The Markets
Market opening: The FTSE-100 is expected to start this morning's session around 38-points higher.
New York: Wall Street ended in the green after the Fed’s decision to keep interest rates unchanged and reduce projections for the number of rate hikes in 2016 to two from four. Furthermore, oil prices rose after lower-than-expected crude oil inventories and expectations of a meeting between oil producers to resume talks on capping output next month. The S&P 500 advanced 0.6%, led by the materials sector.
Asia: Equities are trading mixed, after the Fed cleared the air on interest rate hike for 2016. A rally in oil and commodity prices boosted basic resource stocks. The Nikkei 225 fell 0.2%, amid poor data on Japanese exports and a strengthening yen. The Hang Seng was trading 1.2% up at 7:00 am.
Continental Europe: Markets ended mixed, as investors assimilated the UK’s new budget announcements and awaited the Fed’s decision on interest rates. However, an improvement in oil prices boosted energy stocks. Germany’s DAX rose 0.5%, while France’s CAC 40 fell 0.2%.
Crude Oil: Yesterday, WTI and Brent oil prices increased 5.8% and 4.1%, respectively. The spread between the two varieties stood at US$1.9 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.10% lower yesterday at 710.26.
Today's news
Unemployment in UK remains at 10-year low
As per the data from the Office for National Statistics, the UK’s unemployment rate remained at 5.1% in the three months to January, similar to Q4 2015. The number of unemployed decreased 28,000 to 1.68 million during the period. Moreover, the employment rate stood at 74.1%, the joint-highest level since the current records began in 1971.
Company News
Ariana Resources (LON:AAU, 1.05p) - Speculative Buy
Ariana Resources, the gold-silver exploration and development company with several projects in Turkey and a technology-metals subsidiary in Western Australia, announced yesterday drill results from the Kepez West project in Turkey. The Kepez West project lies within the Red Rabbit joint venture with Proccea Construction and is 12km from the processing plant at Kiziltepe, currently under construction with production targeted in H2 2016. The best intercepts from the 1,543m reverse circulation (RC) drilling programme were 6m grading 2.7g/t Au plus 16g/t Ag from 10m, 4m grading 3.2g/t plus 23g/t Ag from 8m, and 6m grading 2.2g/t plus 13g/t Ag from 6m. Results suggest a shallow-dipping stockwork vein-hosted style of mineralisation near surface and thus potentially amenable to open-pit mining. Ariana plans additional work including trenching and a shallow RC drill programme to confirm the orientation of areas of mineralisation with the goal to define a shallow open-pittable resource suitable for processing at the Kiziltepe mine.
Our view: Ariana continues to develop potential satellite deposits along the Sindirgi gold corridor in western Turkey which could ultimately extend the current life-of-mine schedule at the Kiziltepe mine. We note the shallow mineralisation intercepted at Kepez West is amenable to low strip-ratio open-pit mining and is within trucking distance to the Kiziltepe processing plant. We look forward to a mineable resource from Kepez West and a potential mine schedule in conjunction with the Kiziltepe mine plan. Given Ariana's continued exploration success within the highly prospective Sindirgi region as well as its near-term production at Kiziltepe, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Ariana Resources plc
DekelOil Public Limited (LON:DKL, 1.22p) - Buy
The Company announced the refinancing, on improved terms, of a project development loan which was used to assist in funding the construction of the Company's 60 t/hr. extraction Mill, one of West Africa's largest. The refinancing results in a significant reduction in interest costs and will therefore have a positive impact on the Company's profitability in 2016 and beyond. The new improved terms secured are testament to DekelOil's transformation into a fully operational palm oil company, which successfully produced 35,770 tonnes of Crude Palm Oil ("CPO") during the year ended 31 December 2015. New seven year €9.15m loan with interest payable at a rate of 7% secured with NSIA Banque Cote D'Ivoire and it replaces the €8.69m loan with interest payable at a rate of 10.5% secured with BIDC-EBID (ECOWAS Bank of Investment and Development) with remaining tenure of four years. The result is approximately a €270,000 reduction in annual interest costs as a result of the new loan's lower interest rate of 7% and thus improves profitability. This results in circa €600,000 reduction in capital repayments in 2016 and €800,000 reduction in capital repayments in 2017 as a result of the increased tenure of the new loan facility and provides further free cash flow for both ongoing operational and corporate objectives. The Company further discloses that discussions are at an advanced stage with lenders to improve the terms of the Company's outstanding development loan of €6.76m.
Our view: The refinancing of this loan on such improved terms provides third party validation of how far DekelOil has come operationally in a short space of time. Having produced 35,770 tonnes of CPO in 2015, the Company’s first full year of production, DekelOil has rapidly become a major CPO producer in Cote d'Ivoire. With the Project significantly de-risked, DekelOil is now focused on ensuring the excellent progress made on the ground is fully reflected in its corporate structure and financing arrangements, the majority of which were secured to fund the construction of the Mill. The refinancing ought to be seen in this context and we look forward to further updates regarding the securement of improved terms for the remaining debt, where discussions are at an advanced stage. 2016 is shaping up to be another excellent year of progress for DekelOil. In addition to significantly lower interest costs and also the cancellation of a €5.1m capital note in December 2015, DekelOil expect a further increase in CPO production and a ramp up in the production of Palm Kernel Oil and Palm Kernel Cake at its Kernel Crushing Plant. The Company is focused on maximising the highly cash generative potential of the vertically integrated project at Ayenouan, and, in the processs, build a strong platform from which to transform DekelOil into a leading West African focused palm oil company. DekelOil is in the middle of the key harvesting season at present and we await a quarterly production update in early April. We regard DekelOil as undervalued and strongly reiterate our Buy stance.
Beaufort Securities acts as corporate broker to DekelOil Public Limited
Rex Bionics (LON:RXB, 43.50p) - Speculative Buy
Yesterday, Rex Bionics released a trading update since the company’s interim results statement released on 8th December 2015. The company informed that REX unit sales would be higher in the second half of the year to 31st March 2016 (H2 2016) compared with the three units sold in the first half of the year. At this time, Rex Bionics has already shipped and invoiced three REX units, with one further order being scheduled for shipment before the end of March 2016. The company received good feedback for the initial demonstrations of REX in the US and approved REX's marketing partner, EnableMe. Additionally, Rex Bionics collaborated with the US army to investigate the use of REX in an acute care setting. Meanwhile, the recruitment in the RAPPER II clinical trial is progressing well. A total of 31 volunteers have been recruited until date and two new trial centres - the Royal National Orthopaedic Hospital in Stanmore, UK; and Austin Health's Royal Talbot Rehabilitation Centre in Melbourne, Australia- have each recently treated their first volunteers.
Our view: Rex Bionics performed strongly in H2 2016, delivering commercial sales, obtaining clinical evidences and entering value partnerships. The company expects unit sales to be higher than that in the first half of the year. As per a research report, the market for robotic exoskeletons for medical applications is forecasted to reach US$2.1bn by 2021 from US$16.5m in 2014. These numbers clearly reflect the huge potential and growth opportunities for the company. Rex Bionics plans to focus on the US and Chinese markets in the near future. The company received positive response from the customers in the US and the partnership with the US army would further strengthen its prospects. Rex Bionics’ engagement with the world’s leading neuro-rehabilitation clinics is a valued endorsement of the REX technology. Recently, the company focused on upgrading its systems and plans to secure FDA approval for home use of REX. We are encouraged by Rex Bionics’ progress and look forward to updates on this technology. Therefore, we maintain a Speculative Buy rating on the stock.
FinnAust Mining (LON:FAM, 2.05p) - Speculative Buy
Yesterday, FinnAust Mining informed that it appointed NIRAS Greenland A/S (NIRAS) and Orbicon A/S (Orbicon) to support the completion of various permitting and regulatory work at the Pituffik Titanium Project in Greenland. Both the consultants are Danish companies having operating experience in Greenland.
Our view: FinnAust continues to make good progress at the Pituffik project; it has appointed consultants to help in licencing and regulatory compliance work. The company’s partners are recognised players in Denmark and have been engaged in several big infrastructure and mining projects. FinnAust expects to leverage on its knowledge of the area and speedup the permitting process. Of late, the company has taken a lot of initiatives for the development of the project. FinnAust recently appointed Mr. Peter Waugh and TZ Minerals International Pty Ltd (TZMI) to quickly assess the project’s near-term production potential. TZMI would initially work on leveraging important mineralisation elements such as grade, volume and composition. This would help in creating cost-effective development scenarios that would be measured by FinnAust. In addition, the company would benefit from Mr. Waugh’s extensive experience in the global titanium dioxide pigment industry. FinnAust recently reported positive results from an offshore survey conducted at Pituffik. The results indicated significant titanium volumes extending over a large area, which further enhanced the potential resource base. In light of the positive developments surrounding Pituffik, we maintain a Speculative Buy rating on the stock.
Finsbury Food Group (LON:FIF, 112.0p) - Buy
Finsbury Food Group ('Finsbury Food'), the UK speciality bakery manufacturer of cake, bread and morning goods for the retail and foodservice channels, yesterday announced its interim results for the 26 weeks ended 26 December 2015. During the period, revenue advanced +46% to £156.6m (H1 2014: £107.6m) while on a like-for-like ('LFL') basis, it expanded by +7.4% driven by market share growth across the Group. Operating profit rose +78% to £8.0m (H1 2014: £4.5m) and increased +21% on a LFL basis with operating profit margin up +21.4% to 5.1%. Pre-tax profit for the period were £7.5m, up +84% (+22% on a LFL basis), consequently, adjusted diluted EPS grown +38% to 4.4p per share (H1 2014: 0.83p per share). Net debt was 0.9x pro-forma annualised EBITDA (H1 2014: 1.3x) and cash and cash equivalent at end of the period were £1.8m compared to £1.3m a year ago. The Board declared an interim dividend of 0.93p per share (H1 2014: 0.83p per share), up +12%, to be paid on 22 April 2016. On the operational front, the Group has now fully integrated acquisition of Fletchers (October 2014) and Johnston's (June 2015). The Group's UK business and overseas (lightbody Europe – trades primarily in France) business delivered positive growth with +49% and +19% growth in revenue for the period, respectively. Its CEO, John Duffy commented "we have created a Group that is well positioned to flourish in an improving environment and we look forward to benefitting from increased consumer confidence. Having built solid foundations and implemented a robust growth strategy that aims to create sustainable value for our stakeholders, we look forward to driving further growth both organically and through strategic M&A".
Our view: Finsbury Food continued to deliver attractive results with its H1 performance boosted by the two successful acquisitions of Fletchers and Johnston, resulting in its revenues growing +46% and pre-tax profits jumping +84%. The Group also demonstrated robust organic growth with its LFL revenues and pre-tax profits growing by +7.4% and +22% respectively as it gained market share. The two acquisitions are now fully integrated and providing the Group a broader spread of customers across food retail and foodservice channels. The acquisition of Fletchers brings opportunities in new foodservice channels, retail customer diversification and complementary product ranges, whereas Johnstone's customer base in the coffee shop opens more exposure to the sector. Reduction of net debt to £21m (0.9x annualised EBITDA) suggests a healthy balance sheet ready for future acquisitions, continuing its strategy to consolidate market share in existing product areas or introduce further diversification into additional specialist product areas, customers and channels. Looking ahead, whilst the UK grocery market continues to be challenging with year on year volume decline of -1.9% and value increase of +0.5% (Source: IRI Infoscan w/e 02 January 2016), the wider economic environment is slowly improving, and the Group expect strong H1 performance to continue into the H2. The Board has extensive experience and proved its capabilities for successful acquisitions. We believe the Group can continue its momentum taking advantage of broader channel, customer and product diversification to grow organically as well as through further acquisitions. Beaufort issues a Buy recommendation rating on the stock.
Tullow Oil (LON:TLW, 207.20p) - Speculative Buy
Tullow announced that the Cheptuket-1 well in Block 12A, Northern Kenya, has encountered good oil shows, seen in cuttings and rotary sidewall cores, across an interval of over 700 metres. Cheptuket-1 is the first well to test the Kerio Valley Basin and was drilled to a final depth of 3,083 metres. The objective of the well was to establish a working petroleum system and test a structural closure in the south-western part of the basin. The strong oil shows encountered in Cheptuket-1 indicate the presence of an active petroleum system with significant oil generation. Post-well analysis is in progress ahead of defining the future exploration programme in the basin. On the back of the encouraging Cheptuket-1 and successful Etom-2 results further exploration activities are being evaluated. Tullow operates Block 12A with 40% equity and is partnered by Delonex Energy with 40% and Africa Oil Corporation with 20%. Angus McCoss, Exploration Director, commented today: "This is the most significant well result to date in Kenya outside the South Lokichar basin. Encountering strong oil shows across such a large interval is very encouraging indeed. I am delighted by this wildcat well result and the team are already working on our follow-up exploration plans for the Kerio Valley Basin."
Our view: This is good news and will probably lead to further exploration in the Keiro Valley Basin. With positive partners comment: ‘described it as the most significant well result to date in Kenya outside the South Lokichar Basin’ we continue to regard Tullow as a Speculative buy and reiterate that stance. Tullow Oil is one of our Tips for 2016.
BHP Billiton (LON:BLT, 763.40p) - Hold
Andrew McKenzie, CEO of BHP Billiton yesterday discussed its strategy towards acquisitions and productivity gains. He also described the recent commodity boom as a once in a hundred year event and that current commodity prices were reflective of a return to normal. That said he sees now as an opportunity to make acquisitions due to the financial stress many companies are experiencing. He said "we are very active in looking at areas where we might acquire assets that would fit very well within our portfolio". The vision is to have as few as 10 very large assets, focusing on oil, copper, iron and coal. McKenzie mentioned oil fields and single copper mines as possible targets, but said there's no guarantee they will find an asset meeting its investment criteria. He doesn't want the added complexity of buying companies. The other point he made is that BHPs productivity drives are its primary focus, cutting jobs and reducing its annual $2.0bn maintenance expenditure.
Our view: Although interesting to hear that BHP is actively hunting for acquisition opportunities, it should come as no surprise. BHP has cut its dividend which, along with “productivity gains”, gives it more financial flexibility to make acquisitions. It’s mildly positive for the sector, but will only really impact companies (public or private) that own world class assets. There are only very few copper mine with the size and quality which BHP would require. Perhaps its next move will be in the very distressed oil sector. We remain cautious on the outlook for the resources space, expecting commodity price and company volatility, with sharp upwards and downwards moves both likely. We maintain our Hold recommendation.
Smiths Group (LON:SMIN, 1,050.0p) - Hold
Yesterday, Smiths Group announced its interim results for the half year ended 31st January 2016. During the period, revenues fell 3% to £1.4bn, mainly due to weak performance of the John Crane segment. Operating profit declined 6% to £217m. Consequently, pre-tax profit decreased 9% to £189m, resulting in an EPS of 35.2p against 38.5p in H1 2015. Headline free cash-flow surged 32% to £174m, while return on capital employed remained at 15.4%. Net debt at the end of the period stood at £986m compared with £818m on 31st July 2015. The group’s research and development investment stood at £55m. Smiths installed John Crane's Predictive Diagnostics platform at a number of customer locations to provide actionable rotating equipment performance information. John Crane completed the launch of the next generation of gas seal technology with the introduction of Aura 180 and Aura 100. Smiths Medical introduced a number of new products, including the Medfusion interoperability platform (including PharmGuard 2.0). The Graseby F6 syringe pump, developed by Smiths Medical's R&D team in Shanghai, was launched in China. Smiths Detection division launched the HI-SCAN 6040C for the critical infrastructure segment. Smiths Group declared an interim dividend of 13.25p compared with 13.0p in H1 2015, to be paid on 22nd April 2016.
Our view: Smiths recorded an average performance during the first half of 2016, with mixed performance across divisions. The group’s John Crave segment continued to face pressure amid a slowdown in the energy sector due to weak commodity prices. On the other hand, Smiths’ Medical and Detection divisions reported higher revenues and margins. Performance of the smaller divisions Interconnect and Flek-Tek remained broadly similar to H1 2015. The group continued its fuel for growth programme and expects to generate annualised savings of £60m. Smiths also undertook a lot of initiatives across segments to bring in operational efficiencies and reduce costs. Nonetheless, the outlook for the energy markets looks gloomy and the group’s exposure to it cannot be overlooked. Also, performance of other divisions is not remarkable and demands a lot of improvement. In view of the uncertainty over the company’s performance, we would like to adopt a wait and watch approach and therefore maintain a Hold rating on the stock.