Today's edition features:
• Lansdowne Oil & Gas (LON:LOGP)
• Greene King (LON:GNK)
• Hutchison China MediTech (LON:HCM)
"US equities started weak and fell sharply during yesterday's session before managing in a half-hearted bounce a couple of hours before closing. The sell-off amongst Tech issue resumed, leave all three major averages with quite deep losses as cautious sentiment overpowered buying interest in Financials and Energy stocks The former were celebrating the Fed's confirmation that its major banks had passed their 'stress test', potentially opening opportunity for improved future dividend payouts, while the latter were supported by crude oil for August delivery rising over 30cents to US$45.05/bbl. The Philadelphia Semiconductor Index, however, ended down 2.5%, with Computer Hardware, Internet and Networking stocks are also meeting significant weakness, thereby ensuring that the Nasdaq once again registered the biggest index decline. Economic releases yesterday were mixed, with the Labor Department seeing a slight increase in initial jobless claims for the week ended June 24th, while elsewhere and somewhat behind the curve, the Commerce Department released a report showing stronger than previously estimated Q1'17 economic growth. Indeed, the pattern of the past few days has been one of increasingly volatile gyrations as uncertain traders are pulled between various market scenarios, which if sustained Chartists tell us could potentially signal an overall change in market direction. Driving the point home, Wall Street's 'fear gauge' yesterday registered its biggest daily jump in a month. All-in-all a worrying sign, given the problems President Trump's reflationary agenda continues to face going through Congress and multiple recent signs that the US economy has passed it phase of outperforming consensus. Treasuries climbed off their worst levels but remained firmly in negative territory, as the yield on the benchmark ten-year notes rose by 5.1 basis points to 2.272%. The Dollar fell to its lowest level since early October 2016 and remains vulnerable to further downside ahead of US core PCE data due early this afternoon. Crude-futures, however, continued to enjoy their best week of gains since April, as some investors speculated on a slowdown in U.S. production in order to support prices. Asia also declined sharply this morning following selling in Europe and the US. In Japan, the Nikkei fell below 20000 for the first time in two weeks, tumbling 1,2% as the Yen gained, while recently strong Australian S&P/ASX 200 fell even further. The release of a slightly better-than-expected official manufacturing PMI from China provided some support, although both the Shanghai Composite and Hang Seng remained in the negative just ahead of market close, as was South Korea's tech-heavy KOSPI. Equities in both Europe and London sharply reversed early morning gains on Thursday that had been powered by previously strong US and Asian closings, as Sterling and the Euro continued their rally on rising conviction that nearly ten years of ultra-low interest rates will shortly come to an end. While most still consider the actual commencement of tightening to be some way away, maybe out as far as the beginning of 2018, the message from the two central banks has been heard loud and clear. Given that markets have benefited so enormously from an extended period of very loose policy logically, traders are simply assuming its ending must have an impact. The STOXX Europe 600 plunged 1.37%, with only basic materials (on US$ weakness) and banks (mimicking US strength) being well supported. Both the CAC-40 and Xetra DAX tumbled over 1.8%. The London benchmark declined 0.5% to hit its lowest since 8th May with selling broadly based with consumer staples, like BAT (BATS.L), Unilever (ULVR.L) and Diageo (DGE.L), particularly in focus, while sector support was found in areas similar to their European counterparts, with HSBC (HSBA.L) rising to a 4-year high and the like of Rio Tinto (RIO.L) and Glencore (GLEN.L) climbing on the back of Dollar weakness. Significant UK macro releases due today amount to the Q1 Current Account, GDP and Total Business Investment numbers, as well as April Index of Services data. The EU is due to produce its June Consumer Price Index, while the US offers May Personal Spending, Personal Income and Consumption Expenditures, followed by June's Chicago Purchasing Manager's and Michigan Consumer Sentiment Indexes, followed by the Baker Hughes US Oil Rig Count. UK corporates due to release earnings or trading updates include Serco Group (SRP.L), Eco Animal Health (ECO.L) and Trinity Mirror (TNI.L). The Gfk Consumer Confidence data release first thing this morning suffered a sharp decline amid political uncertainty, rising inflation and weaker wages growth. The monthly measure sank to -10, weaker than a median forecast of -7, the lowest reading since last July's -12, shortly after Britain voted to leave the European Union. All this sets Europe up for another cautious opening today, with London's FTSE-100 seen down 5 to 10 points in early trading."
- Barry Gibb, Research Analyst
Markets
Europe
The FTSE-100 finished yesterday's session 0.51% lower at 7,350.32 whilst the FTSE AIM All-Share index was up 0.15% at 964.95. In continental Europe, the CAC-40 finished down 1.88% at 5,154.35 whilst the DAX finished 1.83% lower at 12,416.19.
Wall Street
In New York last night, the Dow Jones fell 0.78% to 21,287.03, the S&P-500 fell 0.86% to 2,419.7 and the Nasdaq shed 1.44% to 6,144.35.
Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.89% to 16,596.37, while the Hang Seng firmed 1.59% to 23,163.06.
Oil
In early trade today, WTI crude was up 0.82% to $45.21 and Brent was up 0.61% to $47.71/bbl.
Headlines
Sky-Fox takeover deal likely to face competition probe
The culture secretary has said she is "minded to" refer Rupert Murdoch's 21st Century Fox takeover of Sky to the competition watchdog. Karen Bradley's decision is a blow to the media mogul's hopes of having the £11.7bn deal waved through without further scrutiny. Mr Murdoch already owns 39% of the satellite broadcaster. An earlier attempt to take over Sky was abandoned in the wake of the phone hacking scandal. Ms Bradley told the Commons that Ofcom's report into the deal found it risked the Murdoch family having "increased influence" over the UK's news agenda and the political process. "On the basis of Ofcom's assessment, I confirm that I am minded to refer to a phase two investigation on the grounds of media plurality," she said.
Source: BBC News
Company news
Lansdowne Oil & Gas (LON:LOGP, 0.95p) - Speculative Buy
Lansdowne Oil & Gas has entered into a loan agreement with Brandon Hill Capital for £350k, repayable in 12 months time. Brandon Hill is a significant shareholder and the board calculated this was a better/cheaper funding option than issuing new equity. It is a straightforward loan with no warrants or conversion rights.
Our View: Lansdowne is in a farm out process on its Barryroe asset, offshore Ireland. The process is taking longer than expected and Lansdowne has tightened its belt and now has monthly cash costs of £30k, so the loan should last one year. The company said that It "remains heartened by the level of interest it continues to receive in the farm-out process and looks forward to updating all shareholders on progress in due course". We have a Speculative Buy recommendation.
Beaufort Securities acts as corporate broker to Lansdowne Oil & Gas plc
Greene King (LON:GNK, 688.50p) – Buy
Greene King, a UK operator of pubs, restaurants and hotels, yesterday announced its preliminary results for the 52 weeks ended 30 April 2017 ('FY2017'). During the period, revenue advanced by +6.9% to £2,216.5m, comprised of +7.7% increase in Pub Company, +5.8% rise in Pub Partners and +1.7% growth in Brewing & Brands, against the comparative period (FY2016). On an adjusted basis (when exclude exceptional and non-underlying items), EBITDA rose +5.5% to £524.1m, pre-tax profit grew by +6.6% to £273.5m and basic earnings per share climbed by +1.3% to 70.8p. Statutory pre-tax profit fell by -2.6% to £184.9m, leading to basic earnings per share of 49.0p, down -23.9%. Free cashflow jumped to £119.6m (FY2016: £50.2m), while net debt widened to £2,074.5m (FY2016: £2,048.4m), implying net debt to EBITDA of 4.0x (FY2016: 3.9x). Return on capital employed (ROCE) was maintained at 9.4%. The Group achieved positive like-for-like ('LFL') growth in both divisions with Pub Company (82% of revenue) delivered sales growth of +1.5%, outperforming the market by +0.4%, while Pub Partners (9% of revenue) saw record +5.0% growth in net profit. Excluding Fayre & Square brand, which is currently being debranded and converting to Hungry Horse brand, Pub Company's LFL sales would have been up +2.0% driven by strong Q4. Operating profit margin for Pub Company fell by -0.7% to 17.0% due to customer investment and difficult cost environment partially offset by acquisition. Pub Partners on the other hand saw +1.3% improvement in operating margin to 46.7%. Brewing & Brands division (9% of revenue) saw improved trading in H2, resulted in breaking £200m revenue mark for the first time, despite weaker UK total ale market which fell by -2.7%. Margins, however, was down by -1.1% to 15.5% due to increased cost of goods sold and investment in marketing and price. On the operational front, the Group said integration of Spirit has been completed a year ahead of schedule and delivered £35m targeted annual synergies. The Group completed 63 brand conversions for Pub Company and its IT system is now rollout in over 1,700 pubs. Greene King's CEO, Rooney Anand, commented "Greene King has delivered another set of record results, generating full year EBITDA of over £500m for the first time. We will target further market outperformance, in a growing market, supported by additional cost efficiencies, a robust balance sheet and strong cash generation to deliver long-term growth and attractive returns for our shareholders." The Group declared a final dividend of 24.4p, bringing total full year dividend to 33.2p, up +3.6%, to be paid on 15 September 2017.
Our View: Greene King delivered good results for the FY2017, achieving record revenue and EBITDA while continuing its dividend progression. Financial performance was broadly in line with Bloomberg consensus, although EBITDA came slightly ahead. Operationally, the Group completed the integration of Spirit and delivered its £35m synergy target through overhead, distribution and purchasing efficiencies, a year ahead of original schedule, with management identifying yet more synergies ahead. During the first 8 weeks of the new year, the trading has been mixed: Pub Company remained in line considering "tough comparatives", Pub Partners has seen the slower start as anticipated, while Brewing & Brands enjoyed a strong start with own-brewed volume returned to growth (FY2017: -2.8%). The specific figures were not provided. Looking ahead, the Group expects total capex in FY2018 to be £190m-£225m and interest charges in the region of £135m-£140m with a c.6.3% blended cash cost of debt. Normalised free cash flow is expected to be between £60m-£80m per annum. Pub Company is expected to open c.10 pubs, dispose of 50-60, while Pub Partners disposes of 40-50 pubs. Macroeconomic events have, of course, resulted in increasing levels of consumer uncertainty, while competition is intense and the whole industry continues to face various additional cost impacts such as energy inflation, wage inflation, Business Rates and Apprenticeship Levy, besides rising cost of goods. In total, gross cost inflation is expected to be around c.£60m in the FY2018. The Group, on the other hand, has strong track record of cost mitigation and current plans in place are expected to reduce such headwinds by £40m-£50m, resulting in net cost inflation for FY2018 of £15m-£20m. 'Going to the pub' may be regarded as 'affordable treat' in a challenging economy, with revenue for managed pubs and the 'eating & drinking out' market forecast to grow at +4.1% and +2.3% CAGR from 2017 to 2020, respectively, according to MCA Allegra. The shares are valued at FY2018E and FY2019E P/E multiple of 9.6x and 9.2x with dividend yield of 5.0% and 5.2%, respectively. Considering Greene King's track record of cost control and continued market outperformance, with a balance sheet supported by high estate value and flexible capital structure, Beaufort reiterates its Buy rating on the Shares.
Hutchison China MediTech (LON:HCM, 3,612.50p) – Buy
Hutchison China MediTech ('Chi-Med'), the China-based healthcare group, yesterday announced that it has initiated a global pivotal Phase III study of savolitinib (SAVOIR trial) in c-MET-driven papillary renal cell carcinoma ('PRCC'), a type of kidney cancer. Such trial is in partnership with AstraZeneca and as per the agreement, the initiation of Phase III trial has triggered a US$5m milestone payment to Hutchison MediPharma Limited (a 99.8% subsidiary of Chi-Med) from AstraZeneca. Savolitinib is a highly selective inhibitor of c-MET (also known as mesenchymal epithelial transition factor) receptor tyrosine kinase, an enzyme which has been shown to function abnormally in many types of solid tumors. This is the first pivotal study ever conducted in c-MET-driven PRCC and the first molecularly selected trial in renal cell carcinoma ('RCC'). The trial will evaluate the safety and efficacy of savolitinib against sunitinib, with progression free survival ('PFS') as primary endpoint and overall survival, objective response rate ('ORR'), duration of response, best percentage change in tumor size, disease control rate, and safety and tolerability as secondary endpoints. Chi-Med's CEO, Christian Hogg, commented "Based on the results of our Phase II study, we believe savolitinib has the potential to bring meaningful clinical benefit to patients with c-MET-driven PRCC". The Group is scheduled to announce its interim results on 31 July 2017.
Our View: Chi-Med continue to make excellent progress on its pipeline of clinical trials. Commencement of SAVOIR trial follows positive Phase II results. Continuing progress increases the potential of savolitinib to be used as a potential treatment option for c-MET driven cancers, not only for kidney, but also for lung and gastric. There are 366,000 new patients per annum diagnosed with kidney cancer globally. Of this, RCC is the most common (accounts for c.80-85%) and PRCC (the subtype of RCC) being second most common type of kidney cancer (accounts for c.15%). According to Chi-Med, multiple studies indicate that PRCC is c-MET-driven in 40-70% of patients. Currently there are no therapies approved for patients with PRCC, with patients instead presently being treated with sunitinib, the approved treatments for RCC. This is inadequate as RCC agents were mostly approved on the basis that subjects are clear cell RCC, whereas PRCC is the most common of the non-clear cell RCC which has different biology and molecular characteristics. The Group guidance for FY2017 announced at its FY2016 results has not being updated, which stated that revenue is expected in a range of US$225-240m, administrative expenses, interest & tax at US$18-19m and net loss of US$13-28m. Although net loss was forecasted for FY2017 as a result of increased adjusted R&D expenses (US$85-90m), and lower one-time property gains of US$14-16m (FY2016: US$40.4m), the guidance remains subject to licencing deals and other factors (e.g. Eli Lilly may decide to exercise its global rights on recently NDA submitted fruquintinib). The Group's R&D pipeline remain rich with currently 8 oncology drug candidates in 30 active clinical trials (FY2015: 19) globally with 5 pivotal Phase III trials underway, while staying on course to initiate 3 additional Phase III studies during 2017. Chi-Med's strong balance sheet with cash resources of US$173.7m at the end-FY2016, boosted by proceeds from its NASDAQ listing, means the Group is expected to be sufficient to cover development needs "well into 2019", which should enable it to secure better deal from future partnership. Given the Group is progressing in line with expectations and despite the quite exceptional share price performance of the past 4 months, Beaufort reiterates its Buy rating on the Shares.