Carney: Brexit risks now lower

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Today’s edition features:

  • Karelian Diamond Resources (KDR.L)
  • Tertiary Minerals (TYM.L)
  • ValiRx (VAL.L)
  • Evgen Pharma (EVG.L)
  • Joules Group (JOUL.L)
  • Morses Club (MCL.L)
  • Taylor Wimpey (TW..L)

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"Those hoping the President-elect’s first news conference would convey a more considered and expansive approach to his forthcoming period in office were left disappointed. The media, on the other hand, had a field day with his dismissal of claims that Russia holds compromising intelligence on him, clashes with reporters, comparing intelligence agencies to Nazis and admitting Mexico may not pay for the wall after all, while opening his new administration up to charges of nepotism and conflict of interest. The absence of any new detail regarding his planned fiscal stimulus knocked the US$ back, while his repeated determination to reform the bidding process to ensure drugs are bought on a more economical basis, possibly including new import tariffs while offering no guarantees on Obamacare, saw health-care stocks become the day’s principal casualty. The Dow Jones swung 140 points high to low during the session, dipping into negative territory while Trump was speaking, before all three principal US indices closed with modest gains. This morning’s Asian trading ended largely in the negative, with the Nikkei hurting the most due to the Yen’s re-strengthening, while Chinese equities were weaker in the absence of any relaxation Trump’s apparently hard line on trade with the US. With T-bills climbing somewhat on Wednesday following a successful US$20bn 10-year note auction, attention will likely revert to the Fed Chair, Janet Yellen, and any view she might details regarding building inflationary pressures, in a speech she is due to make this afternoon. Today the UK will see release of the Halifax House Price Index Regional Breakdown, while the EU is due to publish November Industrial Production figures and the US details Initial Jobless Claims. With the results season now underway, the UK will also see a number of corporates publishing earnings or trading updates, including Associated British Foods (ABF.L), AO World (AO..L), ASOS (ASC.L), Barrett Developments (BDEV.L), Debenhams (DEB.L), Dunelm (DNLM.L), JD Sports (JD..L), M&S (MKS.L), Moss Bross (MOSB.L), Mothercare (MTC.L) and Tesco (TSCO.L). Without significant lead from the overnight markets, London is expected to open just modestly weaker with the FTSE-100 seen down some 10 points in opening trade this morning, having hit a fresh all-time high yesterday and setting a record for the longest uninterrupted 12-day rise in its history. Traders will also be listening for additional detail regarding Shire’s (SHP.L) reported US$350m settlement in this US against allegations it used kickbacks to promote a skin substitute product."
– Barry Gibb, Research Analyst


The FTSE-100 finished yesterday’s session 0.21% higher at 7,290.49, whilst the FTSE AIM All-Share index closed 0.06% better-off at 870.24. In continental Europe, the CAC-40 finished 0.01% higher at 4,888.71 whilst the DAX was up 0.54% at 11,646.17.

Wall Street
In New York last night, the Dow Jones rose 0.5% to 19,954.28, the S&P-500 gained 0.28% to 2,275.32 and the Nasdaq rose 0.21% to 5,563.65.

In Asian markets this morning, the Nikkei 225 had fallen 1.05% to 19,161.62, while the Hang Seng lost 0.64% to 22,788.85.

In early trade today, WTI crude was down 0.15% to $52.17/bbl and Brent was down 0.02% to $55.09/bbl.


Carney: Brexit risks now lower
The immediate risk posed by Brexit to the UK economy has declined, the governor of the Bank of England has told MPs. Mark Carney said that action by the Bank before and after the vote to leave the European Union had reduced the danger to the country’s financial stability. He added, however, that the overall level of risk was still “elevated”. The risk was greater for continental Europe than for the UK, he said. The governor also told members of the Treasury Select Committee that a period of transition was “highly advisable”. “If there is not such a transition put in place, in our view it will have consequences. We will work to mitigate those consequences as much as possible,” he said. Mr Carney said that the UK should concentrate on stable access to financial markets after Brexit. The financial services industry could suffer “outsize” consequences from losing only some of its access.

Source: BBC News

Company news

Karelian Diamond Resources (KDR.L, 0.58p) – Speculative Buy
Karelian Diamond Resources announced today that further analysis on the recently discovered kimberlite boulder, located 2.5km SW from the Company’s diamondiferous Lahtojoki kimberlite pipe, is derived from a yet undiscovered kimberlite. Thin section and electron microscopy work providing detailed analysis on the textural and elemental characteristics, indicate that the sample is an altered hypabyssal kimberlite rather than a tuffisitic breccia kimberlite attributed to Lahtojoki. In addition, known ice flow direction suggests that the boulder did not originate from the Lahtojoki kimberlite pipe.

Our view: The potential for additional kimberlite bodies in the vicinity of Lahtojoki is encouraging news for Karelian. Whilst much more work is required to determine the nature and origin of the kimberlite boulders, initial detailed petrographic and microscopy results are positive. The above announcement raises the possibility of another diamond bearing kimberlite body close to the Company’s existing Lahtojoki kimberlite. We look forward to further updates on the project, in the meantime, we reiterate a Speculative Buy on the stock.

Beaufort Securities acts as corporate broker to Karelian Diamond Resources plc


Tertiary Minerals (TYM.L, 1.05p) – Speculative Buy
Tertiary Minerals has published an update titled “acquisition opportunities”. It notes frustration that development of its fluorspar projects has taken longer than expected. This mainly applies to Storuman which has been in the portfolio for longest. The statement notes poor continued market conditions for junior miners and fluorspar, and a change in mining case law in Sweden which appears to have delayed the permitting process. The good news is that management is looking to acquire a revenue generating fluorspar asset to complement its development projects. CEO Richard Clemmey comments: “We are pleased to have started the evaluation process on a number of acquisition opportunities with the potential to transform the Company into being one with sustainable revenues in the near term and which will complement our fluorspar assets currently in development.”

Our view: That Tertiary is evaluating revenue generating fluorspar projects is an exciting development. We look forward to learning more about the target operation or operations. Note that Richard Clemmey is an experienced industrial minerals mine operator so we are more than comfortable with Tertiary moving into production.

Beaufort Securities acts as corporate broker to Tertiary Minerals plc


ValiRx (VAL.L, 5.25p) – Speculative Buy
The clinical stage biotechnology company yesterday announced positive results in its VAL201 personalised Phase l/II prostate cancer study. With accumulation of safety and tolerability data there is also evidence of disease stabilisation on CT imaging and reduction in PSA progression in the majority of patients. The Group has extended the study to more clinical sites involving more patients in order to build on these initial positive findings.

Our view: VAL201 has demonstrated disease stabilisation, with a lower dose than was predicted by the Group’s preclinical evaluations. It is also different from other current therapies for advanced prostate cancer, which often include androgen deprivation. VAL201 is intended to target a specific pathway from the androgen receptor, treating the cancer without suppressing sexual and other functions and without many other debilitating side effects many therapies have. Building on these positive results, ValiRx is adding additional clinical sites to participate in the dose-escalating, therapeutically relevant phase of the trial to arrive at the maximum tolerated dose. This can be taken forward by the Group or a partner into subsequent, larger, outcomes-oriented clinical trials to establish its effect on overall survival and health-related quality of life in patients with prostate cancer. It is realistic to consider that an increased dosage will show a high level of efficacy without compromising the safety and tolerability shown to date to meet the needs of those patients currently under-served by existing therapies. ValiRx is entering a very exciting phase, which could result in the crystallisation of substantial value. In anticipation of continuing progress with the Group’s clinical trials for both VAL201 and VAL401, Beaufort retains its Speculative Buy recommendation on ValiRx.

Beaufort Securities acts as corporate broker to ValiRx plc


Evgen Pharma (EVG.L, 24.50p) – Speculative Buy
Evgen Pharma (‘Evgen’), a clinical stage drug development company focused on cancer and neurological conditions, yesterday announced that it has received a positive interim safety review from the independent Data Safety Monitoring Board (‘DSMB’) for the Group’s Phase II SAS trial of SFX-01 for subarachnoid haemorrhage (‘SAH’) indication. The DSMB review was part of the SAS trial protocol and was triggered by the 20th patient being dosed (post haemorrhage) for a minimum of 7 days whilst in hospital care. The review resulted in a recommendation to proceed as planned, allowing continuation of dosing after discharge from hospital and up to 28 days. The SAS trial is a randomised, double-blind, placebo controlled study in which a total of 90 patients will be enrolled; 45 patients will receive SFX-01 and nimodipine and 45 patients will receive placebo and nimodipine. 26 patients have now been enrolled in the study to date. Aneurysmal SAH is a rare brain haemorrhage which accounts for one in every 20 strokes in the UK and c.600,000 worldwide each year, with current standard of care, nimodipine, has a different action and been generic for over 20 years during which time there have been no significant clinical advances in the treatment of SAH. The primary endpoints of the trial include safety, pharmacokinetics (cerebral spinal fluid) and efficacy which will be announced during the H1 2018.

Our view: Evgen has passed an important milestone for the clinical development of its SFX-01 in SAH by receiving a positive first interim safety review. This allows it to continue dosing after patients have been discharge from hospital for up to 28 days. Evgen’s lead product, SFX-01, is a synthetic and stabilised version of the naturally occurring plant compound sulforaphane, a known anti-cancer agent and neuro-protective. The orphan drug designation received in August 2016 for the treatment of SAH gives SFX-01 the potential for US market exclusivity for 7 years from the date of marketing approval. Within its interim results announced on 5 December 2016, the Group confirmed that the SAS trial was recruiting patients as planned, while the STEM trial had opened its first site in Europe for recruitment, with both expected to report in the H1 2018. Considering £5.5m cash held at 30 September 2016, given estimated monthly burn of around £330k during 2017, there should be sufficient funding to complete its current clinical trials and lay the foundations for the follow-on Phase III trials, as may be necessary. Orphan status for SAH, however, offers a prospective route to commercialisation in a market that is prospectively valued at US$1.7bn, just 12 or so months following release of Phase II data, while STEM could be developed further as foundation drug to be used in combination therapy for an indication valued at a multiple of this. Both have high unmet need while also offering strategic entry portals to further therapeutic opportunities in oncology and neurology. For a company presently valued at just £17.9m, investors appear not to have fully recognised the value Evgen might deliver over the coming 18 months or so. Beaufort reiterates its Speculative Buy rating on the shares.


Joules Group (JOUL.L, 224.50p) – Buy
Joules Group plc, a British premium lifestyle brand, yesterday provided its trading update for the 7 weeks ended 8 January 2017. Joules reported total Retail revenue up by +22.8%, while retail gross margin rate is expected to be marginally ahead, against the comparable period (7 weeks ended 8 January 2016), driven by continued strong growth across both the Store and e-Commerce channels. Joules’ CEO, Colin Porter commented “This strong outcome over the important Christmas trading period reflects the growing awareness and strength of the Joules brand”. Joules will announce its Interim results for the 26 weeks ended 27 November 2016 on 31 January 2017.

Our view: The trading statement reassured investors that Joules’ growth momentum during the key Christmas period remained strong. Good performance in both Stores and e-Commerce led retail revenue growth. The Group worked throughout the year to increase Store openings (107 Stores as at 27 November 2016) and selling space, while re-launching its mobile-optimised website and ongoing customer acquisition activities. The Group had a customer database of approximately 2.3 million as at 27 November 2016 and 824,000 active at the end FY2016. Having delivered H1 FY2017 revenue of £81.4m, up +16.2%, comprising +15.8% increase in Retail revenue to £56.7m and +17.2% growth in Wholesale revenue to £24.5m against H1 FY2016, yesterday’s +22.8% growth in total retail sales showed yet further acceleration. Improvement in the retail gross margin rate is also supporting the boost to overall profitability. We believe Joules remains capable of continuing to increase its brand footprint, expand its customer base and product categories to deliver a strong performance. Beaufort reiterates its Buy rating on the Shares and look forward to news of further progress with its interim results.


Morses Club (MCL.L, 126.00p) – Buy
The UK’s second largest home collected credit lender, yesterday announced the acquisition of Shelby Finance Ltd., a provider of online instalment loans. Shelby Finance is fully authorised by the FCA to provide online instalment loans and will operate as a subsidiary of Morses Club PLC. No acquisition price or terms were disclosed.

Our view: This is another example of the progress Morses Club continues to make with its strategic plan of using technology to offer customers a broader range of products, supplementing its core home collected credit offering and ensuring customers can access credit with the flexibility they require. The acquisition of Shelby Finance is an important strategic development will accelerate the launch of a new, branded online instalment loan product. The Group has seen an increasing number of visitors to its website who are looking for alternatives to its core HCC offering. The introduction of an online instalment loan product is the next step in the Group’s strategy of developing digital products to complement its HCC offering and target a wider range of customers across the UK non-standard credit market. Outside the HCC sector, there are c.9 million additional customers who access the wider non-standard credit market. Anticipating the new branded online instalment loan product will be launched in the first half of this trading year, the introduction will enable access to credit in increasingly flexible ways along with all the benefits of Morses Club’s customer service ethos. Shelby represents an excellent fit with Morses Club and shareholders should be confident that management will have acquired the assets on the basis of earnings enhancement during the current year. The shares have performed well since last May’s IPO, but given the quality of management and visibility offered, a 2016/17 P/E multiple of just 12.0x along with almost a 5.0% yield (compared with Provident Financial’s 2016E of 17.5x and 4.3%) with a P/BV of 2.8x suggests it still remains something of a bargain. Beaufort upgrades its price target for Morses Club from 135p to 155p/share while retaining a Buy rating.


Taylor Wimpey (TW..L, 170.60p) – Buy
Taylor Wimpey yesterday issued an update on trading ahead of its full year results for the year ended 31 December 2016, which will be announced on 28 February 2017. Management confirmed that against the backdrop of a stable housing market in 2016, the Group continued to see good demand and solid trading into the second half of the year, despite wider macroeconomic uncertainty. Customers continue to benefit from a wide range of mortgage products and low interest rates with customer confidence remaining robust. Taylor Wimpey continued to make good progress towards each of its enhanced medium-term targets during 2016. In 2016 total home completions increased by 4% to 13,881, including its share of joint venture completions (2015: 13,341). During 2016, the Group delivered 2,663 affordable homes (2015: 2,509), equating to 19% of total completions (2015: 19%). Its net private reservation rate for 2016 was 0.72 homes per outlet per week (2015: 0.73), while cancellation rates remained low at 13% (2015: 12%). The impact of better quality locations continued to have a positive affect with average selling prices on private completions increasing by 13% to £286k (2015: £254k). Overall average selling prices increased by 11% to £255k (2015: £230k). Taylor Wimpey ended 2016 with a year-end order book valued at £1,682 million as at 31 December 2016 (31 December 2015: £1,779 million), excluding joint ventures, with a small fall in the average selling price largely due to a number of high value Central London completions in December 2016. This order book represents 7,567 homes (31 December 2015: 7,484 homes), while entering 2017 with 285 outlets (31 December 2015: 297). Its short-term land market continued to be positive throughout 2016 and, as planned, operated at broadly replacement levels.

Our view: All good news. 2016 was the first year of operating towards enhanced medium-term targets. The Group expects to report an improved operating profit margin for the year of c.20.8% (2015: 20.3%) and a return on net operating assets of over 30% (2015: 27.1%). It also ended the year in a strong position, holding net cash of c.£365 million (31 December 2015: £223.3 million net cash), due to the strength in underlying trading and after the payment of £355.9 million of dividends to shareholders in 2016 (2015: £308.4 million). Importantly, management remains confident in its ability to pay significant dividends through the cycle, and are focused on its medium-term target which pays a total of £1.3 billion in cash to shareholders over the period 2016-2018. Taylor Wimpey starts the New Year in an excellent financial and operational position with significant embedded value in short term landbank and strategic pipeline. It can be expected to demonstrate further progress throughout 2017 against all of medium term targets, delivering increased returns for shareholders and focusing on areas of the operational business where value can be added, including driving further improvements in customer service processes and product quality. Trading on a 2016E price/NAV of 1.85x (against 1.96x for the sector) while offering an after-tax ROE of 20.2%, suggests the shares are already discounting an imminent downturn in this highly cyclical sector. Right now, however, this remains some way off with forward bookings for most of the current years planned build already in place. While the UK housebuilding sector will be seen to deliver a just modest rise in 2016 total new builds (albeit on higher average prices), followed by a higher figure in the current year, the industry awaits release of Sajud Javid’s UK Housing White Paper which may even propose something of a planning revolution that could potentially force local authorities to reduce pre-commitment conditions while also providing advanced notices of new zoning. In a ‘best case’ scenario, this could even open the industry to a prospective ‘mouth-watering’ opportunity designed to spike annual new builds by 20% or so for a limited period of, say, one parliament, from 2020. Any such suggestion would, of course, be very hard fought by ‘Middle England’, but some form of increased activity for the major housebuilders almost inevitably looks to be forced through. Beaufort remains overweight of the UK housebuilding sector of which Taylor Wimpey is its key pick for 2017.


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

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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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