"The Dow slipped somewhat on Wednesday, while Sterling surprised by reversing early losses as the U.K. officially began the process of exiting the European Union. Having fallen around 17% against the US$ since June’s Brexit referendum, most believe the currency now to be fundamentally undervalued; expressions from EU leaders to ‘strive for agreement’ and to ‘keep the UK as a close partner’ following formal triggering of Article 50 around midday yesterday, was enough to spur some traders into rebuilding their Sterling positions, suggesting the market may be overstating the financial obstacles relating to Brexit. The three principal US equity indices closed mixed; the tech-heavy NASDAQ gained on the back of a continued rally amongst healthcare and biotech stocks, the S&P 500 was helped by a rebound in Oils as the EIA inventory signalled strong demand, armed factions reduced Libyan output and OPEC hinted at an extension of its production agreement to the year-end was being agreed amongst Members and other non-US producers, while the Dow was knocked into the red by falling financials. Both the FTSE-100 and the Stoxx Europe 600 managed reasonable gains with good volume, although the formal blocking of the proposed tie-up between Deutsche Börse AG and the London Stock Exchange Group PLC, hinted to some that such cross-border M&A might now face greater regulatory scrutiny, with focus on local interest, than has been seen in the recent past. Today the PM is set to publish her Great Repeal Bill White Paper, containing details of plans to transfer EU law into U.K. law, so that 19,000 decrees and regulations formed over the past four decades will continue to apply after leaving the Union, although Parliamentary will have future scope to propose edits and amendments as it sees fit. Donald Tusk for his part will send draft guidelines framing prospective talks between the EU and UK, the agenda for which should be agreed on 29th April. Asian equities ended mostly in the negative, with only the ASX managing a small gain on the back of firmer oils as the index pushed up to its key 6000 resistance, while the Shanghai Composite saw a sell-off of various highly-valued recent quotes and the Nikkei remained unhappy that the US$ appears unable to breach the Y111.50 level. UK macro data due for release today amounts to just March’s Gfk Consumer Confidence numbers, although the EU will provide March Economic Sentiment plus Consumer and industrial Confidence data. The US is releasing Weekly Jobless, Q4 final GDP and Personal Consumption stats, while later speeches are due from the FOMC’s Robert Kaplan and John Williams. UK corporates due to release earnings or trading updates include Booker Group (BOK.L), Amryt Pharma (AMYT.L), DFS Furniture (DFS.L), Hilton Food Group (HFG.L), SSE (SSE.L) and CMC Markets (CMCX.L). London is expected to open in a rather uninspired mood this morning as it awaits the release from Downing Street, with the FTSE-100 seen opening 5 points either side of unchanged in early trade. Investors will, however, be looking out for more news regarding Saudi Aramco’s plans to raise US$2bn through its first international bond offering, itself a prelude to the giant organisation achieving a market quotation, most likely in New York."
- Barry Gibb, Research Analyst
Markets
Europe
The FTSE-100 finished testerday's session 0.41% higher at 7,373.72, whilst the FTSE AIM All-Share index rose 0.49% to stand at 924.25. In continental Europe, the CAC-40 finished up 0.45% at 5,069.04 whilst the DAX was 0.44% higher at 12,203.00.
Wall Street
In New York last night, the Dow Jones fell 0.2% to 20,659.32, the S&P 500 eased 0.11% to 2361.13 and the Nasdaq gained 0.38% to 5897.55.
Asia
In Asian markets this morning, the Nikkei 225 had shed 0.56% to 19,109.99, while the Hang Seng lost 0.42% to 24,289.67.
Oil
In early trade today, WTI crude was up 0.34% to $49.68/bbl and Brent was up 0.15% to $52.50/bbl.
Headlines
Insurer Lloyd's of London confirms new Brussels base
Lloyd's of London says it will establish a new European base in Brussels to avoid losing business when the UK leaves the EU. The 329-year-old insurance market confirmed the plan as it released its latest annual results. "A subsidiary office will be opened in Brussels with the intention that it will be operational for the January 1 renewal season in 2019," it said. The company's continental business generates 11% of its premiums. Other financial institutions are also planning to relocate business within Europe. Several investment banks, including Bank of America, Barclays, and Morgan Stanley are considering relocating staff to Dublin. Frankfurt, Madrid and Amsterdam are also likely to benefit. HSBC is expected to move significant numbers of employees to Paris. Lloyd's also announced it had made a profit of £2.1bn for 2016, the same as for the year before.
Company news
Bushveld Minerals (LON:BMN, 7.95p) – Speculative Buy
Bushveld Minerals announced today that it has signed the final elements of the financing agreements in support of the Evraz Group’s 78.8% interest in Strategic Minerals Corporation (SMC) with Barak Fund SPC. The Barak financing comprises a bridge loan facility of to US$11m, repayable within two months of drawdown and will incur a total of US$939,077 in interest, fees and legal charges. In addition, the Barak financing includes an inventory facility up to US$7m to monetise Vametco’s inventory of finished Nitrovan product ready for distribution. Bushveld intends to refinance the Barak bridge loan upon completion of the acquisition with no expectation of refinancing through equity issue. The Barak financing agreement coupled with the recently signed US$9m financing agreement with Wogen Resources ensures Bushveld will be able to complete the acquisition of SMC and its 78.8% interest in Vametco with minimal dilution to shareholders. As part of its agreement, Wogen will make a US$3m prepayment, payable by the end of 2018, and provide an inventory and receivable financing package of US$6m to optimise operations at the Vametco mine.
Our view: The above announcement is a major milestone for Bushveld as it has now completed the financing for the Vametco acquisition. The Company can now focus on optimising operations at the mine as well as monetising the inventory of its Nitrovan product. We are encouraged with the Barak Fund and Wogen’s commitment to the project and look forward further updates as Bushveld continues with its integrated vanadium
Beaufort Securities acts as Corporate Broker to Bushveld Minerals plc
MySQUAR Limited (LON:MYSQ, 1.41p) – Speculative Buy
The Myanmar-language social media, entertainment and payments platform whose principal activity is to design, develop and commercialise Myanmar-focussed internet-based mobile applications, yesterday announced that Lucky Wingabar, its casual gaming platform has been launched, with five casual games. Eric Schaer, CEO of MySQUAR, noted: "The Company is one of the first to launch a casual gaming platform to the Myanmar market as we continue enhancing our leading position by bringing new games to market. With the incorporation of various appropriate payment solutions for players to purchase in-game assets, we are now able to monetise the platform on a large scale."
Our view: More progress from MySQUAR, with its focus having moved from acquisition of user accounts to that of monetisation. The incorporation of appropriate payment solution is key. Just a few days ago, the Group confirmed it had successfully integrated and utilised the carrier billing service (purchases are made by deducting from the phone balance) of Telenor Myanmar, the leading Norwegian telecommunications provider operating in Myanmar since 2014, for MySQUAR's mobile applications and games. Despite arriving a little later than originally anticipated, being a major international telecommunications provider in Myanmar with a market share of about 37%, this should power the Group’s second half performance. Should similar arrangements also be made with MPT and Ooredoo in due course, MySQUAR could be set up for a truly impressive 2017/18 result. Release of half-year results to December 2016 is now imminent. Revenues for the period will have been held back by the delayed signing and continuing losses for the period have already been anticipated. The key message shareholders will be listening for, however, is the Board’s continued expectation of achieving monthly cashflow breakeven before the fiscal year end. This would offer potential for a first net profits to be declared for the year to June 2018. Considering MySQUAR’s track-record of over-delivering on its operational promises, the significance of yesterday’s news is unlikely to have been missed by its numerous and very cash-rich global peer group, who remain determined to continue ensnaring quality brandnames in virgin territories that have successfully participated in an online user ‘landgrab’ while demonstrating the ability to secure long-term cashflows from them. In this respect, MySQUAR appears quite dramatically undervalued; Beaufort retains a price target of 21.0p/share and repeats its Speculative Buy recommendation, although it does recognise that the terms of the remaining issued CLNs do at this time continue to create a potential stock overhang which some fear are acting as a drag on the share price.
Beaufort Securities acts as Corporate Broker to MySQUAR Limited plc
Saga (LON:SAGA, 204.45p) – Buy
Saga, the UK’s leading provider of products and services primarily tailored for the over 50s, yesterday announced its preliminary results for the 12 months ended 31 January 2017 (‘FY2017’). During the period, revenues fell by -9.5% to £871.3m against the comparable period (FY2016) owing to the accounting for the new funds-withheld quota share agreement in motor insurance. Trading Profit increased by +0.9% to £213.0m while underlying pre-tax profit (excluding Ogden £4m impact) advanced by +5.6% to £187.4m due to lower finance costs of £6.8m and other costs. This resulted basic earnings per share (from continuing operations) to expand by +6.0% to 14.1p. Net debt was reduced to £464.8m (FY2016: £547.7m), implying net debt to EBITDA of 1.9x from 2.3x. Available operating cash flow enhanced by +22.2% to £217.6m and cash and cash equivalents at the period end stood at £221.5m (FY2016: £164.4m). On the operational front, core insurance policies increased by +3.2% to 3,001k; comprised of 1,366k in Motor Broking, 1,254k in Home Broking and 381k in Other Broking. The number of holiday passengers increased by +0.5% to 190k, while cruise passengers fell by -12.5% to 21k. Solvency II coverage ratio stood at 143% (FY2016: 170%). Saga’s CEO, Lance Batchelor commented “For the third successive year since IPO, we have delivered a strong set of financial results. Our confidence in continuing to deliver a consistent financial performance in 2017 is strong. We have started the financial year well, and I look ahead with a great deal of optimism for the business”. The Group declared a final dividend of 5.8p per share, bringing total full year dividend to 8.5p, up +18.1% to be paid on 30 June 2017.
Our view: Saga delivered good results for the FY2017, broadly in line with expectations. The Group has increased its dividend by +18%, meaning its provided shareholders with pay-out ratio of 62% against 57% last year (in line with of 50%-70% range). Operating cash flow remain strong and ended the year with reduced net debt, implying a net debt to EBITDA multiple of 1.9x, in line with Group’s medium-term target range of 1.5x-2.0x. Post period, the Group said it have seen a “very positive” start to the year on motor premiums, currently running in excess of claims inflation, supporting towards improved motor broking profits during the year. Management noted, however, that Home remains challenging that it expects “another tough year”, fuelled by the benign winter weather. Private medical insurance is performing well, with growing demand. Travel insurance demand was stable, while noting that adverse impact of weaker Sterling may have influence over demand. Looking ahead, Saga said it expect FY2018 to see profits from insurance to increase with improved yield management, operational and marketing efficiencies and the ongoing positive impact of the motor panel. Profitability for the travel business is expected to step forward strongly year on year, primarily within the tour operating businesses. The Group will launch ‘Saga Possibilities’ membership scheme in the H2 to build stronger relationship with its member through “variety of ways” for their loyalty. The shares are currently valued at FY2018E and FY2019E P/E multiple of 13.9x and 12.8x along with dividend yield of 4.7% and 5.2%, respectively. In view of the delivery of ongoing consistent profit growth and management’s confidence over the coming year, Beaufort reiterates its Buy rating on the stock.
Petards Group (LON:PEG, 33.30p) – Speculative Buy
Petards, a software developer of advanced security and surveillance systems, yesterday announced that it has secured c.£4.3m contract to supply Petards eyeTrain, an on-board digital CCTV systems, and Automatic Selective Door Opening (‘ASDO’) systems to Stadler Bussnang AG (‘Stadler’). The contract involves design, development and supply of CCTV and ASDO systems integrated into Stadler's FLIRTUK trains. The eyeTrain systems provides the trains and their drivers with enhanced capability in the areas of security and surveillance through CCTV coverage (both internal and external) of saloon areas combined with pantograph, forward facing and track debris monitoring systems that is integrated with Petards’ video management software. ASDO system delivers improved passenger operations at stations where the platforms are shorter than the trains. The project will commence immediately and is expected to complete during Q2 2019. Petards’ Chairman, Raschid Abdullah, commented “We are delighted that Petards eyeTrain CCTV and ASDO systems have been selected by Stadler for their first UK Mainline Rolling stock contract. We welcome Stadler as a new customer of Petards with the integration onto their FLIRT platform. We are all thrilled about the potential of this new partnership with Stadler, a long established world leading train builder”.
Our view: Petards’ products continue to be the ‘system-of-choice’ for a number of rail industry players. Stadler is a well-known, global system provider of train manufacturing and maintenance services, operating in 18 countries with 7,000 employees. It manufactures a wide range of products, including high speed trains, intercity, regional and commuter trains, trams, tram-trains and underground trains. Yesterday’s contract award marks a new partnership that has a potential for long-term relationship to roll-out Petards’ various products beyond the FLIRT platform to other vehicles manufactured by Stadler. Beside this, Petards continue to win numerous contracts with other blue-chip customers including Siemens, Great Western Railway and Hitachi Rail Europe Limited. At its final results for FY2016 announced on 14 March 2017, the Group demonstrated solid financial performances (revenues +17%, EBITDA +28%, basic EPS +18%) along with strong order book of £12m scheduled for delivery in 2017. Petards ended the year with good cash position of £2.3m (FY2015: £2.5m) with no debt. Beaufort forecasts FY2017E and FY2018E earnings of 2.2p and 2.4p respectively, implying P/E multiples of just 14.7x and 13.4x, having seen the shares gain nearly +150% year-to-date. In view of the continue positive progress, however, Beaufort retains its Speculative Buy recommendation on the shares.