With US markets closed for their Independence Day holiday, Tuesday was rather uneventful in Europe. Spicing things up overnight, however, Federal Reserve officials have hinted their expectation of a September announcement to kick-off the Central Bank's shrinkage of its giant accumulated portfolio of bonds and other assets, while deferring the next interest-rate hike out to the year end, by when inflation should have picked up once again following summer weakness. Although no decision has been cast in stone, the market may possibly find more guidance on this from FOMC Minutes due for release later today and Janet Yellen’s testimony to Congress next week; the end-August annual policymakers’ economic policy symposium in Jackson Hole, Wyoming will also provide an opportunity and may even establish whether President Trump intends to re-appoint Chair Janet Yellen, whose term expires in February. Tensions meanwhile on the Korean Peninsula following North Korea’s successful launch of an intercontinental ballistic missile kept Asian markets nervous this morning, although the trend had turned mixed to firmer by the close. In a show of strength, the US and South Korea conducted a joint military exercise, while the U.S. Ambassador to the United Nations, Nikki Haley, formally requested a Security Council meeting in response, for which a closed session is now due to take place today. U.S. Secretary of State Rex Tillerson warned the North Korea's actions were a "new escalation of the threat to the U.S." He went on to state "Global action is required to stop a global threat”. Seemingly pressurising China, he also noted “Any country that hosts North Korean guest workers, provides any economic or military benefits, or fails to fully implement U.N. Security Council resolutions is aiding and abetting a dangerous regime." The S&P/ASX 200 tracked back following Tuesday’s gains, while elsewhere the Nikkei recovered its early losses inspired by safe haven buying of the Yen to end to make a small gian while other regional bourses recorded modest with bargain hunting amongst tech issues being the principal feature despite data from China’s Service Sector confirming slowing growth for the month of June. Gold, the natural hedge, rallied marginally to US$1,228.3/tr.oz following Monday’s sharp sell-off and remains poised go further should tensions escalate. The benchmark STOXX 600 pulled back from its biggest rally in two months yesterday in response, with the Xetra Dax losing 0.31% and the CAC 40 0.4%. Amongst individual stocks, EDP was one of the strongest blue chips following reports of an approach from Spain’s Gas Natural for a US$40bn merger with the Portuguese utility. Macro input was also limited, with Eurozone Producer prices tumbling 0.4% in May, compared with consensus expectations of a 0.2% decline, while UK PMI Construction also continued its slowdown down to 54.8 after 56.0 in May and against an expectation of 55.0. Following suit, London equities also closed in the red on Tuesday. Mining stocks were mostly higher once again, supported by interest in precious metal plays following gold’s rally, while Oils traded flat after eight rising sessions as crude prices traded fractionally off during the session. Worldpay shares featured, however, with a 27.7% rise following its confirmation it had received two approaches, one from US rival Vantic Inc. and the other from banking giant J.P. Morgan. This reflected strength onto peer Paysafe, while Provident Financial continued to suffer from problems restructuring its consumer lending operations. UK macro releases due today include just Markit Services PMI for June, while the EU produces similar figures for its territory as well as May retail Sales. The US offers its weekly Redbook index, its May Factory Orders June ISM NY Business Conditions and July IBD/TIPP Economic optimism, followed by FOMC Minutes. UK corporates due to release earnings or trading updates include persimmon. IAG Group (IAG.L), Ocado (LON:OCDO), McCarthy & Stone (LON:MCS), Booker Group (LON:BOK), Topps Tiles (LON:TPT) and MJ Gleeson (LON:GLE). In the absence of a US lead and mixed performance from Asia, Europe is expected to have a quiet opening, awaiting more onthe war of words between Kim Jong-un and Donald Trump, while preparing to scrutinise the FOMC minutes later this afternoon. The FTSE-100 is seen opening some 10 to 15 points weaker in early trade.
Markets
Europe
The FTSE-100 finished yesterday's session 0.27% lower at 7,357.23 whilst the FTSE AIM All-Share index was down 0.31% at 959.09. In continental Europe, the CAC-40 finished down 0.40% at 5,174.90 whilst the DAX finished 0.31% lower at 12,437.13.
Wall Street
US markets were closed yesterday for the Independence Day holiday.
Asia
In Asian markets this morning, the Nikkei 225 had risen 0.08% to 20,047.92, while the Hang Seng rose 0.65% to 25,553.34.
Oil
In early trade today, WTI crude was down 0.13% to $47.01/bbl and Brent was down 0.08% to $49.57/bbl.
Headlines
London 'still Europe's top tech hub'
London remains Europe's number one hub for technology investment despite Brexit, with record levels of capital flowing in, say officials in the city. In the first half of 2017, private equity investment in the capital's tech sector totalled £4.5bn, said the Mayor of London's agency, London & Partners. At the same time, venture capital invested £1.1bn in London's tech firms. That total was more than in any other six-month period in the past decade, the agency said. The city's "fundamental strengths" as a centre for technology and business were unchanged, said London & Partners. "The Brexit vote has understandably created some uncertainty, but it is no surprise to see that London continues to attract more than double the amount of investment [of] any other European city," said Laura Citron, chief executive of London & Partners. "We have everything companies need to be successful: policymakers, finance, infrastructure, world-class universities and talent."
Company news
Lionsgold (LON:LION, 1.05p) – Speculative Buy
Lionsgold, the gold-focused exploration company with assets in India, Finland and a significant shareholder of physical gold holding and trading exchange, announced yesterday an update on its projects in India and Finland. Lionsgold holds a 20.5% interest in Geomysore Services, a private Indian exploration company, which is developing the Jonnagiri gold project in India. The completion of an economic feasibility study (EFS) on Jonnagiri was expected to be completed by end of June 2017, however management stated that changes to the Indian tax system has caused delays in compiling the cashflow model of the EFS. The Company now expects the EFS to be finalised by the end of July, early August. As a result, the anticipated timing for gold production to commence at Jonnagiri will be pushed back from end of 2018 into 2019. Lionsgold also holds 28.3% of a newly incorporated Finnish operating company, Kalevala Gold Oy, which planned a bulk sampling programme to commence in Q3 2017. However, part of the work required involves obtaining an environmental permit and management believes that the earliest that it is likely to be approved is during Q4 2017, which may push out gold production form the bulk sampling into 2018.
Our View: Whilst the above announcement is frustrating to shareholders it does not affect the overall qualities of the projects. Jonnagiri has a revised resource of 7Mt grading 1.59g/t, containing 361koz of gold and a valid 30-year mining licence to mine 365,000t per annum. The Finnish gold project has high-grade gold deposits that management expects to support small-scale mining. We look forward to the results of the EFS on Jonnarigi at the end of July/early August and approval of the environmental permit for Kuikka during Q4 2017. In the meantime, we recommend a Speculative Buy on the stock.
Beaufort Securities Limited acts as corporate broker to Lionsgold plc
Our View: Magole Farms and Wami Farms are the pillars of Obtala’s agriculture project in Tanzania so securing ownership of the processing assets and increase profit share from both historic and future investment is a very good news. As Obtala announced in April, it intends to invest US$10m over the next five years in Tanzania under the 'Grow Africa' initiative, and these land deals will ensure shareholders receive an increased interest in the value returned from these. Delivery of this opportunity, nevertheless, will take some time, while, nearer term, pay-off from the Group’s timber operations that have recently confirmed the transformative acquisition of WoodBois International ApS, should be much closer. The opportunity is clearly quite enormous and, importantly, Obtala’s due diligence team verified substantially all the assumptions upon which the valuation was based, finding on numerous occasions that the WoodBois team had in fact been prudent. A great deal of trust has consequentially developed between the Obtala and WoodBois management teams, which adds to the Board’s confidence in its ability to execute a business plan for which timing looks first class! Global timber demand is escalating and prices look set to spike. World Bank forecasts, for example, suggest global demand for timber will quadruple by 2050, which happens to coincide with a number of powerful government bodies armed with national and international policy covering Forest Law Enforcement, Governance and Trade regulation gaining teeth across six Continents; these now seek to coordinate their activities with a view to tightening enforcement and clamping down on illegal logging, which various reports suggest may have accounted for up to half of global supply over the past decade. Nobody doubts, of course, that effective international enforcement will take many years to implement. Nevertheless, the proposed gradual squeeze-out of illegal operations by such agencies offers potential to generate a ‘super-cycle’ or price bubble, particularly in premium hardwoods, in what has otherwise become a finely balanced market. Sure there are risks with all agricultural investments in Third World locations, but modelling prospective cash flows of what is essentially an elementary business plan, suggests fair value is a multiple of the current share price, even after having applied punitive discount rates. Beaufort reiterates its Speculative Buy rating on the Shares.
Beaufort Securities Limited acts as corporate broker to Lionsgold plc
Obtala Limited (LON:OBT, 17.88p) – Speculative Buy
The African focused agricultural and forestry company, yesterday announced it has entered into an agreement to acquire, via a newly incorporated 49% joint venture, the underlying 195Ha agricultural land at its Magole Farms operation, currently leased to Obtala's 75% owned subsidiary Montara Continental Limited. It is intended that the newly acquired land will be subject to a new lease giving Montara Continental an increased effective 94.9% profit share in the agricultural operation at Magole Farms. Within this underlying 195Ha was acquired for a total cash consideration of Tanzanian Shilling (TZS) 1.1bn (approximately GBP380,000/USD492,000) paid for by Obtala, subject only to completion of registration formalities. It is intended that the newly acquired land will be subject to a new lease to a company 90% owned by Montara Continental with the 10% balance owned by Magole Land. Obtala currently operates the farm under a long-term lease with over 30 years remaining. As part of the transaction, Montara Continental's ownership in the processing assets will increase from 80% to 100%. In a separate transaction, the private, non-related Tanzanian joint venture partner that operates the 1,200Ha Wami Farms has been renegotiated, increasing Montara Continental's equity and profit share from 70% to 90% for a nominal cash consideration.
Our View: Magole Farms and Wami Farms are the pillars of Obtala’s agriculture project in Tanzania so securing ownership of the processing assets and increase profit share from both historic and future investment is a very good news. As Obtala announced in April, it intends to invest US$10m over the next five years in Tanzania under the 'Grow Africa' initiative, and these land deals will ensure shareholders receive an increased interest in the value returned from these. Delivery of this opportunity, nevertheless, will take some time, while, nearer term, pay-off from the Group’s timber operations that have recently confirmed the transformative acquisition of WoodBois International ApS, should be much closer. The opportunity is clearly quite enormous and, importantly, Obtala’s due diligence team verified substantially all the assumptions upon which the valuation was based, finding on numerous occasions that the WoodBois team had in fact been prudent. A great deal of trust has consequentially developed between the Obtala and WoodBois management teams, which adds to the Board’s confidence in its ability to execute a business plan for which timing looks first class! Global timber demand is escalating and prices look set to spike. World Bank forecasts, for example, suggest global demand for timber will quadruple by 2050, which happens to coincide with a number of powerful government bodies armed with national and international policy covering Forest Law Enforcement, Governance and Trade regulation gaining teeth across six Continents; these now seek to coordinate their activities with a view to tightening enforcement and clamping down on illegal logging, which various reports suggest may have accounted for up to half of global supply over the past decade. Nobody doubts, of course, that effective international enforcement will take many years to implement. Nevertheless, the proposed gradual squeeze-out of illegal operations by such agencies offers potential to generate a ‘super-cycle’ or price bubble, particularly in premium hardwoods, in what has otherwise become a finely balanced market. Sure there are risks with all agricultural investments in Third World locations, but modelling prospective cash flows of what is essentially an elementary business plan, suggests fair value is a multiple of the current share price, even after having applied punitive discount rates. Beaufort reiterates its Speculative Buy rating on the Shares.
Beaufort Securities Limited acts as corporate broker to Obtala Limited
ANGLE (AGL.L, 67.00p) – Speculative Buy
ANGLE, the specialist medtech company focused on cell separation technology, Parsortix system, for detection and harvesting of cancer cells in the blood, yesterday announced positive headline results for its 400 patient ovarian cancer studies in the US (ANG-003, 200 patients) and Europe (ANG-001, 200 patients). The studies shows that Parsortix system based blood test can differentiate between women with a malignant pelvic mass and those with benign tumours with a high degree of sensitivity (correctly identifying cancer) of up to 95% whilst at the same time achieving a higher specificity (low false positive rate), compared to existing tests. The studies also found that best performance can be achieved by combining selected gene information analysed from the Parsortix harvest in an algorithm with certain patient condition information. The algorithm, which is proprietary, will be further optimised to give the best performance in the upcoming validation study, whilst it is expected that it will be possible to apply for patent protection on the details of the algorithm strengthening ANGLE's competitive positive further. ANGLE’s Founder and CEO, Andrew Newland, commented “ANGLE's first large scale clinical studies of 400 patients have demonstrated positive results with the potential to out-perform current standard of care. This success enables ANGLE to move forward into the validation phase for the use of Parsortix in its first clinical application. We believe ANGLE is building momentum towards securing a leading and well differentiated commercial position in the emerging multi-billion dollar liquid biopsy market”.
Our View: The positive headline results will move ANGLE into validation phase of development for its first clinical application. This will be observed through the performance of an optimised test utilising a second blood sample that has been banked from each of the ANG-003 study patients. This will then be validated by a separate set of patients through the conduct of appropriately validated studies designed to meet European CE Mark and US FDA regulatory requirements. Successful completion of these will permit the commercial sale of the Parsortix-based pelvic mass test across the US and Europe (and eventually worldwide) to address an estimated market opportunity amounting to £300 million per annum. Parsortix is a non-invasive liquid biopsy which not only enables cancer detection but also harvests the CTCs to identify the patient’s specific condition and thereby enable personalised cancer care. The research findings highlight the effectiveness and unique capabilities of Parsortix System in analysis of cancer through a simple blood test. ANGLE’s goal is to seek sector approval and endorsement of its unique solution to be a key participant in the rapidly growing multi-billion dollar liquid biopsy market. Even ahead of this, in FY2016, adoption of Parsortix into its customers’ routine laboratory practice is growing, evident from a substantial increase in revenues from Parsortix cassette sales, which rose more than 500% from last year. The Group also noted that there are further 20 prospective customers evaluating the systems with a view to purchase. Beaufort’s financial model expect ANGLE achieving only relatively limited revenues and remaining in quite deep losses in FY2017, before ramping sharply upward toward the end of 2018 to become cash flow positive for the first time during H1 2019. Based on a cash position of around £5.5m by the end of the April 2017 and assuming the R&D tax credit is received, Beaufort considers the Group will be in the position to demonstrate a strong sales growth trajectory and modest positive earnings before tapping shareholders once again for additional funding. In light of its ongoing positive progress, Beaufort reiterate its Speculative Buy rating on the Share.
Ryanair Holdings (LON:RYA, EUR18.35) – Buy
Ryanair, a low-cost European short-haul airline company, yesterday provided its traffic update for June 2017. During the month, passenger traffic increased by +12% y-o-y to 11.8 million customers, while the load factor grew +2% y-o-y to 96%. The rolling annual traffic to June rose +13% to 123.8 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 June. These strong statistics follow last month’s +11% increase in passenger traffic and +1% growth in load factor. Ryanair said the good result was driven by lower fares and the continuing success of its ‘Always Getting Better’ (‘AGB’) customer experience programme. The Group is currently in Year 4 of AGB, which will work on ‘connecting flights’, initially on Ryanair flights, followed by 3rd party connections in late 2017. As part of this, Ryanair also started selling of long-haul flights from Madrid to North and South America partnering with Air Europa. Looking ahead, in FY2018, Ryanair expect challenging pricing environment to continue with average fares anticipated to decline by -5% to -7% (H1: c.-5%, H2: c.-8%). The Group is set to tackle this by boosting passenger traffic and further reducing unit costs. Subject to normal level of disruptions, Ryanair is targeting +8% growth in passenger traffic to 130 million with a flat load factor of 94% for the full year. Fuel savings for the year is expected to be €70m, while unit costs excluding fuel is expected to decline by -1% despite the strong comparatives. Altogether, these results in profit after tax guidance in the range of €1.40bn to €1.45bn. Beaufort is encouraged by the Group’s ability offering lowest fares in the Europe while still retaining its net profit position. The key differences for Ryanair is its ability to continue reducing its ex-fuel unit costs, achieving “lowest passenger costs” amongst its EU competitors, at the time of traffic growth and when competitors are “forecasting flat or rising” costs. This gap between Ryanair and its rivals should enable Group to maintain its current momentum and continue winning market share. Beaufort retains its Buy rating on Ryanair.