No rate rise until 2019, economists say

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Today’s edition features:

  • Amryt Pharma (AMYT.L)
  • Jangada Mines (JAN.L)
  • Obtala Limited (OBT.L)
  • Everyman Media Group (EMAN.L)
  • McColl’s Retail Group (MCLS.L)

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Markets

Europe
The FTSE-100 finished Friday’s session 0.11% higher at 7,438.50 whilst the FTSE AIM All-Share index was up 0.46% at 1,015.51. In continental Europe, the CAC-40 finished 0.74% higher at 5,123.26 whilst the DAX was up 0.72% at 12,142.64.

Wall Street
In New York on Friday night, the Dow Jones ended the week 0.18% higher at 21,987.56, the S&P-500 added 0.2% at 2,476.55 and the Nasdaq gained 0.1% to stand at 6,435.33.

Asia
In Asian markets this morning, the Nikkei 225 was down 0.92% at 19,510.98 and the Hang Seng was 0.44% lower at 27,829.8.

Oil
In early trade today, WTI crude was 0.23% stronger at $47.4 per barrel, while Brent was down by 0.47% at $52.5 per barrel.


Headlines

No rate rise until 2019, economists say
Most economists do not expect UK interest rates to rise until 2019 despite inflation remaining above target, according to a BBC survey. Most of those surveyed think the Bank of England’s Monetary Policy Committee (MPC) will be reluctant to raise rates during Brexit negotiations. Inflation stood at 2.6% in July – well above the Bank’s official target of 2%. Half the economists surveyed by the BBC think wages growth will outpace inflation in the first half of 2019. Last week, one MPC member, Michael Saunders, said a “modest rise” in rates was needed to curb high inflation. The base rate has stood at a record low of 0.25% since August 2016 – the first move since March 2009, when it was reduced to 0.5%. In June, three of the MPC’s eight members voted for a rate rise – the first time since May 2011 that so many had wanted to tighten policy. The same month the Bank’s chief economist, Andy Haldane, also made a call for a rate rise this year. However, Mark Carney, the Bank governor, said in his Mansion House speech in late June that “now is not yet the time” to start raising rates once more.

Source: BBC News


Company news

Amryt Pharma (AMYT.L, 21.88p)– Speculative Buy
The commercial stage pharmaceutical company focused on acquiring, developing and delivering innovative new treatments to help improve the lives of patients with rare and orphan diseases, this morning has presented its unaudited interim results for the six-month period ended 30 June 2017. The Board reported that since achieving its AIM Admission through a RTO on 8 April 2016, the Group has made excellent progress. This included advancing its development product candidates, completing the Licensing Agreement for Lojuxta, and securing access to non-dilutive funding from the European Investment Bank (‘EIB’) of €20 million. Total revenues for the period amounted to €6,180,000. Lojuxta generated revenues of €5,751,000 and revenues from Imlan, the Group’s derma-cosmetics range of products, amounted to €429,000; this compares with total revenues for the period from the completion of the RTO on 18 April 2016 to 31 December 2016 of €1,351,000. Gross margin for the six months to 30 June 2017 was 59.3% compared to 56.6% for the year ended 31 December 2016. Loss on ordinary activities for the Group before tax of €13.8 million included development costs of its lead product now in Phase III clinical trials, AP101 (a new treatment for Epidermolysis Bullosa), and AP102 (which is expected to enter clinical trials in 2018 targeting Acromegaly and/or Cushing’s disease) and a non-cash charge of €7.7m, relating to contingent consideration following the acquisition of Birken in 2016. As at 30 June 2017, the Company had cash on hand of €10.9 million. On 2 December 2016, Amryt entered into a five year €20 million debt facility agreement with the EIB; the first tranche of €10 million was drawn down on 3 April 2017. Non-executive Chairman, Harry Stratford, noted in his interim statement “Amryt has made excellent operational and strategic progress to date and we look forward to reporting on further progress as we continue to develop the business.”

Our View: Delivering on every promise and more! This truly impressive half-year report highlights a management very much in control of an ambitious programme that spreads across a multiple Rare Diseases, meeting or exceeding best expectations in every case. The low-risk in-licencing of Lojuxta, a treatment for Homozygous Familial Hypercholesterolemia (‘HoFH’), for example, which was completed only in December 2016, has since seen sales grow by 50%; confidence in continued progress is such that management has now revised upwards its estimate of the potential market for HoFH in its territories to approximately €100 million. Beaufort’s own model for Lojuxta (which is detailed in its major report of 23rd May 2017 on Amryt Pharma) assumed peak sales of just US$50m by 2029 on the basis it has already broadened its opportunity through a paediatric investigation plan (‘PIP’). As far as Amryt’s lead development asset, AP101, is concerned, management confirmed its interim analysis readout is expected in H1 2018; this will, if necessary, enable the Group to increase the number of patients in the study to maintain an exceptional 80% chance of success. For AP102, pre-clinical studies are now expected to be completed in Q4 2017 and the Board has detailed its intention to seek approval from the regulatory authorities to commence clinical trials in humans in 2018. There is also good news on the balance sheet – always a sensitive issue when dealing with cash hungry drug developers. The charge of €7.7m included in the Group’s total loss on ordinary activities is a non-cash accounting item; the first €10m tranche from the five year EIB debt facility was drawn down on 3 April 2017, leaving €10.9m cash-in-hand at the end of June, much higher than the €8.5m Beaufort had assumed by this stage and even suggests it will now be necessary to draw down only a further €5m in 2017 (rather than the €10m anticipated). Having clearly ‘set out their table’, there is high confidence that Amryt’s management is capable delivering on its promises and vision for its future. All of which, begs a further question. Why exactly are European investors still failing to grasp the very significant financial and commercial benefits available for Orphan and Rare Disease drug developers? Although Amryt finds no quoted peers in London, a good 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 that Amryt’s lead indication has a demonstrable market opportunity in excess of US$1.3bn, is fully-funded to the point of delivering ‘Topline data’ in less than 9 months, while high-margin licensing revenues are now profitably building out alongside a robust pipeline, such an event is clearly overdue. Beaufort retains its Speculative Buy rating on Amryt Phara, while reflecting on the fact that that quite amazingly the Group’s valuation is presently less than Lojuxta’s prudently discounted future cashflow on its own. Factoring today’s news into its detailed model, Beaufort has upgraded its price target for Amryt Pharma to 65p (from 62p previously).

Beaufort Securities provides corporate sponsored research to Amryt Pharma plc

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Jangada Mines (JAN.L, 4.62p) – Speculative Buy
Jangada Mines, a natural resources company developing South America’s largest and most advanced platinum group metals (PGM) project, announced today an update on its activities at the Pedra Branca project in north-eastern Brazil. As previously announced, the JORC (2012) compliant resource estimate confirms the historical resource and contains an attractive suite of potential by-product credits including Ni, Cu, Co and Cr. Consultants, GE21 Consultoria Mineral, are currently working on a Scoping Study with the results expected in mid Q4 2017 followed by a Pre-Feasibility Study which is expected to be completed by late Q4 2017. The Pedra Branca project comprises four main deposits and management is focused on bring the easily accessible high-grade surface oxides from the Curiu and Esbarro deposits into trial production in early 2018. Application for a trail mining permit and associated environmental permit has commenced with submission date expected during Q4 2017.

Our View: We are encouraged with the pace of development of the Pedra Branca project and the potential for significant production cost savings when considering the suite of by-product credits. We also note that the Company has realised a US$470,000 cost saving from its budgeted infill drill-programme based on the quality and quantity of the historical database which is sufficient for both the Scoping and Pre-Feasibility Studies. The near surface high-grade oxide layer is amenable to low-capex and opex costs with the potential to produce a PGM-bearing concentrate through a simple gravity separation and floatation process. We look forward to results from the Scoping Study followed by the Pre-Feasibility Study in Q4 2017 as the Company progresses Pedra Branca towards trial mining in early 2018. In the meantime, we maintain a Speculative Buy rating on the stock.

Beaufort Securities acts as corporate broker to Jangada Mines plc

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Obtala Limited (OBT.L, 17.62p)– Speculative Buy
Further to its announcement of 4th July 2017, the African-focused agricultural and forestry company, announced on Friday that discussions are continuing with Jiangsu Dolphin International Trading Co Ltd (‘JDIT’) regarding satisfying conditions of the subscription agreement. The original terms were to issue 20,000,000 new Ordinary Shares of 1p each in the capital of the Company to JDIT for a total cash subscription price of £4,000,000, equivalent to a price of 20p per share, with the conditional subscription due to close on 30 June 2017.

Our View: It is always unfortunate to encounter such delays, but the interruption in final receipt of these funds are not seen impacting Obtala’s second half expansion plans in any way. JDIT has encountered unforeseen complications in achieving regulatory approval for external investment, although they are seeking to resolve the problem shortly. It is realistic to anticipate a positive outcome from this in coming weeks/months but, even if this is not the case, Obtala’s Board, under the Chairmanship of Miles Pelham, has already amply demonstrated its ability to secure significant funding for at both parent company and subsidiary level, suggesting a high level of confidence that an alternative investor can be identified on the same or similar terms in the relatively near term. Beaufort’s financial model of the Group’s forestry operations suggests it is capable of producing quite exceptional and long-term expanding gross margins from what is, essentially, an elementary and low-cost operation; in due course, it will have a similar competitive advantage in the export of premium quality fresh fruit and vegetables while high yield production moves up the value chain. Even after prudently discounting Obtala’s business opportunity with the application of punitive rates to reflect all risks, fair value still appears to be significantly higher than the current share price. Beaufort retains its Speculative Buy recommendation on Obtala Limited.

Beaufort Securities provides corporate sponsored research to Obtala Limited

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Everyman Media Group (EMAN.L, 165.00p) – Speculative Buy
Everyman Media (‘Everyman’), the operator of Everyman cinemas across the UK, on Friday announced its interim results for the 6 months ended 29 June 2016 (‘H1 FY2017’). During the period, revenue advanced by +55% to £18.8m, adjusted EBITDA grew +123% to £3.0m and the Group made profit after tax of £438,000 (H1 FY2016: loss £670,000), leading to basic earnings per share of 0.73p (H1 FY2016: loss 1.12p). Net cash generated from operating activities was £3.8m (H1 FY2016: used £1.9m), while net cash outflows were £2.2m (H1 FY2016: £7.4m). Cash and cash equivalents at the period end stood at £1.2m (H1 FY2016: £1.7m). On the operational front, the Group opened one new Everyman cinemas in Stratford-Upon-Avon, bringing total estate to 21 sites (58 screens), and exchanged contracts on 5 new venues (York, Liverpool, Newcastle, Glasgow and Borough Market London). Everyman’s Chairman, Paul Wise, commented “I am pleased to report on the Group’s results for first 6 months ended 29 June 2017. Since the period-end, trading has been in line with expectations, continuing a reasonable overall summer in the cinema market”.

Our View: Everyman continue to deliver a strong performance in the H1 FY2017 with revenue up +55% and adjusted EBITDA up +123%. Driven by its continued expansion program, Everyman has increased its market share to 1.98% (December 2016: 1.64%), according to ComScore. Post the period, the Group said trading to date continued in line with management expectations. In the second half, the Group is expected to open a permanent site in Kings Cross (replacing temporary). Beside Kings Cross, the Group is currently committed to a further 9 new venues, maintains rich pipeline established for future years, including a new venue in Glasgow to be opened in 2018. Although the Group’s cash and cash equivalents has fallen to £1.2m at the period end, it has successfully agreed a new £20m 4-year revolving loan facility in March 2017 (a total of £5m drawdown to date) to replace previous £8m facility. Together with the Group’s existing cash resources, such facility will provide an additional finance stream to progress its ongoing expansion of the Everyman cinema estate. Although there are concerns for squeeze in household disposable income driven by inflation that is likely to impact consumer confidence somewhat (UK CPI of 2.6% in July 2017 according to the Office for National Statistics), Beaufort remains confident in the managements’ ability to deliver another year of quite exceptional growth, based on anticipated openings and momentum being built at its existing sites. The share price has increased by +43% year-to-date but, in view of the positive progress and strong pipeline, Beaufort again reiterates its Speculative Buy rating on the shares.

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McColl’s Retail Group (MCLS.L, 295.00p) – Hold
McColl’s, one of the UK’s leading convenience retailers, on Thursday provided its trading update for the 13 weeks ended 27 August 2017 (‘Q3 FY2017’). During the period, total revenue advanced by +31.1% (+15.8% year-to-date), against the comparative period (Q3 FY2016). On a like-for-like (‘LFL’) basis, it grew by +0.7% (+0.4% year-to-date); comprised of convenience stores +0.7% and newsagents +0.3%. On the operational front, the Group have successfully integrated all 298 newly acquired convenience stores from Co-Op by mid-July 2017. On 1 August 2017, the Group has also announced a new wholesale supply partnership with Morrisons, which will commence in January 2018. McColl’s CEO, Jonathan Miller, commented “We continue to look at opportunities to further enhance organic growth, and are pleased by the progress we are making with our convenience store refresh trial. Customer feedback has been positive and the early performance has been very strong, with significant sales uplifts and increased participation in key convenience categories, including fresh and chilled food”.

Our View: McColl’s Q3 performance was strong, with both revenue and LFL sales growth boosting the year-to-date figures. Whilst LFL sales of +0.7% in Q3 has slowed from +1.4% seen in Q2, the latter had benefitted from favourable weather and a weaker comparative (Q2 FY2016: LFL -2.6%, Q3 FY2016: LFL -2.0%). Perhaps more importantly, the LFL performance of recently acquired and converted stores continued to be strong at +2.6% (Q2 FY2016: +3.8%). Looking ahead, the management confirmed that the Group remains on track to achieve full year results in line with its expectations. Having ‘refreshed’ three convenience stores during the period, the Group said further 20 stores are planned by the end-FY2017. McColl’s recently commissioned research with IGD suggests that convenience stores are estimated to continue enjoy strong growth at +18% to £47.1bn over the next five years. This suggests that the demand for convenience is there, becoming increasingly dominated by a smaller number of more sophisticated players that are capable of offering range and buying power that traditional mom-and-pop stores simply cannot. Given its wide and successful experience in identifying and integrating such opportunities amid an inexorable phase of closure and consolidation amongst the UK’s highly fragmented base of independents, McColl’s can be expected to identify further significant opportunities over the medium-term. The Group’s operational scale and customer reach is something that the national supermarkets are also likely to be keen to tap into, in terms of potential mergers and takeovers. Considering this background and recent broker upgrades, share price has increased sufficiently to take the Group’s FY2017E and FY2018E P/E multiples to 16.6x and 12.9x, while being accompanied with dividend yields of 3.6% and 3.8%, respectively. This now appears to price in just about all of the near-term excitement and Beaufort accordingly reiterates its Hold recommendation on the Share.

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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


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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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