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Beaufort Securities Breakfast Alert Xtract Resources, WPP Group, Easyjet, Oxford Pharmascience, Amur Minerals, London Stock Exchange

Published: 19:12 07 Mar 2016 AEDT

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The Markets

Market opening: The FTSE-100 is expected to start this morning's session around 10-points lower.

New York: Wall Street ended in the green, as better-than-expected US jobs data improved investor confidence on the outlook for the world’s largest economy. Additionally, a rally in oil prices resulted in gains for energy stocks. The S&P 500 advanced 0.3% on Friday, with the materials sector gaining the most. For the week, the markets closed 2.7% higher.

Asia: Equities are trading lower, as investors digested China’s decision to cut its economic growth target. The Nikkei 225 fell 0.6%, as a stronger yen exerted pressure on export driven stocks. The Hang Seng was trading 0.1% down at 7:00 am.

Continental Europe: Markets ended higher taking positive cues from encouraging US jobs report and recovery in oil prices. Furthermore, a rally in mining stocks fuelled buying. France’s CAC 40 and Germany’s DAX increased 0.9% and 0.7%, respectively.

Crude Oil: On Friday, Brent and WTI oil prices increased 4.5% and 3.9%, respectively. The spread between the two varieties stood at US$2.8 per barrel.

UK small caps: The FTSE AIM All-Share index closed 0.84% higher yesterday at 702.49.

Today's news
UK new car registrations increase in February: SMMT
As per data from the Society of Motor Manufacturers and Traders (SMMT), new car registrations in the UK surged 8.4% y-o-y to 83,395 units in February, the highest since February 2004. The increase was mainly due to a 22.6% jump in private registrations. Additionally, diesel and petrol registrations grew 5.6% and 10.7%, respectively.

Company News

Xtract Resources (LON:XTR, 0.19p) - Speculative Buy
Xtract Resources, the gold mining and development company, announced today an update on the economic metrics of the Manica gold project in Mozambique as part of the Bankable Feasibility Study (BFS), which is expected to be completed by Q2 2016. Compared with the Preliminary Economic Assessment (PEA) as complied by Auroch Minerals (29 June 2015), Xtract has increased the NPV10 to US$70m (vs US$50m), returning an IRR of 50% (vs 58%) assuming a gold price of US$1,250/oz an estimated initial capex of US$35m (vs US$28m). The improved economics of the project is based on an increased the Life of Mine (LoM) from 8 years to 12 years based on a LoM production of 6.3Mt grading 2.93g/t compared with 3.4Mt grading 3.49g/t in the PEA. Recoveries are estimated at 96% for oxide ore, 82% for transitional ore and 80% for sulphide ore and average LoM cash cost of US$757/oz versus US$650/oz in the PEA results. Additional capital of US$14m (vs US$8.7m) is estimated for underground development in years three and four and is expected to be funded through existing cash flow.

Our view: We are encouraged with the latest BFS results which compare favourably with the PEA using the same gold price (US$1,250/oz) and discount rate (10%). With the approval by the Mozambican authorities for the acquisition of the Manica project now completed, Xtract can now focus on finalising the BFS by Q2 2016 and initial production in Q4 2017. We look forward to the completed BFS and formalisation of any potential project financing, we understand that management is currently engaged with several banks and institutions regarding financing. In the meantime, we maintain our Speculative Buy rating on the stock.

Beaufort Securities acts as a corporate broker to Xtract Resources plc

London Stock Exchange Group (LON:LSE, 2,853.0p) - Buy
The LSE released its preliminary results for the year-ended December 2015 on Friday. These demonstrate the Group’s ccontinued delivery of successful strategy and that it remains well positioned to make further progress. It delivered strong underlying growth in Capital Markets, Information Services including indices, SwapClear and Italian Post Trade operations as well as a first full year contribution from Russell Indexes. Total revenue rose 78% to £2,285.4 million, being up 11% on a continuing operations basis and up 15% excluding LME clearing. Total operating expenses continue to be well controlled, up just 1% on an organic and constant currency basis as the Group invests in growth initiatives. As a result, adjusted EPS were up 25% at 129.4p, with basic EPS of 94.6p (2014: 56.5p). Its Board proposed final a dividend increased to 25.2p/share - an implied 20% increase in the full year dividend to 36.0p/share - reflecting strong financial position and confidence in further progress, while stating it remains committed to a progressive dividend policy with intention to move towards a 2.5 - 3.0x dividend cover range. The LSE reminded investors that ‘in February 2016, the Group confirmed that it is in detailed discussions with Deutsche Börse regarding a potential merger of equals to form a global market infrastructure group with significant benefits for our customers and shareholders.’

Our view: Strong results and a very confident management statement. Not that anyone should have expected anything less, given the Group’s market position and efficient platform, having successfully integrated the Russell Indices while enjoying continued growth in Capital Markets. In fact, the only questions now actually being asked about the LSE is ‘When will the bidding war begin?’ and ‘Will the competition authorities be seen to block the creation of a clearly dominant European clearing and trading player?’ Most probably, the answers to these are ‘shortly’ and ‘no’. Remember, this is the third time that the LSE and Deutsche Börse have attempted to combine - which is no surprise given their overwhelming cost and revenue synergies – so this time they will undoubtedly have knocked on their respective regulator’s doors to establish what exactly would be required to get the deal done. Seemingly, the conditions were not insurmountable. Having agreed a basis to go ahead, the two proposed a marriage of convenience. Noting it is proposed that Deutsche Börse will control the entity’s majority while also appointing the CEO, however, both LSE shareholders and peers began to smell a rat. So far, only the Intercontinental Exchange has formally advised the market that it was considering making its own bid. The CME Group is also said to now be running its own slide rule over the numbers, while less contentious operators like Hong Kong Exchanges & Clearing might possibly also enter the fray. Given the rarity of jewels such as the LSE, it looks almost certain that a bidding war will soon get underway, and the firepower available suggests that it is unlikely to stop anywhere short of the £35 mark. LSE shares should certainly be bought on this basis, although it may be best for investors to consider locking in profits before the battle goes into months of regulatory abeyance.

WPP (LON:WPP, 1,531.0p) - Buy
On Friday, WPP declared its preliminary results for the year ended 31st December 2015. During the period, Total billings advanced 3.1% to £47.6bn, up 4.9% on constant currency. Revenues increased 6.1% to £12.2bn, with like-for-like (LFL) revenue growth of 5.3%. Headline EBITDA stood at £2.0bn, up 4.9% and crossing the £2bn mark for the first time. Consequently, pre-tax profit rose 2.8% to £1.5bn, resulting in an EPS of 93.6p compared with 84.9p in 2014. Return on equity increased by 1.3 percentage points to 16.3% in 2015. Net debt at the end of the period stood at £3.2bn compared with £2.3bn on 31st December 2014. On the operational front, the company completed 52 transactions in the year; 18 acquisitions and investments were in new markets, 37 in quantitative and digital and eight driven by individual client or agency needs. Of all these transactions, 11 were both in quantitative and digital. WPP announced a final dividend of 28.78p, taking the full year dividend to 44.69p, 17% higher than 2014. The dividend pay-out ratio for 2015 stood at 47.7% (2014: 45.0%). Post FY 2015, the company witnessed a 4.2% LFL revenue growth in January, along with LFL sales growth of 2.3%.

Our view: WPP performed robustly in 2015, reporting higher revenues and margins. The company’s growth was led by the Advertising and Media Investment Management division, which accounted for 45.4% of revenues, and witnessed an 8.2% jump in revenues. Additionally, WPP recorded improved results across all the regions it operates in. The company worked on its long-term plan to enter into the fast-growing geographies and functional markets, completing 52 transactions during the period. These acquisitions would support WPP’s existing divisions and also strengthen its market share in various markets. The company aims to increase its share of digital revenue to 40–45% in the next five years from the current 36%. Furthermore, WPP continued to enhance shareholder value as it increased the dividends payable. We believe the company’s strong cash flow generation would help it achieve the targeted pay-out ratio of 50% by the end of 2016. Overall, the company is progressing well, driven by strong presence in different markets. Therefore, we maintain a Buy rating on the stock.

EasyJet (LON:EZJ, 1,552.0p) - Buy
EasyJet, the Europe’s leading airline company, on Friday announced its passenger statistics for February 2016. During the month, the passenger traffic (the number of earned seats flown) increased 9.8% to 4,932,212 (Feb 2015: 4,491,425) and the load factor (the number of passengers as a proportion of the number of seats available for passengers) fell 0.4% year-on-year (‘y-o-y’) to 90.5%. On a rolling basis for the 12 months, the passenger traffic increased 7.5% to 70,523,738 and the load factor improved 0.8% to 91.6%.

Our view: EasyJet delivered excellent traffic data for February 2016. In line with its strategy of easy and affordable travel, which is evident from the strong growth in passenger numbers, the Group also benefitted significantly from lower oil prices. Although load factor fell slightly y-o-y, easyJet recovered from the impact of the terrorist attacks in Egypt and Paris. On the financial front, easyJet recently reported good performance for Q1 2016, despite the aforementioned terrorist disruption. Although the Group expect revenue per seat at constant currency to decline by mid-single digits in the Q2, the Board expects pre-tax profit for the FY2016 remains in line with market expectations, helped by strong cost performance, low fuel price, disciplined capacity allocation and resilient trading. It has estimated that at January’s exchange rates and with fuel remaining within a US$350 - US$450 metric tonne trading range, its unit fuel bill for the FY2016 is likely to decrease by between £165m - £180m compared to the FY2015. That said one important concern for the Group now must be Brexit. EasyJet is the UK’s largest short-haul airline who has a 20% market share with 134 based aircraft in the UK as of FY2015. The Group’s Chief Dame Carolyn McCall said a Brexit would see cost of flights increase as British airlines are currently benefiting from the free-movement treaties as part of the EU, according to the Sunday Times. She also wrote in the Sunday Times, "(the EU) gave airlines the freedom to fly across the continent. That led to a dramatic fall in fares – around a 40% cut – and the number of routes increasing by 180%. The number of people who flew to and from the UK was 101m in 1995. By 2014 it had almost doubled to 199m. In addition, the Group mentioned in their debt issue prospectus, Offering Circular dated 7 January 2016, that the outcome of a referendum and the UK’s future relationship with the EU could have a material adverse effect on easyJet's financial condition and results of operations. That said, according to the Financial Times early last month, easyJet is already “engaged in detailed planning for a Brexit”. Of course there remains many uncertainties regarding the actual impact and final outcome of the referendum, while the fundamental of the business remain strong and highly sophisticated. Beaufort maintain a Buy rating easyJet on this basis, although it understands that opinion polls suggesting an evident swing to the ‘OUT’ campaign somewhat closer to 23rd June, will likely negatively impact the shares.

Oxford Pharmascience Group (LON:OXP, 4.62p) - Speculative Buy
On Friday, Oxford Pharmascience Group declared its results for the year ended 31st December 2015. Revenues increased to £749,000 from £705,000 in 2014. The group’s operating loss widened to £3.97m from £3.50m, mainly due to investments in research and development (R&D). As a result, loss before tax broadened to £3.9m from a loss of £3.5m in the previous year. The group raised £20m from the issue of new shares in the year. Cash and short-term investments at the end of period stood at £23.1m (2014: £6.7m). On the operational front, Oxford Pharmascience completed proof-of-concept (POC) studies for OXPzero Ibuprofen and OXPzero Naproxen. Data from these studies confirmed that OXPzero products are differentiated and deliver benefits over the standard drug. The group initiated commercialisation process for the OXPzero assets. Oxford Pharmascience also informed that its annual general meeting (AGM) would be held on 22nd June 2016.

Our view: Oxford Pharmascience is a specialty pharmaceutical firm that redevelops medicines to make them safer and easier to administer. Although the group’s financial performance was not that good, it made substantial progress on the operational front. Also, the group is currently in its development phase, so quantitative indicators are not justifiable. The group made good progress related to OXPzero products as it successfully completed the POC. It has also started early stage partnering discussions for OXPzero Ibuprofen and OXPzero Naproxen assets. The group’s solid cash position enabled greater resource allocation to its OXPzero aspirin programme. We are encouraged by the group’s progress in 2015 and wait for future updates on its development. Therefore, we maintain a Speculative Buy rating on the stock.

Amur Minerals (LON:AMC, 7.80p) - Hold
On Friday, Amur Minerals signed a non-binding heads of terms agreement with the Russian government's Far East & Baikal Region Development Fund that would expand the financing options for its flagship Kun-Manie nickel sulphide project located in the far east of Russia. This funding is in addition to Amur's existing mandate for fundraising from potential partners in Russia, China and India.

Our view: Amur Minerals continues to build on its relationship with its fund partners in Russia to support the development of its Kun-Manie project, which is one of the largest nickel sulphide projects in the world. The company has planned to develop a 320km road from the Baikal Amur railhead at Verkhnezeisk to the site. Amur also plans to extend an existing power line starting from the Zeya hydroelectric dam to the planned smelter site. The integrated development of the road and smelter facilities would enable the development of a new industrial hub combining rail transport and affordable hydropower in Amur Oblast. However, the company is still in the exploration phase and in progress to convert into a production entity. Also, the overall outlook for the metal industry is not that promising. We would like to wait and access Amur’s performance in the near future and maintain a Hold rating for now.

Economic News

US trade balance
US trade deficit widened to US$45.7bn in January 2016 from US$44.7bn in December 2015, the Commerce Department said on Friday. Economists had expected a trade gap of US$44.0bn.
 
US change in nonfarm payrolls
The US economy added 242,000 jobs in February, after a revised 172,000 addition in January. The markets expected nonfarm payrolls to increase by 195,000.
 
US unemployment rate
The US unemployment rate in February remained at 4.9%, similar to January and in line with the market expectations.

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