Today's edition features:
• N4 Pharma (LON:N4P)
• Solo Oil (LON:SOLO)
• Joules Group (LON:JOUL)
Markets
Europe
The FTSE-100 finished yesterday's session 0.24% higher at 7,452.32 whilst the FTSE AIM All-Share index was up 0.49% at 983.64. In continental Europe, the CAC-40 finished 0.56% higher at 5,190.17 whilst the DAX finished up 0.33% at 12,305.11.
Wall Street
In New York last night, the Dow Jones closed 0.45%, or 97.58 points, higher at 21,711.01, the S&P-500 climbed 0.03%, or 0.7 points, to 2,477.83 and the Nasdaq added 0.16%, or 10.57 points, to 6,422.75.
Asia
In Asian markets this morning, the Nikkei 225 was up 0.13% at 20,077.01 and the Hang Seng was 0.5% higher at 27,075.36.
Oil
In early trade today, WTI crude was down 0.23% to $48.64 per barrel and Brent was 0.2% lower at $50.87 per barrel.
Headlines
Car production falls almost 14% as UK sales dip
UK car production fell by 13.7% in June compared to a year earlier - the third month in a row that output has fallen. The Society of Motor Manufacturers and Traders (SMMT) said the UK market was cooling in line with forecasts, following a long period of record growth. The industry is likely to fall short of its ambition to produce more than two million cars a year by 2020, it said. The SMMT said uncertainty over Brexit was an added cause for concern. But a spokesperson for the Department for Exiting the European Union said the government was determined that the UK would continue to be "one of the most competitive locations in the world" for automotive manufacturing. The fall in production mirrored a decline in UK car sales. Over the first six months of this year, sales were distorted by a rise in Vehicle Excise Duty in April, which prompted drivers to bring forward purchases of new cars. But comparing the first six months of 2017 with the equivalent period in 2016 still showed a fall of 9.5% in UK sales, the SMMT said.
Source: BBC News
Company news
N4 Pharma (LON:N4P, 6.25p) – Speculative Buy
The specialist pharmaceutical company which reformulates existing drugs and vaccines to improve their performance, this morning announced the appointment of Bio-Images Drug Delivery Limited ('BDD'), the pharmaceutical development organisation, to undertake a Pilot Clinical Trial in a limited number of healthy male volunteers. This will be to obtain preliminary data on two potential reformulations of Sildenafil (which is sold under the brand name Viagra) in line with the Company's patent applications. BDD operate a phase 1 clinical trials unit based in Glasgow Royal Infirmary and are specialists in conducting clinical studies for investigational medicinal products. The Pilot Trial is due to take place in early 2018 with results expected by the end of April 2018.
Our View: An important step forward! Assuming a positive outcome from the Pilot Trial, the Company would then use the resulting data as the basis to determine the full requirements for a pivotal Clinical Study. Importantly, BDD provides N4 Pharma with the opportunity to test a range of potential reformulations to establish which best delivers its target product profile. This together with the data from the pilot trial would then form the basis of its dialogue with the FDA and relevant European regulatory authorities prior to seeking to commercialise its product with the right licensing partner. For shareholders, the important thing now is the pace to market and the size of its commercial opportunity. Here the story is very positive: (i) the Clinical Study might take 12 to 18 months and this would then form the basis for a marketing authorisation submission for the drug; and (ii) A faster acting, longer lasting version of Sildenafil (which presently has global annual sales of some US$4.6bn) has the ability to be a major new product in the erectile dysfunction market, which Beaufort considers offers a potential new market opportunity in the range of US$400m to US$600m per annum. This is a perfect reminder that having adopted a relatively low-risk business model that also offers a rapid route to first revenues, N4 Pharma's present valuation appears to ignore the opportunities its lead candidate and pipeline presents. Even after awarding an absurdly low 20% probability of success and assuming a call for an additional £2m raise to complete clinical studies itself before attracting a suitable partner, a net-present value of £10m is still more than twice yesterday's closing price. Beaufort reconfirms its Speculative Buy rating on N4 Pharma.
Beaufort Securities acts as corporate broker to N4 Pharma Plc
Solo Oil (LON:SOLO, 5.38p) - Speculative Buy
Yesterday Solo Oil's shares completed a consolidation resulting in a total 392,337,801 shares in issue, and the share price recalculating to 5.4p (at close). We recently upgraded our valuation and based on the new number of shares, our target price is now 18.2p.
Our View: Solo has had a good year with drilling success at Ntorya 2 and a subsequent resource upgrade, the investment into Helium One, and the recent exploration success by UKOG in the Weald Basin. Bear in mind Solo has a 6.5% interest in the original Horse Hill discovery at PEDL137 and the adjacent licence PEDL246. The Weald Basin resource play has been substantially de-risked over the last few weeks and only Solo Oil shares have seen no discernible benefit. We reiterate our Speculative Buy recommendation.
Beaufort Securities acts as corporate broker to Solo Oil PLC
GKN (LON:GKN, 330.00p) – Buy
GKN, the global engineering group, yesterday announced results for the 6 months ended 30 June 2017 ('H1 FY2017'). During the period, on a statutory basis, sales advanced by +15% to £4,879m with +5% organically, while operating profit rose +183% to £591m, primarily due to mark to mark valuation of FX contracts, against the comparative period (H1 FY2016). Pre-tax profit therefore rose by +207% to £559m, leading to earnings per share of 24.8p, up +161%. On a management basis, sales advanced by +15% to £5,212m, operating profit rose +12% to £436m, pre-tax profit grew by +14% to £393m, leading to earnings per share of 17.7p, up +14%. The main differences between management and statutory includes change in value of derivative and other financial instruments and acquisition related restructuring charges. Free cash flow improved to £116m (H1 FY2016: £40m), while net debt was reduced to £697m (H1 FY2016: £704m) at the period end. The Group's total deficit on post-employment obligations amounted to £1,849m (31 December 2016: £2,033m). the Group has closed UK defined benefit pension to future accrual with £250m lump sum payment to the scheme to address the deficit. GKN's CEO, Nigel Stein commented "2017 is expected to be another year of growth. Our reputation for technological leadership in our key markets, our focus on driving flexibility and productivity through our manufacturing plants and our market leading position in all three divisions mean we are well placed for the future". The Group declared an interim dividend of 3.1p per share, up +5%, to be paid on 18 September 2017.
Our View: GKN delivered good results for the first half of FY2017 with sales, pre-tax profit and earnings per share all coming ahead of consensus expectations. The Group's results were further enhanced by favourable currency translation due to weaker Sterling. Divisionally, Aerospace (c.36% of sales), Driveline (c.52% of sales) and Powder Metallurgy (c.12% of sales) achieved a good set of results, with organic growth at +1%, +8% and +4%, respectively. The Aerospace division was impacted by slower commercial sales (LFL: -3%), but this was more than offset by the increase in military (LFL: +15%). The division won new and replacement work packages worth c.US$2.3bn over contract life. The Driveline division saw strong organic growth helped by its wide geographic presence and increased content per vehicle and won £230m of annualised new and replacement business. Powder Metallurgy division was helped by pass-through of higher raw material surcharges. Without this impact, the Group's organic growth was +1% and won £110m of annualised new and replacement business. Looking ahead, GKN's Board said it expects organic sales in Aerospace to grow slightly above the market, while both Driveline and Powder Metallurgy expected to grow organically above the market. The Shares are valued at FY2017E and FY2018E P/E multiple of 9.8x and 9.1x along with dividend yield of 2.9% and 3.1%, respectively. Given the management's confidence to deliver full year results in line with expectation, together with its investment in technology expect to result in reduced cost and increase margin, we believe GNK remains well-positioned to achieve further growth. Beaufort retain a Buy rating on the stock.
Hammerson (LON:HMSO, 581.50p) – Hold
Hammerson, an owner, manager and developer of retail property, yesterday announced its results for the 6 months ended 30 June 2017 ('H1 FY2017'). During the period, net rental income advanced by +9.7% to £184m, or grew by +0.7% on a like-for-like ('LFL') basis, against the comparative period (H1 FY2016). The profit for the year under IFRS was up by -76.7% to £287.1m, principally due to higher revaluation gains on the Group's property portfolio. On an adjusted basis, profit increased by +6% to £119.4m, leading to earnings per share of 15.1p, up +5.6%. The Group increased property portfolio value by +5.6% to £10,527m at the period end with equity shareholders' funds up +3.9% to £6,002m. Net asset value per share (EPRA) rose by +4.3% to £7.71 with total property return of 4.0% (H1 FY2016: 2.9%). On the operational front, the Group signed 228 leases (UK 122, France 71, Ireland 35) representing 85,300m2 of space during the period. The portfolio has maintained high occupancy levels with occupancy of 97.3% at period-end (UK: 97.3% occupied, France: 96.6%, Ireland: 99.9%), which was ahead of the 97.0% target. The Group declared an interim dividend of 10.7p, up +5.9%, be paid on 9 October 2017.
Our View: Hammerson delivered resilient results for the H1 FY2017. The Group registered a +9.7% increase in net rental income, primarily led by the acquisitions related to the conversion of the majority loan portfolio to real estate. On a LFL basis, net rental income only grew by £1m, or +0.7%, which was below the Group's stated target of +2.0%, as growth from the UK shopping centre portfolio (LFL: +2.1%) and France (LFL: +1.5%) were partly offset by a reduction from the UK retail parks portfolio (LFL: -3.0%) due to proactive tenant rotation. Although the Group has reduced average cost of debt to 3.0% from 3.1%, shareholders however, will be keeping an eye on its debt pile of £3.7bn, implying net debt/EBITDA of 10.1x. Given higher inflation reducing real disposable income, uncertainty around Brexit and falling consumer confidence, weaker retail activity combined with rising cost pressures from weaker Sterling, business rates and higher minimum wages, the outlook for the UK retail sector remains challenging. The shares are valued at FY2017E price to net asset value of 0.78x along with dividend yield of 4.4%. Beaufort retains its Hold rating on the shares.
Joules Group (LON:JOUL, 303.50p) – Buy
Joules Group PLC, a British premium lifestyle brand, yesterday announced its annual results for the 52 weeks ended 28 May 2017 ('FY2017'). During the period, revenue advanced by +19.6% to £157.0m (+18.6% on a constant currency basis, 'CC'), comprised of; c.+19.4% increase in Retail revenue (CC: +19.4%) and c.+20.3% rise in Wholesale (CC: +17.6%), against the comparative period (FY2016). Gross margin improved by +1.9% to 55.4%, leading to underlying EBITDA grew +25.3% to £16.9m (EBITDA margin +0.5%) and underlying pre-tax profit rose +34% to £10.1m. Basic underlying earnings per share therefore increased by +33.3% to 9.2p. Return on Capital Employed (ROCE) increased by +0.3% to 32.2%. Net cash at the period-end stood at £6.3m (FY2016: £3.2m). On the operational front, the Group opened 13 new stores and close 2 stores during the period to 108 stores. Joules have notified to terminate the 3rd party distributor in the US in order to manage it in-house from Spring/Summer 2018 to gain greater control over the long-term growth. The Group expanded new ranges for childrenswear category and launched women's leather footwear with a range of Chelsea boots. Active customer base has grown by +14% to 907,000 with total customer database reached 2.5 million at the period-end. Joules' CEO, Colin Porter, commented "FY17 was another very exciting year for the Group as the Joules brand continued to expand and develop across distribution channels and product categories both in the UK and internationally. The Board remains confident that the Group's momentum will continue into FY18, despite the uncertain macro-economic outlook". The Group declared a final dividend of 1.2p per share, bringing total full year dividend to 1.8p (FY2016: 0p), to be paid on 16 November 2017.
Our View: Having provided a pre-close trading update in early June, there was no major surprises to be found within the Group's strong full year results. Continued improvement in margin at both the gross and EBITDA level was encouraging, as the Group sold a higher proportion of full price products with a favourable product mix, while delivering further distribution efficiencies. Both Retail and Wholesale divisions registered a strong growth. The Retail division was helped by 11 net new store opening and e-Commerce which increased by +29.4% to now stands at 34.8% of total retail revenue (FY16: 32.1%). The Wholesale division was supported by an expanded presence in key department stores in the US and continued growth in Germany. In the UK, the division was led by both national multi-channel retailers such as John Lewis and Next as well as smaller, independent specialist retailers. On a geographic basis, UK sales increased +17.8% and International sales were up +36.2%, with latter now representing 11.5% of Group revenue (FY2016: 10.1%). Altogether, the results demonstrate brand's continuing momentum across channels and product categories throughout the year. Although the weaker Sterling-driven cost inflation, increasing wage pressures, potential general inflation and any subsequent reduction in disposable income/consumer confidence will impact the entire UK retail sector, the Group has already mitigated some of these concerns by hedging its expected US Dollar requirement up to FY2018 (the majority of Joules' product purchases are US Dollar denominated). Given growth in its customer base, further planned new store opening, as well as "robust" Autumn/Winter wholesale order-book both in the UK and internationally, the Board reiterated its confidence into FY2018, despite the uncertain macro-economic outlook. We believe Joules' strong brand footprint and expanding loyal and highly engaged active customer base will continue to drive its momentum forward. The Shares are currently valued at FY2018E and FY2019E P/E multiple of 29.8x and 23.4x, along with dividend yield of 0.7% and 0.9%, respectively. In view of this positive progress along with a confident outlook, Beaufort reiterates its Buy rating on the Shares.