Royal Mail leaves the FTSE-100 in quarterly shake-up

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Today’s edition features:

  • Amryt Pharma (AMYT.L)
  • Bezant Resources (BZT.L)
  • HSS Hire (HSS.L)
  • Watkin Jones (WJG.L)

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The FTSE-100 finished yesterday’s session 0.38% higher at 7,365.26 whilst the FTSE AIM All-Share index was up 0.36% at 1,006.42. In continental Europe, the CAC-40 finished 0.49% higher at 5,056.34 whilst the DAX was up 0.47% at 12,002.47.

Wall Street
In New York last night, the Dow Jones ended the trading day 0.12% higher at 21,892.43, the S&P-500 added 0.46% to finish on 2,457.59 and the Nasdaq gained 1.05% to end the session at 6,368.31.

In Asian markets this morning, the Nikkei 225 was up 0.81% at 19,664.12, while the Hang Seng was 0.67% lower at 27,906.23.

In early trade today, WTI crude oil was 0.11% weaker at $45.91 per barrel and Brent was down by 0.08% at $50.82 per barrel.


Royal Mail leaves the FTSE 100 in quarterly shake-up
The FTSE-100 closed higher on Wednesday, but Royal Mail (RMG.L) is set to leave the ranks of the blue chip index. The blue chip index finished up 27.83 points at 7,365.26. In FTSE Russell’s quarterly review of its constituents, Royal Mail will be relegated to the FTSE-250 alongside troubled doorstep lender Provident Financial. The postal service has been a FTSE-100 company since shortly after being privatised in 2013. On Wednesday, Royal Mail’s shares closed at 390.5p, giving the postal service a market capitalisation of £4bn. A company’s place in the FTSE 100 or FTSE-250 is determined by its market capitalisation at the close of trading on the day of the review.

Source: BBC News

Company news

Amryt Pharma (AMYT.L, 20.38p) – Speculative Buy
Amryt Pharma, the biopharmaceutical company focused on best-in-class treatments for rare and orphan diseases, yesterday announced the appointment of Dr. Kieran Rooney, Ph.D., as Vice President of Strategic Alliances and Licensing. Dr. Rooney, a member of the Royal Pharmaceutical Society of Great Britain, holding Ph.D. in Neuropharmacology (the University of Wales, Cardiff), has over 25 years of experience in the biopharmaceutical industry, with significant expertise in business development and commercial strategy. Before joining Amryt, he founded Halo BioConsulting, a global healthcare advisory services firm focusing on business alliances and management consulting. Prior to that, Dr. Rooney worked as a consultant for the UK Government and held business development roles at companies including Smith & Nephew, F2G Limited, Pharsight Corporation, and MDS Pharma Services. Dr. Rooney will be responsible for assessing new acquisition and in-licencing opportunities as the Group continue to execute its strategy to acquire, develop and commercialise products to enhance the lives of patients with rare and orphan diseases. Joe Wiley, CEO of Amryt commented “We are excited to continue our buildout of critical leadership roles across the organization as we progress our broadening commercial stage pipeline to the benefit of patients with rare and orphan diseases”. The Group is scheduled to announce its interim results on 4 September 2017.

Our View: The strengthening of Amryt’s management team echoes its ongoing operational progress. The Group has enrolled its first patient for its lead drug candidate, AP101 for the treatment of Epidermolysis Bullosa (‘EB’) at the end of April 2017 to continue progress its Phase III trial. EB is a rare and distressing genetic skin disorder which has achieved Orphan Drug Designation in both the US and EU. There is currently no treatment available for EB which affects approximately 500,000 people worldwide, with global market for a treatment estimated to be valued in excess of US$1.35bn. With its €20m facility secured from European Investment Bank, the Group is fully funded to take AP101 to the ‘Topline Data’ in Q3’2018, while also supporting more modest on-going spend for AP102 (pre-clinical stage for Acromegaly and Cushing’s Disease). Alongside these drug candidates, Amryt has a licensed product, Lojuxta, for the treatment of the rare genetic disorder, Homozygous Familial Hypercholesterolemia (‘HoFH’), which is generating revenue with expected annualised sales of €10.5m for FY2017E. As such, Amryt has significantly de-risked its operations, transforming itself into am integrated pharmaceutical company with a diversified pipeline of therapies ranging from earlier to later stage developments along with a commercial offering which together target multiple Rare (or Orphan) Diseases. Beaufort’s prudently discounted valuation for Lojuxta alone exceeds Amryt’s current market capitalisation, but clearly that’s only part of the story. European investors are failing to grasp the very significant financial and commercial benefits available for Orphan or Rare Disease drug developers. So much so in fact, that sector-focussed Amryt Pharma presently finds no quoted peers in London, despite which a basket of NASDAQ-listed comparables are seen to command a significant premium despite mostly being pre-revenue and somewhat earlier in their development. Such anomalies can and, of course, do rapidly correct. Given Amryt’s AP101 has a demonstrable market opportunity of US$1.35bn fully funded to the ‘Topline Data’ in Q3’2018, while its high-margin licensing revenues are profitably building-out alongside a robust pipeline, such an event appears overdue. Beaufort reiterates its Speculative Buy rating on the Shares along with a target price of 62p. CLICK HERE to see Beaufort’s Initiation Research on Amryt Pharma.

Beaufort Securities provides corporate sponsored research to Amryt Pharma Plc


Bezant Resources (BZT.L, 1.95p) – Speculative Buy
Bezant Resources announced yesterday that a gold and platinum sampling programme is currently underway at the HGE-082 licence located approximately 4km from its current mining operations within the Choco project in Western Columbia. Bezant has an option over the HGE-082 licence comprising 91ha compared with the 75ha of the FKJ-083 licence currently being mined. The Company has over 2,659ha under licence covering the extensive gold-platinum placer fields in Choco, where platinum was first discovered in the 19th century. Following recent commissioning of its first mining operations on the FKJ-083 licence, Bezant is pursuing a low-cost expansion strategy by building a series of production plants for under US$500,000 in construction costs per plant that can be rapidly deployed and fed with placer gravels. These plants can be easily disassembled and redeployed to new areas. Test pitting and sampling activities are currently underway at the HGE-082 licence to test throughput suitability and placer spreads for future implementation of mining operations.

Our View: Bezant continues to deliver on its strategy of developing a low capital intensive gold and platinum recovery model. The investment case is based on the construction of multiple modern and low capital cost operations across an area of historical alluvial platinum production. Bezant is currently producing from licence FKJ 083, but has a large footprint under licence in a region with widespread platinum and gold alluvial deposits. We look forward to updates on the current operations as well as exploration results from HGE-082 licence. In the meantime, we maintain a Speculative Buy recommendation on the stock.

Beaufort Securities acts as corporate broker to Bezant Resources plc


HSS Hire (HSS.L, 49.00p) – Hold
The provider of tool and equipment hire and related services in the UK and Ireland, yesterday released interim results for the period up to 1st July 2017. H1’2017, as expected, saw profitability impacted by substantial changes to the Group operating model. Revenue reported was £160.5m, 3.4% below H1’2016 (£166.2m), reflected an additional week of trading in H1’2016, the targeted closure of 68 branches in the last 12 months and weaker rental revenues, while also being impacted by changes to the Group’s operating model. On an underlying basis, adjusting for the 53rd week and the branch closures, revenues are broadly flat, with marginal growth year-on-year within Q2. Higher cost of sales, distribution costs and administrative expenses, however, resulted in operating losses of £23.2m (compared with a loss of £0.6m in the comparable period), which included exceptional costs of £12.6m (compared to £7.1m in H1’2016). Breaking this down further into the Group’s two principal divisions, rental and related revenues were 7.3% lower than in the comparable period, although sales initiatives implemented in March 2017 have since delivered sales growth in core markets and further work is underway to extend these initiatives into more markets. The divisional contribution was £73.9m, representing a 61.9% gross margin. This was lower than H1’2016 (£86.7m, 67.4% margin) due to growth in HSS’s cost of sales (excluding depreciation) and parallel running costs relating to changes in the operating model that primarily took place in Q1’2017 that contributed to higher distribution and stock maintenance costs. Services revenues were £41.3m in H1’2017, reflecting continued growth in the OneCall and Training businesses; its contribution of £5.2m was in line with H1’2016 albeit at a lower gross margin of 12.6% (13.9%) reflecting changes to the customer mix, including the annualisation of a large managed service provider contract and operational investment. Net debt at 1 July 2017 was £230.6m, £8.2m lower than H1’2016 reflecting the continued focus on working capital management. Following consideration of the H1’2017 performance and its existing net debt position, the Board chose not to pay an interim dividend.

Our View: The interim report made for difficult reading. Especially given that the management was at pains to point out during the conference call that the underlying UK tools and equipment rental market continued to grow, albeit at a relatively slow sub-2% pa rate – which in itself suggests there is only limited read-through from yesterday’s HSS results onto peers like Speedy Hire, Lavendon Group and Ashtead Group. The simple fact is that the operational disruption impacting both rental revenue growth and the overall cost base has been both longer and more severe than originally anticipated. The resulting hit on profitability will be painful, with management warning shareholders to expect a much lower than expected H2’2017 Adjusted EBITA in the range of just £8m to £11m. The knife accordingly has had to be taken to full year forecasts, with Beaufort now estimating FY2017E pre-tax losses to be £15.5m, representing losses per share of -7.4p. That would not have been so bad if management had begun to emanate confidence that the action already taken should be sufficient to reinvigorate operational growth through the implementation of new sales initiatives while also rolling-out cost actions that will deliver annualised savings of around £13m. But the fact that the Board has decided it needs a further strategic review in order to ‘accelerate profitable market share gains and de-lever the business’; this suggests shareholders may have to brace themselves for yet more reorganisation and costly disruption to come when finally presented to investors in November 2017. The net result of this complicates the making of an investment decision on HSS. Partly this is because the review appears to push the expectation of any return to (even modest) positive earnings all the way out to FY2019E, and partly because many believe the new CEO will try to use it to launch a deeply discounted rights issue in order to reduce debt, which by year-end may be getting close to three-times HSS’ market capitalisation or around 4.5x FY2017E EBITDA. So what positives are there to hang on to? One is the fact that the Group returned to profitability during the seasonally strong Q3 with revenue growth for the first 8 weeks and EBITA of around £4m, which will suggest a stronger H2 relative to H1 performance and, hopefully, lead to a healthier exit rate as the Group heads into 2018. Secondly, management continues to exercise strong cash control, having £35m headroom is cash plus existing facilities while sharply cutting non-fleet capex and ensuring outflow from the half-year exceptional charge was limited to just £2m (with the balance coming in the form of impairment). But ahead of November’s strategic review, these really do not provide sufficient comfort for shareholders and Beaufort accordingly has taken the precautionary step of downgrading its recommendation to Hold (from Speculative Buy). Meanwhile, a question regarding the much-discussed takeover of HSS Hire by its larger peer Speedy Hire, must be asked one more time. The principal proponent for such an action in 2016 was Toscafund who remains a major shareholder of both companies (26.2% of HSS and 20.0% of Speedy) and is likely to support such a proposal should it be revisited. Indeed, yesterday’s news may well reinforce its vision that together the two companies would be stronger and increase anticipation that Russell Down, Speedy’s CEO, will eventually use his much higher valued paper to launch a bid. His reluctance so far, however, appears largely to be down to an unwillingness to inherit such a large pool of debt. He too may well prefer to wait until HSS has attempted to resolve this for itself. Beaufort downgrades its recommendation of HSS Hire to Hold.


Watkin Jones (WJG.L, 207.00p) – Speculative Buy
Watkin Jones, a leading UK developer and constructor of multi occupancy property assets, with a focus on the student accommodation sector, yesterday said it has successfully completed the forward sale of a development of 354 beds on Little Patrick Street in Belfast and entered into a development agreement to deliver 972 beds on the Hollis Croft scheme in Sheffield to the same institutional investor. The combined total consideration payable to Watkin Jones is approximately £90m, with both developments due for completion ahead of the academic year 2019/2020. Watkin Jones’ CEO, Mark Watkin, commented “These agreements further demonstrate the Group’s strong and growing relationships with institutional investors, as well as the continuing demand for high quality purpose built student accommodation”.

Our View: Watkin Jones continue to secure, fund and develop a pipeline of attractive sites. Amid continuing strong demand for its student accommodation, the Group provides excellent visibility on future revenue, earnings and cash flow. Following yesterday’s news, the Group has now forward sold 1,981 of the 3,545 beds (c.56%) planned to be delivered ahead of the 2019/2020 academic year, having already completed similar sales for all schemes covering the periods 2017/2018 and 2018/2019. The Group noted in its interim results that the fundamentals of the student accommodation market continue to be attractive. It has received increased institutional demand for its high-quality purpose-built assets, with a number of new international funds now also entering the market. This has led to a positive impact on development values as competition increases and yields improve. With respect to the Brexit, investors have become increasingly confident that the final negotiated outcome will not significantly change the currently advantageous conditions offered to EU students choosing to study in the UK, while Sterling’s concurrent devaluation against the international basket of currencies has made it a more attractive destination for higher education. This means that Watkin Jones can expect to find continued demand for its developments. The Shares has performed excellently year-to-date rising almost +70%, and are now valued at FY2017E and FY2018E P/E multiples of 15.4x and 13.9x, along with dividend yield of 3.2% and 3.5%, respectively. But given the strength of its business model together with its management’s excellent execution, Beaufort reiterates its Speculative Buy rating while upgrading its target price to 225p from 195p.


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

Weekly diary

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During the three months to end-July 2017, the number of stocks on which Beaufort Securities published recommendations was 205, and the recommendations were as follows: Buy – 75; Speculative Buy – 107; Hold – 19; Sell – 1.

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