Today's edition features:
• Ferrum Crescent (LON:FCR)
• Morses Club (LON:MCL)
• Taylor Wimpey (LON:TW)
• WPP (LON:WPP)
"US stocks largely trod water on Thursday, with advances in technology and pharma shares being offset by losses in the energy sector. Only the NASDAQ made a reasonable gain, achieving another record high having been boosted by pleasing results from a number of its tech-related issues. PayPal Holdings shares, for example, climbed 6.2% after the company reported strong first-quarter revenue and usage growth and said it plans to buy back as much as US$5 billion worth of its own stock. Comcast and Intuit also put in good gains while Bristol-Myers moved to the upside after results topped expectations. A continued sell-down of oil futures, however, took the wind out of the market's sails, with the S&P500 sector posting as much as a 1.9% loss while WTI Crude prices dropped 2.7% on continuing oversupply concerns. First-time claims for US unemployment benefits also unexpectedly increased in the week ended April 22nd, according to a report released by the Labor Department on Thursday, which will ensure that next Friday's scheduled release of the more closely watched monthly employment report for April will be very carefully scrutinised. Government bonds ticked marginally higher, with the yield on the 10-year US Treasury falling to below 2.3%, from 2.312% Wednesday. Sentiment during this morning's Asian trade was largely dominated by Trump's threat to pull the US out of the North American Free Trade Agreement and his continuing war of words with North Korea's Kim Jong-un, resulting is a fairly broad regional sell-off. The Nikkei led these despite a softer Yen, as traders wound down activity ahead of the Golden Week holiday. South Korea's benchmark Kospi, however, pared gains after having touched a fresh six-year high early in the session, as a result of comments from the US President that he might renegotiate or terminate a trade pact with the country, which he described as a 'horrible deal'. Investors also appeared to emerge somewhat perplexed from Mario Draghi, the ECB President's press conference on Thursday. Noting that the recovery was 'solid and broad', that EU PMI was now at its highest since 2011 and that deflation risk had 'virtually disappeared', his unwillingness to steer regarding future direction on future monetary policy, was considered something of a contradiction. This could possibly have been due to reluctance to move before second-round voting for the French Presidential Election completes, leading some to concluded that there was enough optimism to Anticipate the beginning of material change with the June meeting. The net result, however, was for the STOXX Europe 600 to close rather in a deflated mood, although the FTSE-100 fell even more, partly due to its heavy weighting in Energy-related shares, partly because ex-dividends stripped points from the index, partly because a dovish ECB sparked Sterling higher and also because of the warning shot from Chancellor Angela Merkel suggesting that Britain must drop any "illusions" it has about negotiating on other issues before it settles its financial commitments to the EU. Tough Brexit negotiations could be coming back on the agenda. Meanwhile, there is quite a lot of UK macro data due for release today, including Nationwide House Prices, BBA Mortgage Approvals for March, Q1 GDP preliminaries and February's Index of Services. The EU also provides M3 Money Supply for March, together with April Consumer Prices, while the US offers its own Q1 GDP, its Employment Cost and Personal Consumption Expenditures Indexes, followed by the Chicago Purchasing Managers numbers and Baker Hughes US Rig Count. FOMC Member, Lael Brainard is also due to make a speech. UK corporates due to release earnings or trading updates include Barclays (BARC.L), RBS (RBS.L), Hastings Group (HSTG.L), EMIS Group (EMIS.L) and Rotork (ROR.L). London equities are seen opening modestly higher this morning, with the FTSE-100 up between 5 and 10 points in early trade despite the GfK Consumer Confidence survey released late yesterday indicating a slight softening during April."
- Barry Gibb, Research Analyst
The FTSE-100 finished yesterday's session 0.71% lower at 7,237.17 whilst the FTSE AIM All-Share index was 0.18% up at 961.84. In continental Europe, the CAC-40 finished down 0.31% at 5,271.70 whilst the DAX was 0.23% lower at 12,443.79.
In New York last night, the Dow Jones rose 0.03% to 20,981.33, the S&P-500 rose 0.06% to 2,388.77 and the Nasdaq gained 0.39% to 6048.94.
In Asian markets this morning, the Nikkei 225 had fallen 0.23% to 19,207.6, while the Hang Seng eased 0.45% to 24,588.27.
In early trade today, WTI crude was up 1.04% to $49.48/bbl and Brent was up 1.01% to $51.96/bbl.
RBS reports first quarter profit as turnaround continues
Troubled Royal Bank of Scotland (RBS.L) made a profit of £259m in the first three months of 2017, up from a £968m loss in the same period last year. The bank said that after stripping out fines and settlements, the core operating business made a profit of £1.3bn, up from £1.02bn. RBS, majority-owned by the government after being bailed out, added its cost-cutting plan was ahead of schedule. It has already stripped out 37% of the £750m cuts planned for this year.
Source: BBC News
Ferrum Crescent (LON:FCR, 0.10p) – Speculative Buy
Ferrum Crescent announced today its quarterly activities and cash flow report for the period ended 31 March 2017. The report follows yesterday's announcement regarding winding-up and hand-over process for the Group's operations and licences associated with the Moonlight iron ore project in South Africa, unless it can secure an alternative opportunity in the short term. Unfortunately, the Group was unable to reach an agreement with a third party following a period of negotiations given the significant headwinds that face the iron ore market and the current investment climate in South Africa. The winding-up period is expected to take three months prior to the project's licences being relinquished or transferred. Meanwhile, the Group continues to advance its Toral lead-zinc project in Spain with the imminent start of a drill campaign designed to test shallow lead-zinc mineralisation. Currently, Toral has a combined (Indicated & Inferred) resource of 8.7Mt with a weighted average grade of 10.7% (Pb + Zn). As at 31 March 2017, the Company had a cash balance of A$725,373.
Our view: The above announcement marks the potential end of FCR's involvement in the Moonlight project and new start of exploration work for the Toral project. The unwinding of the Moonlight project is not surprising given the current depressed iron ore market conditions and the significant capital investment required to bring the project on line. The Group can now focus on the Toral lead-zinc project and the proposed new drill programme to test its hypothesis that known mineralisation at depth is linked to shallow mineralised features. If proven correct, these shallow mineralised features could potentially add to the current resource base. We note that zinc prices continue to rise with a 32% increase this year. We look forward to the drill results from Toral in the coming months. In the meantime, we maintain our Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Ferrum Crescent plc
Harvest Minerals (LON:HMI, 13.88p) – Speculative Buy
Harvest has published an RNS describing the steps towards application for a full mining license. The RNS also outlines upcoming crop trial results. Harvest has been testing its new fertiliser product in three places, a Veloso coffee farm (on juvenile and adult plants), at the Institute of Agricultural Research of Cerrado, and at the University of Uberlândia. Test results will start coming through in late May, with more in June and July. These results should show the efficacy of the product and in time for Veloso to place an order for the new planting season - August/September. Regarding the full mining licence application, the process requires a feasibility study so the licence won't come through until late 2018, earliest. Meanwhile, Harvest can continue to operate under its trial mining licence.
Our view: The upcoming crop trial results are a key part of gaining Stonemeal and then Fertlizer status for Harvest's direct application product. More importantly, if the product works as expected it should enable Harvest to start marketing to potential customers in the local area. We look forward to the results and hopefully first sales in 3Q.
Beaufort Securities acts as corporate broker to Harvest Minerals plc
Morses Club (LON:MCL, 136.12p) – Buy
The UK's second largest home collected credit lender, yesterday released its preliminary results for the year ended 25 February 2017. These were broadly in line with Beaufort's expectations. Financial highlights included continued strong performance with revenue up 10% to £99.6m (FY16: £90.6m), along with net loan book growth of 8% to £61.2m (FY16: £56.8m). Impairments as a percentage of revenue for the period were 24.4% (FY16: 20.8%), comfortably within management's target range as customer numbers increased 9% to c.216,000 (FY16: c.198,000). Costs as a percentage of income declined to 56.9% (FY16: 58.9%), resulting in adjusted profit before tax increased to £17.7m (FY16: £16.8m), reported profit before tax £11.2m (FY16: £10.4m) and adjusted EPS of 10.8p (FY16: 10.2p) with Basic EPS at 6.6p (FY16: 6.1p). The Board proposed a final dividend of 4.3p (FY16: n/a).
Our view: Innovation remains the foundation of Morses Club growth. The continued evolution of new technology and capabilities to enhance customer and agent experience, increasing efficiency and improving service while embedding regulatory compliance remains key to its progress. Technological efficiencies are capable of delivering a 28% capacity increase in customer/manager ratio, while new products developed and introduced, including Morses Club Card (cashless lending) in April 2016 and Dot Dot Loans (online lending) in March 2017, enhances the increasing connected user experience and convenience. Meanwhile, regulatory burdens continue to force the consolidation of this highly fragmented industry; Morses took advantage by completing seven acquisitions with total gross receivables of £6.8m last year, while the strategic take-over of Shelby Finance Limited in January 2017 provided it with a FCA-approved platform for launch of Dot Dot Loans at significantly lower cost than through a bespoke IT build. The CEO confirms his Group has made a strong start to the current year in terms of both credit issued and customer numbers. Morses also has a significant pipeline of territory builds bringing high quality growth along with further attractive acquisition opportunities in the wider non-standard finance market. Such moves could potentially create a step improvement in the Group growth rate over the next two years, even if the bolting on of a significant batch of additional agents could impact short-term cost. Any squeeze in current year margins would, however, be more than compensated in the P&L just one further year out. Despite recent outperformance, the underlying quality of Group operations, together with the visibility they bring plus scenario for a period of accelerated operational expansion, are still not priced in. A pre-tax forecast of £19.5m for this year and £23.0m, placing the shares on earnings multiples of 10.9x and 9.1x, together with
Persimmon (LON:PSN, 2,340.00p) – Buy
Persimmon, the UK housebuilder yesterday provided a trading update for the first 4 months ended 27 April 2017. The Group confirmed that its operational performance continues to be "excellent", with weekly private sales rate per site is +12% higher than last year, resulting in a sales rate +4% ahead for the period. The Group forward sold 8,928 new homes into the private ownership market with an average selling price of c.£229,500, an increase of +4.1% against last year. This gives total forward sales revenue (including legal completions) to date of £2.56bn, up +11% against last year. Operationally, Persimmon have already opened 67 of the 90 new sites planned for the H1. The Group have also concluded a one year extension for its £300m Revolving Credit Facility to 31 March 2022. The Board said it remains confident of the future prospects of the Group. As previously announced on 27 February 2017, an additional payment of 25p per share, or £77m under the Capital Return Plan was paid to shareholders as a dividend on 31 March 2017. At the same time the Board confirmed that the scheduled return of 110p per share, or £338m, will be paid to shareholders on 3 July 2017 also as a dividend. These payments take total value of surplus capital returned to shareholders at that date to £1.45bn, or £4.85 per share. The total value of the Capital Return Plan is now c.£2.85bn, or £9.25 per share. Persimmon will provide its next Trading Update on 5 July 2017.
Our view: A reassuring trading update from Persimmon. The Group confirmed that its operational performance has been "excellent" to date with a strong forward sales figure of £2.56bn. The UK housebuilders continue enjoy a resilient UK economy, supported by strong customer demand, excellent mortgage availability and an improved planning environment together with government incentives (Help-to-Buy, etc.). Reassuringly, Lloyds' CEO, António Horta-Osório, also commented yesterday that he does not expect rise in interest will occur this year, which should help keep costs of mortgage borrowing down. Indeed, Persimmon's focus on building affordable family housing continue to attract new buyers, having seen 6% more visitors at its development sites during the period compared to last year. Certain concerns, such as annualised increase in 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. Persimmon had a strategic landbank of 70,792 plots at the end of FY2016, equivalent to 3.5 years of forward supply, while the Group said it continued to identify good opportunities to acquire new land sufficient to support future growth of the business. Assuming no significant Brexit/interest rate shock slows underlying demand in the meantime, Persimmon's strong 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 with the balance immediately chasing additional land reserves. Beaufort remain overweight in the housebuilding sector, which it considers to be enviably positioned right now, recommending investors seek to expose themselves both for capital growth and income. Persimmon, which presently trades on a 2017E earnings multiple of 10.8x with a 5.3% yield while being valued at 2.4x book together with Taylor Wimpey remain Beaufort's top picks. Buy.
Taylor Wimpey (LON:TW, 201.60p) – Buy
Holding its Annual General Meeting yesterday, the CEO of the national housebuilder, Pete Redfern, noted "We've had a good start to 2017, with positive customer demand and good mortgage availability supporting a strong sales rate. We remain well positioned to make further progress in 2017 which supports us in our strategy to deliver sustainable growth and returns through the cycle". He went on to state "We are optimistic that in 2017, assuming no major policy changes, the upcoming General Election will not disrupt this positive market sentiment". In the first four months of 2017, the housing market remained positive, with continued good accessibility to mortgages at competitive rates. In central London, the market remains stable. Total order book currently stands at 9,219 homes (2016 week 16: 8,811 homes), excluding legal completions to date. The total order book value has increased by 2% to approximately £2,210 million from the equivalent point last year (2016 week 16: approximately £2,168 million), and by 31% from the year end. As noted in its Full Year results statement, following concern expressed by some customers the Board carried out a review into historic lease structures. As a consequence, the Group will make a gross provision of c.£130 million that will be recorded as an exceptional item in the 2017 first half accounts and have an impact of c.3% of net assets, although the total cash outflow will be spread over a number of years.
Our view: Taylor Wimpey has been one of Beaufort's two top picks for the past six months in a sector which it retains as 'overweight', both for income and capital investors. Nothing from yesterday's upbeat statement and conference call has changed this. The UK housing market continues to be underpinned by good mortgage availability, government incentives and healthy employment prospects. Management continues to anticipate build-cost inflation of 3-4% in 2017, and expects to demonstrate further progress against all medium-term targets, including the announced £450 million total dividend payment to shareholders, during 2017. Conclusions reached in its leasehold review resulted in prudent accounting actions, which clearly are too small to have any effect on existing dividends or ongoing investment programmes. Positively, it is possible to see upside opportunity regarding current year sales rate and dividend expectations. Indeed, reflecting back on the needs identified in the UK Housing White Paper from earlier this year, it will be something of a surprise if the sector majors, like Taylor Wimpey, are not seen to respond through a modest acceleration of build-out between now and 2020. Given the extent of their permitted and strategic landbanks (Taylor Wimpey, for example, has a short-term landbank of some 76k plots at the end of the year, or 5.5 years of forward supply), they are capable of satisfying the government's wish to see annual completions rise to the 240k – 265k mark. Indeed, in April 2018 the Government is expected to be more explicit still, releasing strategic policy for the UK's annual housing needs, against which major housebuilders will be required to detail anticipated build-out rate along with directive requiring local authorities to provide greater visibility of their planning process. Should the housebuilders be seen to ignore this request, the treat of more punitive measures might have to be taken more seriously. None will wish to challenge Westminster on this, nor to lose market share to their peers. So, given that they have the land and working capital available, it is possible that it will have been enough to result in the sector increasing total annual completions by 20%+ within four years, assuming a strong push to take strategic land to 'shovel ready' in the coming 24 months or so. Assuming no Brexit/interest rate shock 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 chases additional land reserves. Altogether, this means the sector finds itself in an enviable position that investors should continue to expose themselves to, both for growth and income. The shares trade on a 2017 (P/NAV)/ROE multiple of 9.5x compared to a 9.2x average for the sector, which still underestimates its and the sectors underlying opportunity and forward visibility. Meanwhile, following yesterday's shareholder approval, Taylor Wimpey will be paying a final ordinary dividend of 2.29 pence per share on 19 May 2017 (2015 final dividend: 1.18 pence per share), giving a total ordinary dividend for the year of 2.82 pence (2015 total dividend: 1.67 pence per share). As previously announced, it will also be paying a special cash dividend of 9.20 pence per share on 14 July 2017 (July 2016: 9.20 pence per share), subject to shareholder approval. Beaufort keeps its Buy rating on Taylor Wimpey with a target price of 230p. Taylor Wimpey is one of Beaufort's Tips for 2017.
WPP (LON:WPP, 1,680.00p) – Buy
WPP, the world's largest advertising agency holding group, yesterday announced its results for the 3 months ended 31 March 2017 ('Q1 FY2017'). During the period, net sales increased by +18.5% to £3.10bn, comprised of like-for-like ('LFL') growth of +0.8%, acquisitions growth of +4% and +13.7% from currency, against the comparative period (Q1 FY2016). At constant currency basis, net sales grew +4.8%. Net debt has risen by £453m to £4.54bn due to significant net acquisition spend (plus debt acquired) and dividends of £1.32bn in the 12 months to 31 March 2017, more than offset the improvements in working capital. On the operational front, the Group increased net new business by +18.2% during the Q1 to US$2.10bn, taking WPP to first or second position in net new business league tables year-to-date. The Group has completed £180m of share buy-backs during the period, representing some 0.8% of the issued share capital.
Our view: WPP delivered Q1 performance broadly in line with expectations. Net sales of £3.10bn were higher than the consensus Analysts' estimate of £2.96bn, while LFL net sales growth of +0.8% was marginally lower than +1.0% estimated. The latter was dragged down by the much expected weaker North America (38.8% of net sale) contribution which declined by 1.1%, in an absence of 2 (AT&T and Volkswagen) of its top 10 accounts this year. On the other hand, the UK (12.8% of net sale) and Western Continental Europe (19.3% of net sale) demonstrated strong LFL net sale growth of +3.7% and +4.3%, respectively, while Rest of the World (29.1% of net sale) performed roughly flat at -0.1%. Divisionally, both Public Relations & Public Affairs (PR & PA) and Branding & Identity, Healthcare & Specialist Communications (BI, HC & SC) performed strongly, which were somewhat offset by weakness in the Advertising & Media Investment Management (AMIM) and Data Investment Management divisions. Looking ahead, the Group remain on track to meet its full year net sales LFL guidance of around +2%, weighted towards H2, along with a +0.3% improvement in headline net sales margin, which, along with resumption of net new business momentum of US$2.10bn in the Q1 should provide some reassurance. Based on FY2017E and FY2018E EPS estimates of 127p and 137p, along with dividend per share of 62.5p and 67.5p, respectively, WPP is now trading on a current year P/E multiple of 13.4x with a yield of 3.7%. We see recent share price weakness as good opportunity to build positions. Beaufort reiterates its Buys rating on the Share with a price target 2075p. WPP is one of Beaufort's Tips for 2017.