting committee. Kristin Forbes, a US academic, was the only member of the Monetary Policy Committee to vote to raise rates this month. This was the first split between policymakers on rates since last July. "Monetary policy should not go on hold," Ms Forbes wrote in an opinion piece in the Daily Telegraph. Ms Forbes, who is due to leave the Bank in June, said raising rates would lessen the risk of above-target inflation, and boost an improved outlook for unemployment and UK output.

Source: BBC News

 

Company news

Jubilee Platinum (LON:JLP, 5.72p) – Speculative Buy

Jubilee announced today that it has acquired the rights, subject to completion of due diligence, to 1.25Mt of new platinum-bearing surface material grading 2.7g/t 4E PGMs (platinum, palladium, rhodium and gold). The additional material is expected to add 14,000oz of PGMs annually to Jubilee’s existing PGM production, pushing the Total annual production to potentially 50,000oz, all from its surface tailing and third party ore projects. The new material is located within trucking distance of Jubilee’s Hernic processing plant, however the Company is considering construction of a dedicated PGM plant adjacent to the new material. Jubilee also announced that it has completed a placing of 66M shares at a price of 5p per share for gross proceeds of £3.3m which will be used to fund the above transaction.

Our view: Jubilee continues with its strategy of acquiring additional surface material and increasing its annual PGM production without the risk and burden of hard rock mining. We anticipate further acquisitions as Jubilee has the capability and expertise to generate cash flow over the short term from the above transaction. We look forward to results of the option study on either processing the material through a dedicated platinum processing plant or through the Company’s nearby Hernic plant. In the meantime, we retain our speculative Buy recommendation.

Beaufort Securities acts as a corporate broker to Jubilee Platinum PLC

 

Karelian Diamond Resources (LON:KDR, 0.52p) – Speculative Buy

Karelian Diamond Resources, the diamond exploration company focused on Finland, announced yesterday a 100 metre extension to the NW of the existing Riihivaara kimberlite body, which remains open to the NW, SE and at depth. The extension is based on results from a series of till samples taken along trend NW of the known kimberlite body and showed high concentrations of KIMs (kimberlite indicator minerals). Garnet analyses and low chromite grain counts suggest that the Riihivaara kimberlite is the source for the KIMs. Further analysis by scanning electron microscopy will focus on classifying the KIMs.

Our view: The Riihivaara kimberlite continues to show positive mineral chemistry results for diamonds and its extent continues to grow from its initial 250m extent. Numerous G9 and G10 harzburgitic garnets present in the samples are encouraging given their strong compositional and pressure- temperature association with diamonds and are thought to be produced within the diamond stability field. The above results combined with the recent discovery of a diamond within a till sample adds to the prospectivity of the Kuhmo region. As such, we reiterate a Speculative Buy on the stock.

Beaufort Securities acts as a corporate broker to Karelian Diamond Resources Plc

 

Balfour Beatty (LON:BBY, 271.60p) – Hold

The Materials, construction and support services group yesterday reported full year results to end-December 2016. With underlying revenue £8.5bn, up 4% (down 3% at constant exchange rates), the Group returned to profit following two years of losses; underlying profit from operations was £67m. In the second half of 2016 UK construction returned to underlying profitability, while its order book ended at £12.7bn, up 15% (or +4% at CER). Strong period end balance sheet with net cash at £173m is underpinned by its £1.2bn Investments portfolio. Following dividend reinstatement, the Board recommended a final dividend of 1.8 pence per share (making a full year 2.7 pence/share payout). Balfour significantly exceeded its 24-month Phase One targets, with £439m ‘cash in’ and £123m ‘cost out’ as it continued to simplify operations and exit non-core assets. Management has upgraded leadership and de-layering of management in UK and US, while improving risk profile and order book from strengthened governance and increased customer satisfaction. Pointing at the Group’s favourable medium and long term market outlook, the Board reiterated its Phase Two targets to achieve industry-standard margins by end of 2018.

Our view: Fair enough. Steady progress, but not yet enough to want to increase investment exposure. Build to Last is a long-term transformation programme designed to deliver superior returns for all stakeholders from Lean, Expert, Trusted and Safe operation. As a result of the actions taken during the 24-month self-help phase, Balfour now has a solid platform having exceeded its Phase One financial targets with £439 million cash in (Target: £200 million) and £123 million cost out (Target: £100 million). Over the next 24 months, Phase Two, the Group expects each of its Construction Services and Support Services businesses to continue their positive trajectory to reach industry-standard margins. Specifically, for these earnings-based businesses the underlying profit margin from operations targets are UK Construction: 2%-3%, US Construction: 1%-2% and Support Services: 3%- 5%. For Investments, which is an asset-based business, during Phase One there were 20 partial or full disposals from the portfolio, all of which were at or above the Directors' valuation; the liquidity which this provided to the Group was an integral part of the self-help in Phase One. As the financial performance continues on a positive trajectory, it will have greater flexibility over the timing of the sale of infrastructure assets. During Phase Two of Build to Last, it will continue to sell these assets timed to maximise value to shareholders, although there are not expected to be material disposals in the first half of 2017. The trading environment in the Group’s core UK and US markets remains positive, with UK government policy is helping to drive a strong pipeline of major infrastructure projects in transport and energy. In the US, the new administration has made infrastructure one of its key priorities. This positive market backdrop supports the Group's commitment to be more selective, targeting contracts with improved profitability and cash flow dynamics. Against this background, Balfour’s Phase Three (2019 onward) aims to command a premium to industry-standard margins as market-leading strength should be matched by market-leading performance. That’s the wish and there is reasonable confidence its prudent management will succeed in its ambitions. The trouble is, that the market already prices in such an outcome, awarding the shares a 22x 2017E earnings multiple while offering just a 1.5% yield. Balfour Beatty shares look like they could represent good value by this time next year, by when the forward multiple could be as much as 10-points lower. Investors can wait for this by parking their funds in the meantime in lowly rated and high yielding mainstream housebuilders (like Persimmon and Taylor Wimpey). Beaufort retains its Hold recommendation on Balfour Beatty.

 

J Sainsbury (LON:SBRY, 268.10p) – Hold

J Sainsbury plc (‘Sainsbury’), an owner of Argos and Sainsbury’s supermarket, yesterday provided trading statement for the 9 weeks ended 11 March 2017 (‘Q4 FY2017’). During the period, excluding fuel, Group’s like-for-like (‘LFL’) sales grew by +0.3%, comprised of; -0.5% LFL decline in Sainsbury’s offset by +4.3% LFL improvement in Argos. Total sales for Sainsbury’s and Argos, excluding fuel, increased by +0.1% and +3.8%, respectively. On the operational front, the Group said it has reduced promotional participation, lowered operating costs and cut food waste. During the quarter, the Group opened 10 Sainsbury’s convenience stores and 11 Argos Digital stores in Sainsbury's supermarkets, bringing the total to 41, and opened one Mini Habitat store in a Sainsbury's supermarket, bringing the total to 8. Sainsbury’s CEO, Mike Coupe, commented “We are pleased with this performance and are making good progress against our key priorities. The market remains very competitive and the impact of cost price pressures remains uncertain. However, we are well placed to navigate the external environment and remain focused on delivering our strategy”. The Group will announce its Preliminary results for FY2017 on 3 May 2017.

Our view: Sainsbury delivered a mix performance for Q4 FY 2017. Argos showed strong LFL growth of +4.3%, which was very much ahead of the consensus Analysts’ estimate of just +1.7%, boosted by strong sales growth in technology categories, particularly the mobile phones, video gaming, wearable tech and sports equipment. Sainsbury’s supermarket, on the other hand, saw LFL sales declined by -0.5% against a consensus unchanged (0%), despite its online groceries expanding by +7% with +8% improvement in orders. Although its convenience stores delivered total sales growth of nearly +7%, Sainsbury's general merchandise sales have fallen by -4%, due to the timing of this year's Mother's Day and Easter. This takes Sainsbury’s supermarket’s full year LFL sales (excluding fuel) decline of -0.6%. The Q4 performance appears to Beaufort that Sainsbury has decided to cut back on its price investment on supermarket side while placing greater focus during the quarter on Argos, with a hope that latter will stimulate footfall and create the cross-selling opportunities for the former. The shares are valued at FY2017E and FY2018E P/E multiple of 13.2x and 13.4x, along with dividend yield of 3.9% and 3.8%, respectively. We expect Sainsbury to release its full year result in line with market expectation, and therefore maintain our Hold rating on the shares. Beaufort’s only Buy rating amongst the UK supermarket majors is presently Wm Morrison.

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