Today's edition features:
• Alecto Minerals (LON:ALO)
• Savannah Resources (LON:SAV)
• Stellar Diamonds (LON:STEL)
"Later today, President Trump is expected to transform his posturing of the past four months into genuine policy priorities. White House officials have suggested that his State of the Union Address, which is due to start at 21:00hrs ET, will detail proposals to simplify the tax code and dismantle Obamacare. Markets are, of course, aware that anything less than expected on stimulus or, perhaps, more aggression on trade policy could well result in a sharp sell-off. Indeed, given that the Dow Jones has risen almost 14% since November's election, some further disclosures may be required to keep its 'plates spinning'. Yesterday, however, US equities were again seen to reverse early caution, with all three principal indices once more closing in the positive albeit with just fractional movements. Early profit taking in utilities and other high-yielders did threaten to break the Dow Jones's sweep of what has now become 12 consecutive record closes, but the wall of money liberated from global bond sell-off rapidly found its way into US equities as news leaked out regarding the scale of additional spending the Republicans are proposing to hurl at the national defence budget. Officials yesterday suggested they would be seeking a much higher than consensus US$54bn funding increase, which they intend to offset with cuts from non-military agencies and foreign aid. In fact, the President was yesterday scheduled to send all Federal Agencies his 2018 budgetary blueprint, of which a complete proposal is expected to be made public in the springtime. One downside for the Department of Defense, however, is that such a dramatic funding boost is unlikely to secure Congress approval without extended negotiation, meaning spending will likely end up frozen at the 2016 level for the remainder of this year. Asian equities by contrast ended mixed this morning, with the Nikkei's early gains given back to finish unchanged on news that industrial output unexpectantly fell last month, while the two Chinese indices went in opposite directions and the ASX remained soft on weak commodity prices. The biggest surprise coming from the large spread of macro data released across the globe yesterday was January's Eurozone business confidence index, which rose to its highest since before the financial crisis, suggesting heightened uncertainty ahead of key elections has yet to dent confidence among the region's business leaders. Perhaps less surprising, but still somewhat cautionary, was this morning's hit on UK consumer confidence for February detailed in the Gfk survey, which suggests that personal finances are now starting to notice the effects of Sterling devaluation. Looking elsewhere, the US is due to publish another large batch of statistics ahead of Trump addressing the joint-session of Congress, including Q4 GDP figures, Wholesale Inventories, Personal Consumption, Chicago PMI and Consumer Confidence numbers. Speeches are due from the Fed's Bullard and FOMC's Williams, which may provide additional hints regarding timing of future interest rate policy, although Fed Funds presently indicate only a 30% change of a rate hike at the March meeting. Being in the middle of the results season, a good number of UK corporates are due to release earnings or trading updates, including Provident Financial (PFG.L), Meggitt (MGGT.L), Taylor Wimpey (TW..L), Greggs (GRG.L), Revolution Bars (RBG.L), GKN (GKN.L) and Fresnillo (FRES.L). Assuming no particular fireworks emanating from the these, London is expected to have a relatively subdued opening, with the FTSE-100 seen rising between 5 and 10 points in early trade."
- Barry Gibb, Research Analyst
The FTSE-100 finished yesterday's session 0.13% higher at 7,253.00, whilst the FTSE AIM All-Share index gained 0.06% to stand at 908.49. In continental Europe, the CAC-40 finished unchanged at 4,845.18 whilst the DAX was 0.16% higher at 11,822.67.
In New York last night, the Dow Jones rose 0.08% to 20,837.44, the S&P-500 firmed 0.1% to 2,369.75 and the Nasdaq gained 0.28% to 5,861.9.
In Asian markets this morning, the Nikkei 225 had risen 0.06% to 19,118.99, while the Hang Seng fell 0.38% to 23,834.04.
In early trade today, WTI crude was up 0.26% to $54.19/bbl and and Brent was up 0.32% to $56.11/bbl.
Tesco to replace 1,700 managers with lower-paid staff
Tesco (LON:TSCO) plans to replace 1,700 deputy managers in its chain of Express convenience stores. Their work will be taken by an extra 3,300 lower paid "shift leaders", increasing staff numbers by 1,600. The retailer said the deputy managers would be offered the new roles, redundancy payments or be redeployed. It comes on top of 1,000 job cuts announced by Tesco in January as part of a plan to cut the number of its distribution centres. Tracey Clements, managing director of convenience stores at Tesco, said: "To help improve our service to customers in our Express stores we are aiming to have more of our colleagues on the shop floor, more often. "We appreciate that these changes will impact our deputy manager colleagues, and will do everything we can to support them throughout this period."
Source: BBC News
Alecto Minerals (LON:ALO, 0.07p) - Update
Alecto has published a very positive announcement which clearly demonstrates the reality and transformational nature of its new copper mine acquisition in Botswana. It describes the mobilisation of a mining fleet and the start of grade control drilling (next week) as the Mowana mine returns to production. The announcement doesn't give the exact date of first ore mining or copper production but we anticipate more details over the coming weeks. CEO Mark Jones did comment that "The arrival of our mining contractor and the earth moving equipment on site marks the beginning of a very exciting three-month period, which will be characterised by production, sales and renewed activity at Mowana". So over the next few weeks we can expect a healthy schedule of newsflow culminating in production during 2Q.
Our view: This is a very exciting announcement and although much is still to be done (not least profitable copper production), one has to congratulate management for the achievement thus far. The readmission is estimated to be end of March (post General Meeting) and Mowana has sufficient funds to be progressed towards first copper production as an Alecto mine. Alecto is borrowing funds in the form of offtake and vendor financing to fund expansion of the plant (trippling tonnage and adding a DMS circuit). All being well this gearing should maximise upside for Alecto's shareholders. It is a shame Alecto's stock is suspended but we expect a very positive response when trading resumes.
Beaufort Securities acts as corporate broker to Alecto Minerals PLC
Savannah Resources (LON:SAV, 5.62p) – Speculative Buy
Savannah Resources announced today results from its fixed loop and downhole transient electromagnetic (EM) surveys completed at its highly prospective Block 4 and 5 properties in the Sultanate of Oman. EM surveys are a proven exploration tool that have successfully identified anomalies associated with volcanic massive sulphides (VMS) deposits. The Company has also received results from its recent drill programme on the Dog's Bone deposit. Savannah owns a 65% shareholding in Al Fairuz Mining, the owner of the Block 5 licence and is earning a 65% shareholding in Al Thuraya LLC, the owner of Block 4 licence, both are highly prospective for copper and gold. The surveys confirm potential for extensions at Lasail and Mahab 4. However, they did not pick up massive sulphide anomalies at the Bayda, Zuha and Sarami East targets. That said, previous drilling has intercepted disseminated copper mineralisation at Bayda and the area remains a large tonnage, lower grade target. Drill results at Dog's Bone returned high grade Zn mineralisation at 6.1m grading 6.8% Zn, 1.4g/t Au and 84g/t Ag. Further detailed evaluation is now underway at Dog's Bone and further drilling and down-hole EM surveys is required at Lasail and Mahab 4 to confirm and evaluate the EM anomalies. In addition, Savannah released drill results and compilation work on the Ravene deposit in Mozambique, which forms part of the Mutamba Mineral Sands project, being explored by Savannah and Rio Tinto as part of the Consortium Agreement. Savannah has confirmed high-grade zones of. Drilling confirmed the existence of two mineralised zones with total heavy mineral (THM) >5% at Ravene, with the main zone having a length of 3.5km and widths up to 1.5km.
Our view: We are encouraged with the EM anomalies revealing potential extensions to Lasail and Mahab 4 massive sulphide mineralisation. Whilst the EM survey for the Bayda deposit was not as encouraging we note that there is still potential for disseminated copper mineralisation as was previous intercepted and thus Bayda remains a large tonnage, lower grade target. Potential anomalies at Lasail and Mahab 4 will now be drill tested, which could ultimately add to the current resource base of 1.7Mt grading 2.2% Cu. We note that VMS-type deposits generally occur in clusters and look forward to further drilling on the high-grade Zn mineralization at Dog's Bone. We are also encouraged with the drill results and compilation work done by Savannah on the Ravene deposit in Mozambique. The thick and continuous high-grade zones bode well for additional resources with the current mineral resource estimate at 3.5Bt grading 3.8%. We look forward to the results from the scoping study which is currently underway. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Savannah Resources Plc
Stellar Diamonds (LON:STEL, 5.38p) - Speculative Buy
Stellar Diamonds has resumed trading on AIM, raised c.£350k and is planning a further £250k via an open offer. The restoration has come about due to the new structure of the Tonguma transaction with Octea. The economics for Stellar shareholders are very similar but it is now a tribute agreement where Stellar funds and operates the mine, receives the lion's share of the cash flows (as before) but doesn't take legal ownership of the Tonguma license. It is no longer regarded by Stellar's NOMAD or the AIM team as an RTO. The money being raised includes $150k to pay for the Tongo environmental licence which should result in the Tongo mining license being issued, an important milestone to look out for.
Our view: The Tongo-Tonguma Project has the potential to be a high margin, medium sized producer of very high quality diamonds. The tribute agreement means that Octea receives a 10% revenue royalty, but only once Stellar has recouped its initial capital outlay of circa $30m to build the mine. Stellar estimates that under the tribute agreement an NPV 8% of $104 million and an IRR of 31% will be attributable to Stellar shareholders. Plus there is very significant upside from other dykes in the Tongo-Tonguma licence area and below the current mine plan. Now that Stellar is trading again its approach to financing Tongo-Tonguma is more flexibile, however we expect the majority of the finance to come from a strategic investor, with the balance from existing shareholders. We have a Spec Buy recommendation and note the most important catalyst is securing a strategic investor who can cornerstone the equity component of the mine construction funding.
Beaufort Securities acts as corporate broker to Stellar Diamonds PLC
Bunzl (LON:BNZL, 2,245.00p) – Hold
Bunzl plc, the international distribution and outsourcing group, yesterday announced its final results for the 12 months ended 31 December 2016 ('FY2016'). During the period, revenue advanced by +14% to £7,429.1m (+4% at constant exchange rate 'CER'), operating profit increased +12% to £409.7m, pre-tax profit rose +12% to £362.9m, leading to basic earnings per share up +14% to 80.7p, against the comparative period (FY2015). At adjusted basis, operating profit grew +15% to £525.0m (CER: +5%), pre-tax profit rose +16% to £478.2m (CER: +6%), leading to earnings per share up +6% to 106.1p. Net debt at the period end stood at £1,228.6m (FY2015: £1,312.5m), implying net debt to EBITDA of 2.0x (FY2015: 2.1X). Cash conversion stayed strong at 99%. On the operational front, the Group has acquired 14 businesses during the year spending in total of £184m, and in addition, the Group confirmed acquisition of LSH, a Singapore based distributor of personal protection equipment, primarily to oil & gas, construction, pharmaceutical and industrial sectors, at an undisclosed sum yesterday on a separate announcement. Bunzl's CEO, Frank van Zanten, commented "…against the backdrop of mixed macroeconomic and market conditions, we believe that our well positioned portfolio of international businesses and improving organic growth rates, recent customer wins and a promising acquisition pipeline will lead to continued overall growth for the Group". The Group declared a final dividend of 29.0p, bringing full year dividend to 42.0p per share, up +11%, to be paid on 3 July 2017.
Our view: Bunzl delivered its FY2016 results broadly in line with expectation, while continuing its 24-year track-record of providing a progressive dividend. On a reported basis, the Group's performance was boosted by c.+10% due to weaker Sterling, given that it generates over 85% of revenue outside the UK. Operating profits outpaced revenue growth with a margin improvement of +0.1% to 7.1%, benefitted from acquisitions. On the other hand, excluding these and on a constant exchange rate basis, just +0.3% was generated from organic growth due to customer losses and price declines on plastic resin-based products. The Group has noted, however, that in the Q4 FY2016, organic growth improved to c.+1.5% as it won new business and price declines eased. Regionally, North America (59% of revenue) saw adjusted operating profit at CER rise +4% with maintained margin, while in Continental Europe (18% of revenue) operating profit was boosted by +13% with +0.2% growth in margin provided mostly from acquisitions. In UK & Ireland (15% of revenue), on the other hand, operating profit dropped by -2% due to sluggish markets while margin was maintained. Rest of the World (8% of revenue) recorded +4% growth in operating profit but -0.7% decline in margin due to macroeconomic conditions and currency weakness. Looking ahead, the Group said the pipeline of potential acquisitions remains "promising", and expects further positive translation effect in FY2017, particularly in the H1 if current exchange rates remain. Growth through acquisitions remains an important part of the ongoing strategy of Bunzl. Following retirement of CEO, Michael Roney in April 2016, after more than 10 years in the role, Beaufort would like to continue monitor performance under the new CEO, Frank van Zanten. The shares are valued at FY2017E and FY2018E P/E multiples of 20.4x and 19.6x along with dividend yields of 2.0% and 2.2%, respectively, with translational benefits from the Sterling devaluation now largely priced-in. Beaufort reiterate its Hold rating on the shares.
Persimmon (LON:PSN, 2,030.00p) – Buy
The UK housebuilder yesterday announced Final Results for the year ended 31 December 2016. Persimmon's Board focussed on its ability to deliver disciplined high quality growth and an excellent 2016 performance. Full year revenues were up 8% to £3.14bn (2015: £2.90bn), from which the operating margin increased to 24.8% (2015: 21.9%), including a second half improvement to 25.7%, which created an underlying profit before tax increase of 23% to £782.8m (2015: £637.8m). Cash generation pre-capital returns saw a 41% increase to £681m (2015: £483m), with Return on Average Capital Employed increasing by 23% to 39.4% (2015: 32.1%). Legal completions increased by 599 new homes to 15,171 (2015: 14,572) and average selling price increased by 3.8% to £206,765 (2015: £199,127). A further 18,709 plots of land were also acquired in the year, with 11,268 plots successfully converted from the Group's strategic land portfolio. Underlying basic earnings per share increased by 19% to 205.6p (2015: 173.0p), while Net Cash increased to £913.0m at 31 December 2016 (2015: £570.4m). The Board reported forward sales were ahead at £1.89bn (2016: £1.74bn), an increase of 9%.
Our view: It's hard not to be impressed with the management's operating performance and its willingness to rapidly hand back surpluses to shareholders. The Group's continued outperformance in 2016 enabled a further increase in its Capital Return Plan, with an additional payment of 25p/share, increasing the total value of the Plan by some £77m to £9.25 per share. This new payment will be made on Friday 31 March 2017 as a first interim dividend in respect of fiscal 2016. In addition, the Board confirms that the scheduled capital return of 110 pence per share will be paid on 3 July 2017, as a second interim dividend in respect of the financial year ended 31 December 2016. A total of £1,071m, or £3.50 per share, of excess capital returned has been returned since launch of plan in 2012, and there is more to come! Indeed, the Group has now completed the first five years of its long-term strategy which remains focused on growing Persimmon into a stronger, larger business while maintaining capital discipline and robust free cash generation. The strength of the Group's operating model is demonstrated by its ability to grow completion volumes by more than 60%, while investing £2.6bn of cash in land through this period and simultaneously returning excess capital to shareholders. The future Capital Return Plan payment of £5.50 per share is set to be paid in equal instalments of £1.10 per share over the remaining five years of the Plan period, commencing in early July 2017. An increase cost-of-build of around 3.5% anticipated this year is expected to be passed on directly to buyers, while shortages in labour resources are being successfully offset by the Group's own trainee scheme. The UK new build housing market remains confident with customer demand for new homes. Customer activity in the first eight weeks of the 2017 spring season remained strong with site visitors some 7% ahead year on year, which is expected to strengthen further upon entering the spring selling season. Indeed, it is hard to imagine the industry will not in due course reflect on the current period, which enjoys a structural shortage of supply of dwellings across the UK, exceptionally low interest rates, excellent mortgage availability and improved planning conditions together with government incentives (Help-to-Buy, etc.), as near ideal trading conditions. That said, although eventual publication of the recent Housing White Paper was considered to be something of a 'damp squib', at the very least it fires a warning shot across the bows of the national housebuilders. Given the extent of their permitted and strategic landbanks (Persimmon, for example, owned 70,792 plots at the end of the year or 3.5 years of forward supply), they are the only ones capable of satisfying the government's demand to see the number of annual new completions rise from the current 170k mark to around the 230k to 240k level. Should they be seen to ignore this hint, the treat of more punitive measures will overhang the sector. In fact, none will wish to challenge Westminster on its veiled threat, nor to lose market share to their peers. So, given they have the land and working capital available, it is a very real possibility that the net result will be for the sector to authorise a veritable leap in total annual completions by 20% or so before the next general election. Assuming no significant Brexit/interest rate shock slows underlying demand in the meantime, such higher activity levels might be expected to result in a period of relative bonanza for shareholders who will likely see a chunk of this returned in the form of special dividends while the balance immediately chasing additional land reserves. Altogether, this means the sector finds itself in an enviable position that investors should seek to expose themselves to, both for growth and income. Investors should hold an overweight position on the sector; Persimmon, which trades on a 2017E earnings multiple of 10.8x with a 6.8% yield while valued at 2.4x book, and Taylor Wimpey are Beaufort's high quality picks.