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Beaufort Securities Breakfast Alert: Biffa and Persimmon

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Post-holiday, the three US major equity averages turned in a mixed, rather uninspired performance. Certainly, no suggestion of a reversion to the 'taper tantrum' that some had feared and no great flight to safety despite heightening North Korean tensions. Indeed, the FOMC Minutes added little of substance to yesterday's dovish hint from Fed officials that raised expectations for a September kick-off of the Central Bank to commencing shrinkage of its giant accumulated portfolio of bonds and other assets, while seemingly 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 appears to have been cast in stone, the market will be keen for more guidance from Janet Yellen's testimony to Congress next week or, perhaps the end-August annual policymakers' economic symposium in Jackson Hole, Wyoming which may even establish whether President Trump intents to reappoint Chair Janet Yellen, whose term expires in February, for a second term. While the S&P-500 and Dow Jones Industrial danced either side of fractionally unchanged, with the Arca Oil Index down over 1.9% as Energy shares after being hit by reports of Russia being unwilling to participate in deeper production cuts proposed by OPEC, only the Nasdaq managed a reasonable gain based following good demand for biotech, software and semiconductor plays. Benchmark 10-year Treasury yields briefly ticked up to 2.35% following release of the Minutes only to settled at 2.334%, compared with Monday's 2.352% which had been its highest close since 11th May. Unable to find direction from the US close, Asia markets this morning also ended flat to modestly down. While Kim Jong-un's actions remained the principal talking point, tumbling crude was largely responsible for knocking confidence in Japan, with the Nikkei ending down around 0.5% and a similar move being recorded by the Shanghai Composite, while the other regional bourses made just fractional moves. European equities also delivered an unconvincing performance, with the STOXX 600 recording a fractional gain of 0.18%, supported by the CAC-40 +0.1% and the Dax +0.13%. Sentiment was modestly boosted by release of the Eurozone's Composite PMI for June, which came out at 56.3 against a preliminary estimate of 55.7, albeit below May's final figure of 56.8. There were few features amongst individual stocks, other than Adidas AG rising on a broker upgrade, while the Auto sector suffered from a shock 4.8% drop in UK June new registrations and Oils followed their global peers. London equities mimicked their European cousins as Sterling briefly fell below US$1.29 following release of PMI Services Sector data, signalling its slowest expansion since February. Recently strong Worldpay (LON:WPG) shares tumbled following a US$10bn takeover approach from US giant Vantiv, on fears that a counter offer from JP Morgan may now not appear. Housebuilders were also firm following an upbeat statement from Persimmon (LON:PSN), while Tesco (LON:TSCO) benefitted from an upbeat statement from its takeover target, Booker (LON:BOK). There are no UK macro releases scheduled for today, although the EU provides its ECB Monetary Policy Meeting Accounts, while the Central Bank's Peter Praet is due to make a speech. The US is expected to make a large number of disclosures, including MBA Mortgage Applications, May Trade Balance, Weekly Jobless Claims, June Markit PMI Composite and ISM non-Manufacturing PMI, as well as July IBD/TIPP Economic Optimism and EIA Crude Oil Stocks Change. Speeches are also due from the Fed's Stanley Fischer and the FOMC's John Williams. UK corporates due to release earnings or trading statement include Associated British Foods (ABF.L), Bovis Homes (LON:BVS), Ferrexpo (LON:FXPO), Great Portland Estates (LON:GPOR) and Sycona. Reports that the EU has struck a trade deal with Japan are expected to be confirmed at today's Summit in Belgium; coming at a time when the US and UK economics are seemingly turning increasingly inward the accord, reached after four years of negotiation, will remove tariffs from 99% of goods traded between the EU and Japan, although in some cases lengthy transition periods of a decade or more will apply and they have also agreed to open up their public procurement markets and to remove some non-tariff barriers to trade. This will serve as yet another reminder of what opportunities Brexit might be stealing from the UK, particularly given the problems faced by Theresa May with her undisciplined cabinet and severely divided party. Europe equities are expected to open without enthusiasm this morning, however, contemplating foremost the US Central Bank's intentions, while also trying to judge whether President Trump might just go beyond seeking additional sanctions against North Korea. The FTSE-100 is seen opening 5 to 10 points higher in early business."
- Barry Gibb, Research Analyst

Markets
Europe
The FTSE-100 finished yesterday's session 0.14% higher at 7,367.60 whilst the FTSE AIM All-Share index was up 0.17% at 960.68. In continental Europe, the CAC-40 finished up 0.10% at 5,180.10 whilst the DAX finished 0.13% higher at 12,453.68.
Wall Street
In New York last night, the Dow Jones fell 0.01% to 21,478.17, the S&P-500 firmed 0.15% to 2,432.54 and the Nasdaq Composite gained 0.67% to 6,150.86.
Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.5% to 19,982.07, while the Hang Seng fell 0.32% to 25,440.35.
Oil
In early trade today, WTI crude was up 0.69% to $45.44/bbl and Brent was up 0.69%% to $48.12.

Headlines
Butter could cost more by Christmas, Arla boss warns
The boss of dairy giant Arla has warned that there could be a butter and cream shortage in the UK this Christmas. Peder Tuborgh, chief executive of the farmer-owned firm, says that the shortage will bite across Europe. "We know that as an industry, I know that from our forecasting," Mr Tuborgh told the BBC's Today programme. "It is going to play out differently in different markets. The first sign we will see of it is that the price of butter rises very sharply." Mr Tuborgh, whose company is the UK's biggest milk buyer, said prices rises would be different in different European nations, but did not want to predict a UK figure. He added: "At the moment we are trying to get as much butter and cream out of our producers." Arla Foods is a massive European milk co-operative, owned by dairy farmers including British ones. Its brands include Anchor and Cravendale, and it has annual revenues of 9.6bn euros (£8.4bn).

 

Company news
Biffa (LON:BIFF, 229.00p) – Buy
Biffa, a leading UK integrated waste management company, yesterday announced that it has acquired O'Brien Waste Recycling Solutions Holdings Limited ('O'Brien'), a leading provider of waste and recycling solutions in the North East of England, for a cash consideration of £35.2m funded from Biffa's existing cash and debt facilities. A further contingent consideration of up to £0.9m is also payable subject to the award of an identified new contract and recoveries from historical bad debt. As at 30 April 2017, O'Brien generated annual revenues of c.£34.4m, EBITDA of c.£6.6m, operating profit of c.£5.3m and had gross assets of c.£15.3m, and has c.190 employees. The management stated that the acquisition is expected to be "immediately earnings enhancing" for the Group. Biffa's CEO, Ian Wakelin, commented "The acquisition of O'Brien WRS is further evidence of our ongoing strategy of combining organic growth with value-creating acquisitions which enhance our network, capabilities and service offering".

Our View: Biffa has announced its first acquisition of the year (FY2018)! O'Brien's operations are highly complementary to Biffa's existing business with synergies to be achieved through elimination of duplicated overheads, operational efficiencies and scale. O'Brien's collection business of c.3,600 customers (Revenue: c.£20.7m) will be incorporated into Biffa's Industrial & Commercial division, whilst its recycling and waste treatment operation across three locations serving both commercial and local authority customers will be incorporated into Biffa's Resource Recovery and Treatment divisions. At the FY2017 results, the Board confirmed that its expectations for FY2018 remain unchanged, supported by both organic growth and acquisitions, with strong pipeline of further opportunities. Biffa operates in a highly-fragmented environment, which means a number of reasonably sized acquisition prospects regularly become available and, when well selected, these can create short-term and not insignificant enhancement to earning, while building out dominance of its operations. Biffa's model is for strongly managed, highly visible cash generative returns, some of which are given back in the form of income with the remainder targeting expansion. Biffa is a traditional business that is opportunistically positioned both as an industry leader and sector consolidator who we believe, deserves a higher rating than the FY2018E P/E multiple of 12.6x and EV/EBITDA of 5.4x presently awarded, especially when it comes with a 3.0% dividend yield. Beaufort repeats its Buy recommendation with a raised price target of 250p (from 235p previously) for the shares, noting that its current market capitalisation could also potentially make it a future contender for inclusion in the FTSE-250.

Persimmon (LON:PSN, 2,345.00p) – Buy
The UK National housebuilder provided investors with a trading update yesterday. It confirmed performance in the first half of the year has been excellent. Legal completion volumes increased by 8% to 7,794 new homes (2016: 7,238), demonstrating the Group's drive to meet market demand in all its regional markets across the UK. Average selling price also improved by 3.5% to c. £213,000 (2016: £205,762), as revenue grew by 12% to reach £1.66bn (2016: £1.49bn). Management confirmed it continues to experience good levels of customer demand since April, with the market seemingly taking the surprise result of the UK General Election in its stride, which suggests consumer confidence remains resilient and compelling mortgage rates continue to offer good support. Group sales through May and June were healthy, leaving its weekly private sales rate per site for the first half some 7% ahead of last year at 0.80 (2016: 0.75). Accordingly, it expects to report strong trading through the first half of the year, including the contribution from 95 new sales outlets opened in the period, which will see operating margins comfortably exceeding the 25.7% delivered in the second half of the prior year. Moving into the second half of the year momentum remains strong, with total forward sales value at 30 June 2017 of £1.60bn, 18% higher than last year (2016: £1.36bn) and a network of 375 active outlets. In addition, sales through the second half of 2017 will be supported by opening a further 100 or so new sales outlets despite the frustration of continued delays to site starts due to planning inefficiencies. It also confirmed it remained active in the land market with 47 new land deals for c. 9,300 new homes that it believes will provide high quality returns in future periods. Some 3,000 plots, representing 38% of its first half land consumption, were taken from its strategic land portfolio within this total, taking total land spend to £370m (2016: £305m).

Our View: More impressive stuff from this high-quality housebuilder! The impact of the trading update may have been diluted somewhat due to Directors conveying a similarly positive message in recent City analyst presentations but, nevertheless, this underlines the successful execution of the long-term strategy Persimmon launched back in 2012, which now places it in a strong financial position with an excellent asset platform. Its ability to generate a post-tax Return on Equity of 25.9%, compared with a sector average of 21.2%, justifies its current premium price/NAV of 2.63x when compared to UK peers which presently trade under 2.0x. Shareholders also loudly applaud the Group's ongoing commitment to return surplus capital to shareholders: On 27th February, the Board announced an additional payment under its Capital Return Plan of 25p per share (or £77m) which was paid on 31 March 2017. This raised the total value of the Plan to around £2.85billion, or £9.25 per share, by the end of 2021 and represents an increase of 49% over the original launch value. Taken together this gives a healthy 5.8% yield, again higher than the sector average. So from here, the question investors should be asking is not whether Persimmon can continue to outperform its peers, but more about whether or not this notoriously cyclical sector is setting itself up for a setback? Its equities have already somewhat recovered from the swipe taken as a result of the surprise General Election outcome, despite subsequently tumbling consumer and forward investment confidence. In this respect, shareholders should be asking just how much longer can the housebuilders, who have uniformly been reporting buoyant activity despite widely a reported slowdown in the second-hand housing market, buck the trend? Not much longer perhaps, and certainly any stumble by Theresa May, Brexit-related or otherwise, that could bring forward an early return to the polls, could also send a shiver given Labour-party leader, Jeremy Corbyn's stated desire to rebuild tenancy rights and fund a social housing boom. So the message is that Beaufort retains its Buy recommendation on Persimmon but, recognising the Group must find it harder to please going forward, lowers its price target to 2,600p (from 2,800p).

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