Beaufort Securities Breakfast Alert: easyJet plc, Howden Joinery Group, UK Oil & Gas Investments PLC, Unilever plc


Today's edition features:

• easyJet (LON:EZJ)

• Howden Joinery (LON:HWDN)

• UK Oil & Gas Investments

• Unilever (LON:ULVR)


"On balance, most concluded he had been slightly more dovish than expected. ECB President, Mario Draghi, certainly did a good job in keeping the markets guessing during his Central Bank's Monetary Policy Statement and press conference yesterday afternoon. But in saying "We were unanimous in setting no precise date for when to discuss changes in the future," and going on to point out "In other words, our discussions should take place in the Fall, or in the Autumn, since we are in Europe", he appears to have ruled out the opportunity for next month's Jackson Hole Symposium to be his platform for the big announcement. Whilst he is simply putting off the inevitable, Draghi's insistence that "Inflation is not where we want it to be or where it should be", while also voicing commitment to bolster the bond buying programme should it be necessary, the 'can' now appears to have been kicked down the road to either the September or October meetings. This all left the US in a rather anticlimactic mood, having already received mixed macro news inputs as the Labor Department reported a fall in weekly first-time unemployment claims, while the Federal Reserve Bank of Philadelphia released a report showing that regional manufacturing activity grew at a notably slower rate in July and the Conference Board said its index of leading indicators rose by more than expected for the month of June. With a Bloomberg report suggesting the investigation into association between Trump's Campaign and Russia was also to be extended into his business dealings, the three major averages drifted downward shortly after the opening on profit taking, going on to traded fractionally either side of unchanged for the remainder of the session. Reporting majors Travelers and American Express both weighed on the Dow Jones after releasing dull second quarterlies, while Best Buy and Home Depot were hit after Sears said it would start selling its Kenmore line of refrigerators and stoves on Amazon.com; Trucking, Railroad, Telecom, and Steels also all met modest selling. Post-close, Microsoft firmed 0.9% in after-hours trading, on reporting that its quarterly profits had more than doubled, boosted by strong demand in its cloud operations plus tax benefits. So far, the Wall Street's Q2'2017 earnings have tended to surpass consensus expectations, which presently appears to be the principal bull support for equity indices which remain at or close to their record highs. Treasuries found demand as the ECB deflated some concerns over an early shift toward reducing monetary stimulus. The yield on the benchmark ten-year note fell as low as 2.239%, before settling virtually unchanged at 2.266%. Crude prices rose to a seven-week high Thursday, with the international benchmark Brent touching the $50/barrel level for the first time in more than a month during US hours, although this succumbed to profit taking late in the session and crude went on to decline fractionally during Asian trading. Traders eyeing the recent decline in US stockpiles, will be sensitive to this evening's weekly US Oil Rig Count data and Monday's meeting of OPEC delegates to review an extension to existing production cuts and discuss now also including Libya and Nigeria into the agreement. Following recent strength coming from Bank of America Merrill Lynch's bullish stance on Asia-Pacific equities, the region's markets appear to have somewhat run out of steam this morning. Just ahead of their close, most had made just fractional moves with only the S&P/ASX-200 showing a reasonable decline with its export plays being pressurised by the AUS$'s recent strengthening against the US$, while weak Energy stocks also kept the Nikkei pointing downward. European shares started on a positive note yesterday, following new record highs amongst the principal US indices on Wednesday and a firm closing of Asian trading first thing Thursday morning. This was further bolstered by strong earnings reports from media heavyweight Publicis and consumer giant, Unilever (ULVR.L). The STOXX 600 peaked almost 0.5% higher immediately before the ECB president spoke, but then collapsed into the red where it remained following the US's lacklustre opening. The Euro dipped slightly during this morning's Asian session, having extended recent gains to hit its highest level against the US$ since August 2015 yesterday. The IMF Board this morning has reportedly accepted Greece's latest bailout plans 'In Principle', while an earthquake in the county resulted in 2 deaths and multiple casualties. By comparison, the FTSE-100 opened in the positive yesterday, going on to rise further on receipt of better than expected June retail sales data and then just blipped modestly on the ECB statement, to close with a good 0.77% gain on the day. The highly international index benefitted from a further sharp fall in Sterling as the EU's Chief Brexit Negotiator, Michel Barnier, highlighted continuing "fundamental" differences over the issue of citizen rights and willingness to recognise obligation to pay exit bill that remained. Amongst individual stocks, Sports Direct (SPD.L) rallied as full year profits highlighted the damage Sterling's devaluation had inflicted to its full year profits, while easyJet (EZJ.L) led a round of profit taking amongst European airlines. There are limited macro releases due today. The UK details just its Public Sector Net Borrowing for June, while nothing is due form the EU and the US provides its Baker Hughes US oil Rig Count. UK corporates due to provide earnings or trading updates include Vodafone (VOD.L), Homeserve (HSV.L), Close Brothers (CBG.L), AO World (AO..L), Acacia Mining (ACA.L), Record (REC.L), Beazley (BEZ.L) and Capital & Counties Properties (CAPC.L). Majors reporting in the US later today include General Electric and Honeywell. Lacklustre overnight markets bode for a similar European opening this morning, with the FTSE-100 seen trading between 0 to 10 points down in early business."

- Barry Gibb, Research Analyst




The FTSE-100 finished yesterday's session 0.77% higher at 7,487.87 whilst the FTSE AIM All-Share index was up 0.43% at 967.59. In continental Europe, the CAC-40 finished 0.32% lower at 5,199.22 whilst the DAX finished down 0.04% at 12,447.25.

Wall Street

In New York last night, the Dow Jones fell 0.13% to 21,611.78, the S&P-500 eased 0.02% to 2,473.45 and the Nasdaq gained 0.08% to 6,390.0.


In Asian markets this morning, the Nikkei 225 had fallen 0.18% to 20,109.06, while the Hang Seng shed 0.13% to 26,706.31.


In early trade today,  WTI crude was down 0.02% to $46.91/bbl and Brent was broadly unchanged at $49.30/bbl.



UK air traffic controllers warn of over-crowded skies

Air traffic controllers are warning that UK skies are running out of room for record numbers of planes. Friday is likely to be the busiest day of the year, with air traffic controllers expecting to handle more than 8,800 flights - a record number. They have called for a drastic modernisation in the way aircraft are guided across UK airspace. It comes as the government launches a discussion to shape the UK's aviation industry for the next 30 years. Air traffic controllers expect to manage a record 770,000 flights in UK airspace over the summer - 40,000 more than last year. But the ability of the the UK's National Air Traffic Control Service (Nats) to deal with this surge is being stretched to the limit, it is claimed.

Source: BBC News


Company news

easyJet (LON:EZJ, 1,334.00p) – Buy

easyJet, a low-cost European short-haul airline company, yesterday provided its trading update for the 3 months ended 30 June 2017 ('Q3 FY2017'). During the period, total revenue advanced by +16% to £1,387m, comprised of +16% growth in seat revenue to £1,363m and +13.9% increase in non-seat revenue to £24m, against the comparative period (Q3 FY2016). The revenue growth was supported by +10.8% increase in passengers to 22.3 million led by a +9.5% capacity growth to 24 million seats and improvement in load factor to 93.1%, up +1.1%. Total revenue per seat also increased by +2.2% to £55.77 at constant currency basis (+5.9% to £57.78 on a reported basis). Benefited from the lower fuel prices, headline cost per seat at constant currency reduced by -5.5% to £48.98, while cost per seat excluding fuel has risen by +1.6% due to planned investment in operation and the additional load. Net cash at the period end stood at £426m (Q3 FY2016: £368m, H1 FY2017: £353m), retaining "BBB+" credit rating by S&P. On the operational front, the Group has received approval for its Air Operator Certificate (AOC) and airline operating licence from the authorities in Austria, meaning it has secured its operations within the European Union post the Brexit. The Group has also signed a new ground handling agreement with DHL at Gatwick which will commence in November 2017.

Our View: easyJet delivered perfectly acceptable Q3 figures yesterday. But while revenue per seat improved by +2.2% on a constant currency basis against expectation of low single digit decline, helped by the timing of Easter which contributed a benefit of c.£55m for the quarter (previously estimated: benefit of c.£45m), traders were still spooked by suggestions in the Group statement that it "currently expects continued pressure on yields into the next financial year". Although headline cost per seat excluding fuel at constant currency increased by +1.6%, which was higher than expected, such figure year-to-date remained 0.6%, which remained comfortably within its target. Operationally, the Group has removed clouds overhanging by obtaining AOC, which enables easyJet to continue operate flights both across and within European countries regardless of the outcome of Brexit negotiation. Looking ahead, subject to normal levels of disruption, the Group maintained its expectation for capacity growth of +8.5% in the H2, and cost per seat excluding fuel at constant currency of c.+1% for the full year as it is on track to deliver Lean savings of c.£80m. For the medium-term, the Group noted it remains committed to flat cost per seat excluding fuel at constant currency in FY2019 against FY2015 (FY2015: £37.44). Revenue per seat at constant currency for H2 is expected to decline by c.-2%, based on Q4 forward bookings of 67% that the Group have secured. With current exchange rates and fuel price range (US$450-US$520 metric tonne), easyJet said unit fuel cost for the FY2017 is likely to reduce by between £230m-£245m (previous guidance: £225m-£235m) against FY2016. As previously announced, despite the exchange rate movements are likely to cause a £100m adverse impact to headline pre-tax profit for the FY2017, in light of the cost savings and improving underlying revenue performances, the Group upgraded its headline pre-tax profit guidance to between £380m-£420m from £370m previously. So, the reality is that, having outperformed very sharply since March, traders simply used easyJet's caution on pricing as an excuse to take profits across the whole UK sector, as demonstrated by sharp share price falls for Ryanair, AIG, Lufthansa and Wizz Air as well as easyJet itself. However, Beaufort believes the business plan for low-cost airlines remains strongly intact and with the shares now valued at FY2017E and FY2018E P/E multiple of 16.8x and 13.6x, with dividend yields of 2.9% and 3.6%, respectively, recommends treating yesterday's setback as a buying opportunity. Given positive progress, a strong balance sheet, along with an upgraded full year profit guidance, Beaufort retains its Buy rating on the Shares, while keeping one careful eye on the fuel price and movements in market capacity.


Howden Joinery (LON:HWDN, 432.80p) – Hold

The vendor of kitchen and joinery products yesterday released half year results to end-June 2017. Highlights included (i) UK depot revenue £539.5m (2016: £518.9m), an increase of 4.0% and 2.4% on a same depot basis. Group revenue was £553.0m (2016: £528.9m); (ii) Gross profit margin 64.1% (2016: 64.5%), stable on FY 2016 and including £12m of currency costs; (iii) Operating profit £66.6m (2016: £74.7m), reflecting expected costs due to new distribution centre and new product introduction programme, leading to earnings per share of 8.4p (2016: 9.1p). Net cash was £215.1m at 10 June 2017 (24 December 2016: £226.6m net cash), with £11.3m returned to shareholders by 9 June 2017 as part of a £80m share buyback programme announced in February 2017. The interim dividend was declared at 3.6p per share (2016: 3.3p). Capital expenditure amounted to £22.0m (2016: £28.0m) as part of three-year investment programme started in 2015, including with the opening of 11 new UK depots bringing total to 653, a new distribution centre at Raunds with scheduled IT systems integration completed, in preparation for H2 2017 trading. Chief Executive Matthew Ingle noted "We delivered a solid revenue performance in the first half in line with our plans for the full year".

Our View: Scope for a relief rally! Howden shares have tumbled quite significantly since early May as it became clear that UK RMI activity levels had not experienced the spring revival some had been hoping for, following which consumer sentiment took a further hit due to the General Election result. So, the fact that Howden's revenues for the period remained in line with market expectations, gross margins were similar to 2016 even after taking a £12m forex hit and operating profits (after also factoring out additional costs due to the new distribution centre and multiple product introductions) remained toward the top-end of a narrow consensus, was altogether a pleasant surprise. Indeed, the fact that the Group's Joinery UK depot revenue increased by 6.5% in the first four week period of the second half of the year (to 8 July 2017) is even an early sign that momentum could be improving slightly, although a cautious Board still suggests "Our overall expectations for the full year are unchanged" while remaining "..watchful given economic uncertainties". For the second half, foreign exchange costs will continue to weigh (amounting to some £20m for the year) along with higher comparative charges associated with pensions, product introductions, new distribution centre and higher depreciation (a further £20m), plus inflationary pressures in both costs of goods sold and SD&A. Having factored such expectations into its forecasts already, however, full year expectations will largely be left unchanged. Base on a 2017E pre-tax estimate of £227m, followed by £246m the year after, delivering earnings per share of 28.2p and 30.6p respectively, the shares are valued on price/earnings multiples of 15.5x and 14.4x along with yields of 2.7% and 2.9%. That's not expensive considering the underlying quality of the Group's operations, but a softening second-hand housing market along with a consumer that remains spooked by Brexit uncertainties, suggests Howden shares are presently fairly valued. Beaufort retains its Hold recommendation along with a newly set 425p/share price target.


UK Oil & Gas Investments (LON:UKOG, 4.95p) - Speculative Buy

UKOG published an update from its 100% owned 300km2 Broadford Bridge licence where it has been drilling BB-1. The update details very positive results of electric and image logging by Shlumberger (which shows extensive fracturing and associated oil and wet gas shows) and the probable discovery of an additional reservoir zone - called KL0. The 5 fractured limestone horizons KL0 to KL04 now total 1200 feet of possible oil bearing zone. The casing is going in now, and a permitted flow test along a total of 900ft will begin shortly - probably within the next 2 weeks.

Two quotes from the RNS are key:

"Whilst there is always uncertainty in any new well and testing outcome, the technical results from BB-1 to date continue to remain both positive and most encouraging."

"This Continuous Oil Deposit therefore likely underlies the entire PEDL234 licence and a significant area of the wider Weald Basin, including the Horse Hill-1 Kimmeridge oil discovery"

Our View: This update is very positive and sets up nicely for the imminent flow test. Although the shares have gone from 1p to circa 5p, a positive flow test should provide further upside. The Weald Basin is developing into a huge oil discovery, potentially with the resource scale of a shale play, but without the need for fracking. We will learn more from the flow test, but it may also benefit from conventional type decline rates i.e slower than a typical US producing shale. Note that oil production in the Middle East is dominated by limestone reservoirs. The Weald Basin is excellent news for the UK. We have a Speculative Buy recommendation.


Unilever (LON:ULVR, 4,389.00p) – Buy

Unilever, a consumer goods company manufacturing, distributing and marketing branded and packaged goods, yesterday announced its interim results for the 6 months ended 30 June 2017 ('H1 FY2017'). During the period, revenue advanced by +5.5% to €27.7bn at a reported basis (including a favourable currency impact of +1.7% and +0.8% from acquisitions net of disposals), against the comparative period (H1 FY2016). Underlying operating margin improved by +1.8% to 17.8%, and underlying earnings per share rose +14.4% to €1.13. Underlying sales growth was +3.0%, supported by +3.0% increase in price and flat volume changes. All divisions registered positive underlying sales growth with Refreshment (+6.1%), Home Care (+3.3%), Personal Care (+3.0%) and Foods (+0.6). Geographically, emerging markets continue to show strong growth with +5.5% growth in underlying sales, supported by +0.3% increase in volume and +5.1% rise in price, whilst Developed market, saw decline in underlying sales by -0.4%, fuelled by -0.4% fall in volume partially offset by +0.1% growth in price. On the operational front, the Group said its 'Connected for Growth' ('C4G') programme is delivering ahead of plan with savings of more than €1bn expected in the first half year. The Group also said its preparation to exit the spreads business (via a sale or de-merger) is well underway, while the review of the dual-listing is also progressing well with outcome to be announced before the year end. In the H1, Unilever completed €1.4bn share buyback. Unilever's CEO, Paul Polman commented "Our first half results show continued growth well ahead of our markets and a substantial step-up in profitability despite the persisting volatile global trading environment. It once more shows the validity of Unilever's long-term compounding growth model. The actions we are taking keep us on track for another year of underlying sales growth ahead of our markets…". The Board declared Q2 dividend of 31.83p per Unilever plc ordinary share, up +18.4% (+12% in Euro term), to be paid on 6 September 2017.

Our View: Unilever continue to deliver strong result, with H1 underlying sales growth of +3%, outperforming its market, with improvement in underlying operating margin by +1.8%. The underlying sales growth increased by +3% in the Q2 which was marginally accelerated from +2.9% in the Q1, but below the +3.2% estimated by the consensus Analysts', although it was against the strong comparative period (Q2 FY2016: +4.7% underlying sales growth with +1.8% volume and +2.8% price). Excluding the Spread business, which Unilever has decided to sell or demerge, Food division delivered H1 underlying sales growth of +2.2%, leading to Group underlying sales growth to +3.4%. During the H1, the increase in price was seen in all division and geographical region other than the Europe which remain suffers from weak consumer demand and price deflation. Asia has led the price growth due to rising commodity costs. Looking ahead, we continue to sense the Board's confidence in its outlook by confirming its underlying sales growth guidance in the range of 3%-5% (FY2016: +3.7%), and now expect to achieve improvement in underlying operating margin by 1.0% (previously: +0.8%). A +12% hike in dividend (in Euro term) as promised in its business review announced earlier this month too is a great reflection of its long-term confidence. Furthermore, having completed €1.4m of the scheduled €5bn share buyback programme, the Group said it is on track to complete the rest by the year end. For the medium-term, the Group noted that it is "well on track" towards its savings target of €6bn, and a targeted underlying operating margin of 20% by 2020. With positive performance delivered during the H1, we expect to see growth accelerate in the H2 to meet upper-end of its guidance for the full year. The shares are valued at FY2017E P/E of 22.5x, along with dividend yield of 2.9%. Beaufort reiterates its Buy rating on the shares with a target price of 4330p. Unilever is one of Beaufort's 'Tips for 2017' recommendations.

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