Ryanair expects lower fares but reports record profits

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Today’s edition features:

  • Savannah Resources (SAV.L)
  • Pets at Home (PETS.L)

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Global politics centre stage

"After his high-profile tour to Saudi Arabia, Israel and Europe comes to an end, the dust should begin to settle on the various deals and threats that emerged. On return to Washington, President Trump must face the implications of an FBI enquiry into his son-in-law, Jared Kushner, concerning alleged dealings with Russia.

As the General Election campaign sputters back into life, the Conservatives are key to return to their core message around competence in running the country while the Labour Party has returned with a focus on National Security. The latest YouGov poll has marginally re-extended the Tory lead to 7% or higher from last week’s shock 5%.

A result of the deterioration of Mrs May’s position implied by the previous poll trend was for Sterling to drop to below $1.28 but, typically, this prompted a knee-jerk rally in the FTSE-100 Index to a new high. Conversely, any perceived improvement in Theresa May’s standing may strengthen Sterling and weaken the FTSE-100 Index. In yesterday’s Paxman’s interviews with Theresa May and Jeremy Corbyn, both sides appeared to have a mauling from the Grand Inquisitor.

Weekend press comment about Petrofac (PFC.L) suggests that the group may face a fine, if convicted of bribery, of $800 million which is half the fall in market valuation since the allegations surfaced. The source of much of Petrofac’s difficulties appear to stem from its dealings with Middle East and North Africa energy sector consultancy Unaoil. Based in Monaco, Unaoil is alleged to be under investigation by the UK’s Serious Fraud Office and the US Department of Justice may be hovering. The web of official interest may carry implications for the deal between Wood Group (WG..L) and Amec Foster Wheeler (AMFW.L) and Rolls Royce (RR..L) is noted as a group that has used Unaoil services in the past though it is not clear that this, in itself, implies any wrongdoing."
– Mike Franklin, Chief Investment Strategist



Markets

Europe
The FTSE-100 finished last Friday’s session 0.04% higher at 7,547.63 whilst the FTSE AIM All-Share index was up 0.23% at 991.38. In continental Europe, the CAC-40 finished down 0.08% at 5,337.47 whilst the DAX was 0.21% higher at 12,628.95.

Wall Street
In New York last night, the Dow Jones traded down 0.01% to 21,080.28, while the S&P-500 was up 0.03% to 2,415.82 and the Nasdaq gained 0.08% to stand at 6,210.19.

Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.18% to 19,647.47, while the Hang Seng firmed 0.24% to 25,701.63.

Oil
In early trade today, WTI crude was up 0.16% to $49.88/bbl and Brent was down 0.19% to $52.19/bbl.


Headlines

Ryanair expects lower fares but reports record profits
Ryanair (RYA.L) expects its fares will fall further this year, although the drop will be less steep than in 2016. The airline said fares would fall by between 5% and 7% in the year to the end of March 2018, down from a fall of 13% in the past financial year. Europe’s largest carrier by passenger numbers also reported a record annual net profit of 1.316bn euros, up 6%. But the carrier warned that Brexit and the risk of terror attacks in Europe remained a threat to its business.

Source: BBC News



Company news

Savannah Resources (SAV.L, 6.25p) – Speculative Buy
Savannah today announced results from a scoping study on the Mutamba Mineral Sands project in Mozambique, which is being developed by Savannah and Rio Tinto through the Consortium Agreement signed on 11 October 2016. By completing the scoping study, Savannah now holds a 20% interest in the project and has the right, subject to key milestones being met, to earn up to a 51%. The salient features of the study include first production targeted for 2020 of 15Mtpa for 456ktpa and 118ktpa ilmenite and non-magnetic concentrate (rutile and zircon), respectively for 30 years. Assuming a base case price of US$185/t for ilmenite and US$250/t for non-magnetic concentrate, the pre-tax NPV (10% discount rate) is US$154m with an IRR of 19% using a capex estimate of US$152m plus US$74m in contingency. The pre-tax NPV increases to US$245m (23% IRR) and US$335m (27% IRR) assuming a 10% and 20% increase in the product price respectively. Considerable upside potential remains through refining costs and further resource drilling. Total resource for the Mutamba project stands at 4.4Bt grading 3.9% THM (total heavy minerals).

Our view: We are encouraged with the above results from the scoping study. Whilst these types of studies are based on general technical and economic assessments, we note that the above results point to a long life and robust project economics that can further be optimised through refined studies. The TiO2 pigment industry continues to gain strength on the back of strong demand for feedstock which should help support current prices moving forward. On aggregate, the Mutamba resource compares favourably with other major African based mineral sand deposits. We look forward to further updates on the project including the initiation of a Pre-Feasibility Study, in the meantime we maintain a Speculative Buy rating on the stock.

Beaufort Securities acts as a corporate broker to Savannah Resources plc

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Pets at Home (PETS.L, 162.80p) – Buy
Pets at Home Group, the UK’s leading specialist retailer of pet food, pet accessories, veterinary and grooming services, on Thursday announced its preliminary results for the 52 weeks ended 30 March 2017 (‘FY2017’). During the period, Group revenue advanced by +7.2% to £834.2m, comprised of +2.9% increase in Merchandise revenue to £716.7m and +44.5% growth in Services revenue to £117.5m, against comparative period (FY2016). Like-for-like (‘LFL’) revenue growth for the Group was +1.5% during the period, comprised of +0.8% and +7.9% growth in Merchandise and Services, respectively. Gross margin declined by -0.35% to 54.2%, leading to statutory pre-tax profit of £95.4m, up +5.8% with basic earnings per share of 15.1p (FY2016: 14.6p). Excluding exceptional items, EBITDA increased by +4.7% to £130.5m while pre-tax profit rose +1.1% to £96.4m, leading to earnings per share of 15.3p, up +1.3%. Free cashflow stood at £64.6m (FY2016: £77.8m) and net debt was £153.7m (FY2016: £162.0m) at the period end, implying net debt to EBITDA (before exceptional) at 1.2x (FY2016: 1.3x). On the operational front, the Group opened 15 new superstores, 50 vet practices and 50 grooming salons during the period. VIP club active members increased to 3.7 million (FY2016: 3.4 million), while VIP card swipe rate (as % of revenue) stood at 68% (FY2016: 64%). Pets at Home’s CEO, Ian Kellett commented “In an evolving consumer environment, we are taking steps to reposition prices on own label Advanced Nutrition and pet essentials and have made some initial changes to branded food lines. Encouraged by the reaction of our customers and having seen an improvement in Merchandise LFL to 1.0% in the 16 weeks since launch, we will move swiftly to deliver even better value. We are confident this is the right path for success and will give us a strong platform for sustainable future growth”. The Group declared a final dividend of 5.0p per share, bringing full year dividend to 7.5p, flat year-on-year, to be paid on 14 July 2017.

Our view: Pets at Home reported good growth during in the FY2017, in line with the consensus Analysts’ estimates. This was supported by a growth in all divisions, particularly strong in Services, with LFL growth of +7.9%. Within Merchandise (includes Food and Accessories, 85.9% of revenue), Advanced Nutrition was strong while Grocery food and wild bird food performed short. Accessories sold well and Health & Hygiene improved but was offset by aquatics accessories. In Services (14.1% of revenue), vet practices and grooming salons continue to perform strongly. Its joint venture veterinary also generated total income of £47.1m, up +24.6% against last year. The Group’s ongoing investment in omnichannel is bearing fruit as it saw online revenue growth of +53%. Looking ahead, in FY2018, the Group warned that gross margin to decline by 1% to 2% due to price investment and adverse foreign exchange rate movement. Operational cost will rise by 4.5% to 5.5% as next increase in National Living Wage and Apprenticeship Levy kicks in, while ongoing store rollout (c.10 superstore, c.4-50 vet practise, c.40-50 grooming salons) is expected. The pet market has grown from +4% CAGR (2012-2014) to +4.5% CAGR (2014-2016) which is forecasted to grow at +4.5% over the next 5 years. Given Pets at Home’s ongoing store rollout, we believe the Group is capable to expand its overall market share of c.20% further, attracting potential customer to its integrated ‘one stop shop’ stores. Its JV vet practices is also set to generate higher income as its centres mature (10+ years) with a potential to generate over £80m. The Shares are valued at FY2018E and FY2019E P/E multiple of 11.1x and 10.6x, along with dividend yield of 5.0% and 5.3%, respectively. Although gross margin decline is expected to squeeze the profit in FY2018, we expect investment in price to support better topline and LFL growth. The Group has strong balance sheet with leverage within the policy of up to 1.5x net debt to EBITDA (1.75x for appropriate acquisitions), while reiterated its dividend of at least 7.5p (policy is c.50% of earnings) in the FY2018. In view of its progress with management’s confidence over sustainable future growth, Beaufort retains its Buy rating on the Shares.

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To read Beaufort’s full research archive click here

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


Weekly diary


Click here to see all next week’s planned corporate and economic announcements.


Recommendations
During the three months to end-April 2017, the number of stocks on which Beaufort Securities published recommendations was 216, and the recommendations were as follows: Buy – 73; Speculative Buy – 118; Hold – 22; Sell – 3.

Full definitions of the recommendations used by Beaufort Securities in its publications and their respective meanings can be found on our website here.

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