Fuel prices hit 18-month high, after Opec production cuts

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Today’s edition features:

  • Carillion (CLLN.L)
  • Next (NXT.L)
  • Ryanair Holdings (RYA.L)

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"US equities closed higher once again yesterday evening, with broad gains led primarily by consumer stocks, despite release of the FOMC minutes from the December meeting which detailed blatantly frank discussions regarding the potential economic impact of Trump’s campaign pledges. While many market pundits still remain sceptical that the President-elect will actually make good on his ‘miracle growth rhetoric’, Fed officials felt obliged to contend with the real impact delivery of his proposed near-term hike in infrastructure spending and protectionist measures together with major personal and corporate tax cuts might potentially have. An overheating economy could most certainly generate a severe inflationary shock, but right now ‘considerable uncertainty’ regarding timing leaves them with the all but impossible task of communicating the likely future for Fed rates. This uncomfortable scenario overnight appeared only to have been noticed by a weakening US$. And while this a dose of realism may well hinder European market openings today, Asian equities continued to make good ground in early morning trading, with only the Nikkei choosing to give back some of the large gain it chalked up on Wednesday. Chinese equities by comparison basked in the reflection of strong Caixin China services PMI figures for December, confirming its economy had accelerated further in the fourth quarter, although evidence of rising input costs and product pricing also appear to provide evidence of early inflationary pressures already being felt in the west. Equities in London are seen making a softish start this morning, with the FTSE-100 down perhaps 5 or so points in early trade, as economists try to interpret the minutes along with the deepening Brexit fog created by Tuesday’s resignation of the UK’s Ambassador and chief negotiator to the European Union. Although Ivan Rogers has rapidly been replaced by career diplomat Tim Barrow, such news injects concern that the Government is perhaps less prepared for the forthcoming momentous events than investors might otherwise have wished. Macro data from the UK today includes December Markit Services PMI, while the EU delivers its Producer Price Index for November, followed this afternoon by December Composite PMI numbers from the US. UK corporates providing earnings or trading updates include Costain Group (COST.L), IG Design Group (IGR.L), Persimmon (PSN.L) and PureCircle (PURE.L)."
– Barry Gibb, Research Analyst



Markets

Europe
The FTSE-100 finished yesterday’s session 0.16% higher at 7,189.74, whilst the FTSE AIM All-Share index closed 0.19% better-off at 851.53. In continental Europe, the CAC-40 finished unchanged at 4,899.40 whilst the DAX finished the session at 11,584.31.

Wall Street
In New York overnight, the Dow Jones rose 0.3% to 19,942.16, the S&P-500 gained 0.57% to stand at 2,270.75 and the Nasdaq added 0.88% to finish on 5,477.00.

Asia
In Asian markets this morning, the Nikkei 225 had risen 1.23% to 18,996.370, while the Hang Seng gained 1.47% to 22,460.10.

Oil
In early trade today, WTI crude was down 0.15% to $53.18/bbl and Brent was down 0.23% to $56.33/bbl.


Headlines

Fuel prices hit 18-month high, after Opec production cuts
The price of petrol and diesel in the UK has risen to its highest since July 2015, following a three-pence-a-litre increase in December alone. The average cost of unleaded petrol hit 117.23p at the end of the month, with diesel reaching 119.63p, the RAC said. The wholesale price of both fuels has risen significantly, following the production cuts announced by Opec. Brent crude jumped by 10% on 30 November, the day the cartel announced a cut of 1.2 million barrels a day. As a result, the oil price is now double what it was a year ago, rising from a low of $27.88 in January 2016 to more than $55 this month. The fall in the value of sterling since the Brexit vote has also increased UK fuel prices, as oil is priced in dollars.

Source: BBC News


Company news

Carillion (CLLN.L, 235.20p) – Buy
Carillion, a leading integrated support services company, yesterday announced that its Joint Venture, Al Futtaim Carillion (‘AFC’) has been awarded a c.£160m contract for Phase 1A6 of ONE CENTRAL Development from the Dubai World Trade Centre. ONE CENTRAL is a major integrated real estate development located between the current Dubai International Convention and Exhibition Centre and Emirates Towers in the heart of the city’s Central Business District. This phase of the ONE CENTRAL development comprises two Grade A quality office buildings, which has achieved LEED® Gold precertification from the US Green Building Council – the industry benchmark for green building performance covering design, construction, operations and maintenance. The Group said the technology solutions and infrastructure being planned are in line with the Dubai Government’s Smart City strategic agenda. Carillion’s CEO, Richard Howson, commented “We are delighted to have been selected for Phase 1A6, the third phase of the ONE CENTRAL development, where we continue to see good opportunities coming to market for which our capabilities and reputation for delivering to high standards of quality, safety and reliability are important to customers. We look forward to continuing our close relationship with Dubai World Trade Centre to deliver this important development”. The contract will commence this month, and is scheduled for full completion by the end-2018.

Our view: Carillion’s JV continue to add significant new contracts. This new ONE CENTRAL Development contract demonstrates its capabilities and reputation with key customers. The contract for Phase 1A6 awarded yesterday follows Phase 1A5 awarded in October 2015 that the Group continues to working on, and Phase 1A2 which has been completed now that is in the process of being leased. The three contracts awarded bring the total value of AFC’s contracts for ONE CENTRAL development to £400m. Last month, Carillion also announced its full year trading update for the FY2016, confirming the Group had continued to perform in line with expectations, supported by strong revenue growth and operating margin in its Support Services division that pushed the overall underlying operating profit higher. For FY2017, the Group will focus on part of Middle East markets where the demand remains high, as overall trading environment in Middle East construction services remains challenging. For PPP, the Group said it sees a steady flow of pipeline opportunities in the health and transport sectors both in the UK and Canada. The Group also welcomed the UK Government’s Autumn Statement in which it increased its commitment to investing in economic infrastructure, particularly in sectors such as highways, digital infrastructure and railways, where Carillion is a market leader. This is a significant news, given that the Group typically generates over 70% of its revenue in the UK. Considering its strong order book, framework contracts and pipeline of contract opportunities reported at the full year trading update, Beaufort reiterates its Buy rating on the shares.

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Next (NXT.L, 4,085.00p) – Hold
Next reported weak Q4-FY17 (to 24 December 2016) trading figures yesterday, along with an especially grim outlook statement. Next expects FY-18 (to Jan) profit before tax (PBT) to be between –2% and –14% lower than the current year. This is likely to originate from a squeeze in real personal incomes in the UK and also due to devaluation- driven, garment price rises. The four, 45p quarterly Special Dividends do add some comfort to shareholders however, such that the total dividend yield is now over 8% prospectively.

– Q4-FY17 trading disappointing Y/Y. Next Brand’s ‘full price’ sales over the 54 day trading period to 24 December saw a sequentially improved growth rate (-0.4% v – 3.5%), but the year-on-year (Y/Y) growth rate was disappointing, especially given the weak comparatives ‘comps’ last year. This was mainly driven by the Retail division, with Y/Y sales numbers down by –3.5%. Next’s Online division (Next Directory) showed growth of 5.1%.

– FY-17 earnings in the bag, but FY-18 will be sharply lower. Next has confirmed its full year to end Jan-17 earnings guidance, with the figure likely to be about flat Y/Y. The outlook for FY-18 is much more negative however, with PBT likely to be between –2% and –14% lower than FY-17, which is a sharp decline and may not end there.

Our view: Next has announced four quarterly special dividends of 45p each, to start in May-17. This augments the total dividend pay-out, such that the stock is now yielding over 8% prospectively. After yesterday’s sharp share price correction, it is now trading on around 10.2x FY-18 earnings and 7.6x FY-18 EV/ EBITDA, undemanding multiples, but with the macro environment set to deteriorate and with “exceptional levels of uncertainty in the clothing sector” we see little to drive the share price significantly higher. We downgraded our recommendation to Hold from Buy, with a price target of 4,300, believing that the stock price is still vulnerable to further sell-offs but the dividend yield will remains supportive.

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Ryanair Holdings (RYA.L, EUR14.67) – Buy
Ryanair, a low-cost European short-haul airline company, yesterday provided traffic update for December 2016. During the month, passenger traffic increased by +20% y-o-y to 9.0 million customers, while the load factor improved +3% y-o-y to 94%. The rolling annual traffic to December rose +15% to 117.0 million customers.

Our view: Ryanair reported strong passenger traffic and load factor data for December, driven by lower fares and the continuing success of its ‘Always Getting Better’ customer experience programme. The strong statistic follows last month’s +15% increase in passenger traffic and +2% improvement in load factor. Within its H1 result announced on 2 November 2016, Ryanair reported a strong profit after tax which saw +7% jump, helped by reduced cost, improved margin and an increased number of customers travelling along with an improved load factor. This was despite the Group having lowered average fares by -10%, as it also delivered reduced unit costs by -10%, of which, -5% was excluding fuel as it took delivery of new lower cost aircraft, cheaper financing and higher volume incentives from airports. Looking ahead, the Group noted back in its interim results, that it remained comfortable with its full year net profit guidance of €1.30bn-€1.35bn, while the Board also approved a further share buyback of up to €550m from November 2016 to February 2017. Ryanair said it expect passenger traffic of just over 119 million customers for FY2017 (FY2016: 106 million customers) and raised its long-term traffic forecast from 180 million to over 200 million customers per year by March 2024. We believe Ryanair has continuing good momentum and remains well-positioned for growth. Beaufort therefore retains its Buy rating on Ryanair.

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To read Beaufort’s full research archive click here

Compiled by:
Barry Gibb, Kazunaga Senga, Sheldon Modeland & Charles Long
(t) +44 (0) 207 382 8384
(e) info@beaufortsecurities.com


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Recommendations
During the three months to end-December 2016, the number of stocks on which Beaufort Securities published recommendations was 228, and the recommendations were as follows: Buy – 83; Speculative Buy – 116; Hold – 27; Sell – 2.

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