VW launches new UK diesel scrappage scheme


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Today’s edition features:

  • Galileo Resources (GLR.L)
  • Melrose Industries (MRO.L)
  • Morses Club (MCL.L)
  • Restaurant Group (RTN.L)

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Markets

Europe
The FTSE-100 finished yesterday’s session 0.89% higher at 7,430.62 whilst the FTSE AIM All-Share index was up 0.45% at 1,010.91. In continental Europe, the CAC-40 finished 0.58% higher at 5,085.59 whilst the DAX was up 0.44% at 12,055.84.

Wall Street
In New York last night, the Dow Jones ended the day 0.25% higher at 21,948.1, the S&P-500 added 0.57% at 2,471.65 and the Nasdaq gained 0.95% at 6,428.66.

Asia
In Asian markets this morning, the Nikkei 225 was slightly ahead, up 0.04% at 19,653.89, and the Hang Seng was 0.31% higher at 28,057.51.

Oil
In early trade today, WTI crude was 0.68% weaker at $46.91 per barrel and Brent was down by 0.28% at $52.71 per barrel.


Headlines

VW launches new UK diesel scrappage scheme
Volkswagen UK is offering customers discounts of up to £6,000 to trade in diesel vehicles when buying a new car. All the Volkswagen UK brands – including Audi, Seat, Skoda and Volkswagen Commercial Vehicles – will participate. VW launched a more generous scheme in Germany in August in the wake of its diesel emissions scandal. Competitors in the UK, including BMW, Ford, Hyundai, Mercedes-Benz and Vauxhall have already launched schemes. Rival Toyota also launched a scrappage scheme on Friday, offering up to £4,000 off a new Toyota. VW’s UK scheme is a continuation of the initiative launched in Germany, which was brought in after a top level summit between politicians and the country’s leading carmakers, including BMW, Daimler and Opel. VW’s German scheme offered a discount of up to 10,000 euros (£9,000) to trade in diesel vehicles. Diesel cars have been under scrutiny over high levels of nitrogen oxide emissions, sparked by VW’s diesel scandal. Two years ago, it was revealed that Volkswagen had cheated emissions tests that affected 11 million vehicles worldwide. Car manufacturers have been under increasing political pressure, especially in Germany, to encourage consumers to buy less polluting cars.

Source: BBC News


Company news

Galileo Resources (GLR.L, 1.50p) – Speculative Buy
Galileo Resources announced yesterday that it has entered into a binding term sheet with BMR Group (BMR.L) whereby it has agreed, conditionally, to advance BMR US$591,600 (at an interest rate of 12%). The funds are intended to be used to complete an option to acquire the Star Zinc project in Zambia through a JV established with BMR. Under terms of the agreement Galileo will subscribe for a 51% equity stake in the JV through newly created special purpose vehicle, Enviro Mining Ltd, which will be financed by the cancellation of the above loan of US$591,600. The Star Zinc project is a historical small-scale open pit that operated intermittently between 1950s and 1990s. Star Zinc is located 18km NNW of Lusaka and has adequate power, water, rail and telecommunications. Should BMR fail to execute the settlement agreement by 30 November 2017, all loans plus interest are repayable in full. Galileo also announced that it has raised £1,093,450 through the placement of 54.7M new ordinary shares at a price of 2p per share.

Our View: The potential to acquire an interest in the Star Zinc project is positive news for Galileo. We note that zinc prices continue to be well supported on the back of dwindling inventories caused by declining global production. The availability of primary zinc deposits is diminishing and the Star Zinc project has a non-JORC compliant resource of 0.3Mt grading 20.2% Zn which remains open along strike and at depth. We look forward to the completion of the settlement agreement followed by a formal JV agreement with BMR as well as confirmation of the non-JORC resource. In the meantime, we maintain our speculative buy on the stock.

Beaufort Securities provides corporate sponsored research to Galileo Resources Plc

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Melrose Industries (MRO.L, 220.00p) – Buy
Melrose Industries (‘Melrose’), a company who buys, improves and sell manufacturing businesses, yesterday announced its interim results for the 6 months ended 30 June 2017 (‘H1 FY2017’). During the period, on a statutory basis, revenue was £1,085.6m (H1 FY2016: £104.7m), operating profit was £57.9m (H1 FY2016: loss £9.5m), pre-tax profit stood at £47.8m (H1 FY2016: loss £9.2m), resulted in diluted earnings per share of 2.0p (H1 FY2016: loss of 0.6p). On an underlying basis, operating profit was £141.2m (H1 FY2016: £5.9m), pre-tax profit stood at £131.1m (H1 FY2016: £6.2m), resulted in diluted earnings per share of 4.9p (H1 FY2016: loss of 0.3p). Given that H1 FY2016 did not include results from the various Nortek businesses (which were acquired on 31 August 2016), comparison with last year’s numbers is not meaningful. Net debt at the period end stood at £669.1m, implying net debt to EBITDA of 2.3x. The Group said Nortek (91% of revenue), the global provider of innovative air management, security, home automation and ergonomic and productivity solutions, has seen a “fastest improvement in profit compared to any previous Melrose deal”. By contrast, Brush (9% of revenue), the world’s largest independent manufacturer of electricity generating equipment for the power generation, industrial, oil & gas and offshore sectors, is experiencing its “toughest market conditions since Melrose acquired it in 2008”. Melrose’s Chairman, Christopher Miller, commented “During the first ten months of our ownership, Nortek has delivered the fastest initial improvement in performance Melrose has ever achieved. More investment is being made in Nortek to drive further improvements and appropriate actions are being taken in Brush for the long term. We have also been busy exploring potential acquisitions over the past few months, and remain confident in our ability to find the right opportunity”. The Group declared an interim dividend of 1.4p per share (H1 FY2016: 0.3p) to be paid on 6 October 2017.

Our View: Melrose disclosed a mixed to disappointing set of interim results yesterday. While Nortek has delivered a particularly strong profit performance, Brush continues to meet challenging conditions. Nortek saw flat revenue of £987.4m with improved underlying operating margin by +5.5% to 14.7%, resulted in underlying operating profit up +54% to £145.5m. It delivered its highest ever first half cash generation of £103.4m (before capex), while investing £47m in capital and restructuring projects in order to secure further operational improvements. Brush on the other hand saw its revenue fall by -11% to £98.2m, with decline in its underlying operating margin of -4.7% to just 7.3%, resulted in a fall in its underlying operating profit of £7.2m, down -43% year-on-year. Challenging trading conditions for its customers continued, resulting in a negative impact on divisional utilisation and productivity. The management said it expects to sell approximately 80 generators this year compared to 122 last year and a 2012 peak of 208. The Group has warned that it sees “no recovery in generators expected in the foreseeable future” and, as such, the management continue to review all parts of the Brush business. Looking ahead, having seen encouraging progress already, management considers further substantial operational improvements still to be available for the Nortek business and remains on track to deliver them. Further to this, the Group also noted that it has commenced the search for its next acquisition opportunity, being “optimistic” in its abilities to deliver further shareholders value. Considering Melrose’s enviable track record of successful operation and quality of management, with Nortek’s improving performance, we believe the Group continues to present an excellent opportunity for strong long-term returns. The Shares are valued at FY2017E and FY2018E P/E multiple of 21.6x and 18.7x, along with dividend yield of 1.8% and 2.1%, respectively. Beaufort retains its Buy rating on the Shares.

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Morses Club (MCL.L, 144.00p) – Buy
The UK’s second largest home collected credit lender yesterday released a trading update for the 26-week period to 26 August 2017. Management confirmed the Group’s trading performance for the period continued to be strong. Customer numbers increased substantially by 12% to approximately 233,000 as at 26 August 2017, driven by territory builds and organic growth (H1 2017: 2.4%). Total credit issued increased by 25% to £82.2m compared to the same period last year (H1 2017: 16% to £66.0m), reflecting the significant increase in territory builds while strict control ensures impairment for the period can be expected to remain within the Company’s target range. The gross loan book also increased by 12% (H1 2017: flat) with the average customer balance unchanged. Notwithstanding the up-front costs of the investment in territory builds and infrastructure during the first half of the year, overall, the underlying business performance remained in line with management expectations. Morses Club also confirmed that it will be announcing its interim results on Thursday, 5 October 2017, when it will also declare its dividend (to be paid in Q1 2018).

Our View: To date in 2017, the Group’s ambitious territory builds are performing ahead of management expectations. As Beaufort has already discussed in recent research releases, and factored into its forecast earnings numbers for the years to February 2019E and 2020E, the increased level of investment to support this expansion, however, is not be expected to have an adverse impact on earnings in 2018E. The new loan facility announced on 18 August 2017 however, is just one of the tools supporting well over 400 new agent territory builds in the current financial year. This expansion, which in no small part takes advantage of Provident Financial’s self-inflicted and highly disruptive ‘own goal’ while migrating its own Consumer Credit Division (‘CCD’) to a new operating model, highlights both Morses’ comprehensive understanding of its continuing opportunity in home collected credit and its Board’s ability to react rapidly in order to seize market share from its peers. Meanwhile the quality of Morses’ customer base continues to improve with the proportion of loans attributable to the Company’s highest tier customers increasing by 7% compared to 27 August 2016. Significantly also, given the current pace of expansion, the Group continues to make good progress on development of its digital platform to provide additional control while offers innovative new services and products for its customers. Success in this respect is reflected in its customer service model which consistently delivers customer satisfaction levels of 95% or more. Morses Club Card, the Company’s cashless lending product, meanwhile continues its organic growth with Dot Dot Loans, its first online instalment product launched in March 2017, continuing in its market test phase. The Group’s forthcoming interim results are likely to reinforce the Board’s confidence in its strategy going forward. Far from being ‘sleepy’, Morses’ current push is expected to deliver an impressive leap in both revenues and earnings by year-end February 2020. Beaufort re-set its P&L projections a couple of weeks back in response to this news, which now places the shares on 2019E and 2020E earnings multiples of 11.8x and 8.5x, together with yields of 5.1% and 7.0% respectively. The share price has recovered significantly from the Provident-led set back in August but, nevertheless, still appear too cheap considering its operations this year should deliver 24% ROE on a P/BV of just 3.0x. Beaufort upgrades its price target for Morses Club to 165p/share (from 155p/share previously) while repeating its Buy rating.

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Restaurant Group (RTN.L, 346.50p) – Hold
Restaurant Group, the operator of 494 restaurants and pub restaurants across the UK, yesterday announced its interim results for the 26 weeks ended 2 July 2017 (‘H1 FY2018’). During the period, statutory revenue fell by -7.1% to £333.1m, while like-for-like (‘LFL’) sales dropped by -2.2%, against the comparative period (H1 FY2017). On an adjusted basis, EBITDA dropped -25.7% to £44.3m, operating profit declined by -29.5% to £26.5m, pre-tax profit fell by -30.4% to £25.5m, leading to earnings per share of 9.98p, down -30%. Free cash flow generated stood at £35.1m (H1 FY2017: £35.8m), and net bank debt was reduced to £19.3m (H1 FY2017: £35.6m). On the operational front, the Group opened 12 new restaurants and pubs during the period and said it expect to open a further 6 to 8 sites in H2 (FY2016: 24 sites). Restaurant Group’s CEO, Andy McCue, commented “We have made good progress against our strategic initiatives outlined in March. Our Leisure customers are enjoying a better value, higher quality product; our growth plans for our Pubs and Concessions businesses are advancing well and we have made good progress in delivering cost efficiencies. I’ve been impressed with our colleagues’ receptiveness to change and thank them for their contribution to stabilising the business”. The Group declared an interim dividend of 6.8p per share (H1 FY2017: 6.8p), to be paid on 12 October 2017 (ex-Dividend: 14 September 2017).

Our View: A sigh of relief! The market had been bracing itself for a cautionary statement from Restaurant Group given the inflationary pressures now being faced by its operations and intense competition within the sector. In the event, it delivered improving trend for H1 FY2018 registering a LFL sales decline of -2.2% compared to -3.9% seen last year, permitting the shares to recover most of the past week’s sell-off. Indeed, the Board were confident enough to suggest it was seeing early signs of improved volume momentum in its Leisure brands (Frankie & Benny’s, Chiquito, Garfunkel’s, Filling Station and Joe’s Kitchen) as it continue to work to broaden the brand appeal. Cost cutting is ahead of plan while the Group continues to invest in new technology and people. Together with changes to menu and prices (discounting and/or new reduced prices), the introduction of fixed price course menus has attracted more value-conscious customer base. Pubs’ performance was helped favourable weather and strong operational delivery, while the Group’s concessions business continues to perform well, driven by both passenger growth and through strong execution in maximising the throughput of customers. Post the period, Restaurant Group said current trading (34 weeks to 27 August 2017) was in line with management expectations with LFL sales down -2.5%. Looking ahead, the Group said as a result of investments in menus and price, it expects cost of goods sold margin to be between 1.5% and 1.8% higher in FY2018 against year ago, while expecting to save c.£10m through higher efficiencies for the full year. Capex associated to new restaurants and pubs openings is expected to be between £18m and £20m, while refurbishment and maintenance including technology is expected to cost around £20m in FY2018. Overall, the management expect to deliver full year adjusted profit before tax in line with current consensus expectations (around £56.2m). Beaufort understands that FY2018 will remain a challenging year for Restaurant Group due to ongoing cost pressures including commodity cost inflation and increase in wages (National Living Wage and National Minimum Wage). These, together with reduction in price and improved customer proposition, will continue to pressure Group margins. The shares are valued at FY2018E and FY2019E P/E multiples of 15.4x and 14.5x along with dividend yields of 4.7% and 4.7%, respectively. This seems about right given that the Group still needs to reassure investors that it can deliver visibility and planning to sustain its long-term growth. Beaufort keeps its Hold rating on the Shares.

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


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Recommendations
During the three months to end-August 2017, the number of stocks on which Beaufort Securities published recommendations was 203, and the recommendations were as follows: Buy – 65; Speculative Buy – 117; Hold – 20; Sell – 1.

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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