HSBC profits fall as bank bids to restore flagging revenues


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Today’s edition features:

  • Armadale Capital (ACP.L)
  • N4 Pharma (N4P.L)
  • Sunrise Resources (SRES.L)
  • JD Wetherspoon (JDW.L)
  • Ryanair Holdings (RYA.L)

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"No one ever said it was going to be easy. U.K. Prime Minister Theresa May on Wednesday accused European officials of threatening her country ahead of Brexit talks. In his first news conference since EU leaders agreed to guidelines last Saturday their negotiator, Michel Barnier, repeatedly emphasized that Brexit would be painful and complicated. Wednesday’s directives weigh in on the three key issues the EU wants settled at the start: EU citizens’ rights; a British payment to cover past EU financial commitments and; the status of the Northern Ireland border. They specifically avoid giving Mr. Barnier a mandate to discuss a future EU-U.K. trade agreement or even a transitional deal to smooth the economic disruption caused by Britain leaving the bloc. In the past, EU officials have said the U.K.’s exit bill could total EUR60 billion but now suggest it could be significantly higher, all of which warns investors that the UK market will face a period of additional volatility as various rumours and counter-rumours sway sentiment when discussions formally get underway. If that was not enough for the PM to contemplate, industry lobbying groups have also begun applying pressure on Westminster with one, for example, suggesting Britain’s failure to agree an exit deal with the EU, causing the oil & gas sector to fall back on WTO rules, could burden its companies with as much as £1.1bn additional costs. US stocks meanwhile saw modest weakness on Wednesday’s opening, continuing the lacklustre performance of recent sessions as investors reflected some disappointment with Apple’s Q2 release that followed yesterday’s close along with the continuing heavy round of quarterly reports. The two major averages then traded in a narrow range to close with just fractional moves either side of unchanged, despite release of an ISM report showing activity in the service sector grew at a faster than expected rate in the month of April,while crude prices again declined as new U.S. inventory data failed to ease oversupply concerns. This left just the Nasdaq pulling back more sharply from yesterday’s record close, delivering its biggest fall in three weeks with a lack of detail on hoped-for deals and continuing quarterly losses being enough to push Sprint down almost 15%. The 2:00pm ET announcement from the FOMC held few surprises; interest rates remained unchanged although traders clung to hints that the June meeting will indeed herald the next hike, as Fed Futures pushed up to a 72% probability of it being delivered. This was accompanied by a sell-off of U.S. government bonds, in the process driving yields on some very short-term debt to their highest since the financial crisis. While Japan remained on holiday, most other Asian bourses stayed in the negative following disappointing service sector from China, which expanded at its slowest pace in nearly a year; only South Korea’s Kospi stood out, rising sharply again as significant international inflows allowed the index to break its 2011 peak for the first time. A large amount of international macro data is due for release today. The UK offers March Net Lending, Mortgage Approvals, Consumer Credit and retail Sales, along with April Markit Services PMI data, while the EU releases its own Markit PMI Composite for April plus Retail Sales for March; the ECB’s President Draghi is also due to make a speech. Later in the afternoon, the US will provide its April Challenger Job Cuts and weekly claims, along with its March Trade Balance and Factory Orders plus Q1 Nonfarm Productivity and Unit Labor Costs. UK corporates due to release earnings or trading updates this morning include Royal Dutch Shell (RDSA.L), HSBC Holdings (HSBA.L), Next (NXT.L), RSA Insurance (RSA.L), Glencore (GLEN.L), WM Morrison (MRW.L), Punch Taverns (PUB.L) and esure Group (ESUR.L). With Macron emerging as the most convincing in last night’s final televised Election debate, Europe is expected to open confident of the centralist securing his position at the Eleysee Palace. A positive opening across Europe this morning with the FTSE-100 trading around 45 points higher in early trading. "
– Barry Gibb, Research Analyst


The FTSE-100 finished yesterday’s session 0.21% lower at 7,234.53 whilst the FTSE AIM All-Share index was 0.34% down at 964.04. In continental Europe, the CAC-40 finished down 0.06% at 5,301.00 whilst the DAX was 0.16% higher at 12,527.84.

Wall Street
In New York last night, the Dow Jones Industrial Average rose 0.04% to 20,957.9, the S&P 500 eased 0.13% to 2388.13 and the Nasdaq shed 0.37% to 6072.55.

In Asian markets this morning, the Nikkei 225 was up 0.7% to 19,445.7 and the Hang Seng was down 0.53% to 24,565.64.

In early trade today, WTI crude was down 0.25% to $47.70/bbl and Brent was down 0.16% to $50.71/bbl.


HSBC profits fall as bank bids to restore flagging revenues
Bank giant HSBC has reported a 19% fall in profits for the first three months of 2017 as it bids to restore flagging revenues after a restructuring. But the fall in profits to $5bn (£3.9bn) beat analysts’ forecasts, and HSBC’s shares rose 1.5% in Hong Kong. The lower profits were due mainly to accounting changes, while the results last year included proceeds from the sale of its Brazilian business. Chief executive Stuart Gulliver called the figures a “good set of results”. Revenues for quarter rose to $12.84bn from $12.57bn, while adjusted pre-tax profit – which excludes one-off items – rose to $5.94bn from $5.3bn a year earlier. The figures are the first since Europe’s largest bank announced the appointment of a new chairman in March. The move was part of a management overhaul that will also see HSBC choose a new chief executive. Following a big drop in profits in 2015, HSBC embarked on a restructuring that led to thousands of job cuts, branch closures, asset sales, and a bigger focus on Asia.

Source: BBC News

Company news

Armadale Capital (ACP.L, 1.62p) – Speculative Buy
Armadale Capital announced yesterday test work results demonstrating purity of up to 99.99% graphitic carbon that can be achieved from its Mahenge Liandu graphite project in Tanzania. Results also indicate that purity above 99.95% can be achieved for size fractions between 106 and 500µm, which are typically used for the production of spherical graphite. These results demonstrate the project’s ability to produce high-quality graphite concentrates, which could be suitable for several commercial applications. Armadale is planning further metallurgical test work, including bulk samples to be used for marketing graphite concentrates to potential offtake partners. In addition, a 2,500m drill campaign will commence imminently to update the JORC-compliant resource of 40.9Mt grading 9.41% total graphic content (TGC) in preparation for a proposed Prefeasibility Study (PFS) later in 2017.

Our view: We are encouraged by the high-grade total graphite content of 9.41% as well as the excellent purity results in the medium size fractions. The ongoing test work continues to demonstrate that Mahenge Liandu is capable of producing high-quality graphitic concentrates suitable for a range of commercial applications. The Company is looking to capitalise on the expected growth in the graphite market driven by increasing applications particularly in the energy storage market and the Mahenge Liandu project continues to deliver favourable results. We look forward to drill results from the planned resource update and the proposed marketing of high-quality graphite concentrates to potential off taker partners. In the meantime, we maintain a Speculative Buy rating on the stock.

Beaufort Securities acts as corporate broker to Armadale Capital plc


N4 Pharma (N4P.L, 6.30p) – Speculative Buy
The specialist pharmaceutical company which reformulates existing drugs and vaccines to improve their performance, yesterday announced its readmission to trading on AIM following the reverse takeover of the now renamed, Onzima Ventures plc. Its Admission follows the raising of £1.5m (gross) through a placing of new ordinary shares at 7.0p each, the net proceeds of which will be used to fund development of additional patent applications for reformulations of a wide range of generic drugs, to undertake clinical trials for N4 Pharma’s reformulation of sildenafil, commonly known as Viagra, and for working capital purposes. Founded in 2014 by its CEO, Nigel Theobold, N4 Pharma’s expanded Board now boasts extensive experience in this field, both from a pharmaceutical and commercial point of view. Having partnered with Opal IP Limited, N4 has also found the ideal means by which to expand its intellectual property portfolio. Through the purchase of rights covering a wide range of patents from this Scottish-based operation, N4 has secured access to both new uses and formulations of many leading off-patent or soon-to-come-off-patent drugs.

Our view: N4’s commercial strategy is to advance a pipeline of re-formulated drugs through clinical proof of concept, before partnering with larger pharmaceutical groups in order for them to be progressed through to new drug applications (NDA) and subsequent commercialisation phases in exchange for upfront and milestone payments plus royalties associated with the licence. N4 intends to focus on those reformulated drugs which they believe have the potential to achieve gross annual sales of at least £300 million. Under terms of its agreement, the Company would then be required to pay a proportion of any such royalties received to Opal IP. The Board considers N4’s reformulation approach should take approximately three years to obtain regulatory approval with a cost typically in the range of £3m to £5m, as opposed to the traditional process for new drugs that take an average of ten years to complete at a cost of up to US$1bn. As such, its cost and risk profile remains significantly lower than the industry norm and first revenues could be seen as early as 2020. N4’s most advanced reformulation for sildenafil, where it seeks to improve the speed at which the drug takes effect whilst also extending its duration of action. Once the in-vitro reformulation work on the molecule has completed, assuming positive results, N4 Pharma will undertake small scale human healthy volunteer clinical trials to demonstrate its profile in plasma. This will be funded from the net proceeds of the Capital Raising with any subsequent shortfall likely to be found through the issuance of new equity or other related instruments. At this stage, it would be expected to seek pre-IND acceptance of the proposed programme from the FDA. Having adopted a relatively low-risk business model that also offers a rapid route to first revenues, N4 Pharma’s valuation upon Admission appears to ignore the opportunity its lead candidate presents. Even after awarding a lowly 20% probability of success and assuming a call for an additional £2m raise to complete clinical studies before attracting a suitable partner, a net-present value of £10m is still more than twice yesterday’s closing price. Beaufort initiates N4 Pharma with a Speculative Buy rating.

Beaufort Securities acts as corporate broker to N4 Pharma plc


Sunrise Resources (SRES.L, 0.12p) – Speculative Buy
This morning Sunrise Resources published a very significant announcement. It describes good results from a concept study of the CS Project and a new “strategic decision that development of the CS Project should be the company’s priority”. In other words, Sunrise management now believes the CS Project is of sufficient quality to become it’s flagship, and Sunrise will move away from investing in multiple projects in multiple different commodities.Sunrise decided not to publish any economic details from the study because CS Project hasn’t yet been drilled. However, the RNS mentions “attractive financial returns based on low capital and operating cost estimates”. And we note that as a volcanic tuff deposit, which Sunrise has widely sampled and mapped, the geological risk is low. The CS Project is a natural pozzolan and perlite deposit so should produce two products for two markets. Pozzolan for cement manufacturing and perlite for lightweight fillers, insulation and filtration. Both products have large local markets in California and pricing which should leave Sunrise with an attractive margin. For example the potential market for natural pozzolan is 900kt in California and the selling price of a crushed pozzolan from CS should be in excess of $60/t. The biggest cost for Sunrise will be transport, capex and production costs will both be small numbers. We estimate sub $5m and circa $7.5/t respectively. Note that Sunrise has published the Concept Study on its website but without the economic model.

Our view: We regard this as an important and positive development. Sunrise is now an industrial minerals company with a high quality pozzolan and perlite project in a stable, mining friendly state (Nevada), with a nearby market in California. We are a little in the dark regarding numbers but given the board decision to focus on CS, plus the pozzolan and perlite market info found in the Concept Study, we expect both products to generate a decent margin (20% to 30%) and for capex to be very manageable for a junior like Sunrise. We also note that Sunrise’s pozzolan is a green product which should greatly assist in taking market share from the 900,000 ton California market which currently uses fly ash from coal power plants. In a best case scenario, Sunrise could take several hundred thousand tonnes of that market, and potentially dominate it. We have a Speculative Buy recommendation.

Beaufort Securities acts as corporate broker to Sunrise Resources plc


ANGLE (AGL.L, 49.00p) – Speculative Buy
The specialist medtech company yesterday provided a business update following the close of its financial year ended 30 April 2017. It confirmed the Company’s first clinical application for Parsortix is being progressed with two clinical studies in ovarian cancer: ANG-001 in Europe (200 patients) and ANG-003 in the United States (200 patients). Good progress has been made with these studies and patient enrolment is now complete in both. A few patients remain to have their abnormal pelvic mass surgically removed and/or the removed tissue to be analysed to confirm the presence or absence of tumour cells. The studies will then be un-blinded and an independent statistical evaluation of the predictive power of the Parsortix clinical application will be undertaken. The headline data is on track for reporting this quarter (Q2 CY17). ANGLE has successfully completed fundamental aspects of the FDA analytical study and the remaining tasks are in progress. The FDA clinical study, ANG-002 in metastatic breast cancer, has passed formal Scientific Review Committee approval and The University of Texas MD Anderson Cancer Center has been signed as the lead cancer centre for analysis of the primary endpoint and one of the secondary endpoints for the study. ANGLE has engaged with IRBs (institutional review boards) at six US cancer centres to provide patient samples and to process these with Parsortix for subsequent analysis. The studies remain on track for completion by the end of CY17.

Our view: The results of current studies in ovarian cancer are expected to be the clearest possible demonstration of the value of Parsortix in the clinical setting. Success in these will mark a major step forward in the validation of the technology and for ANGLE as a key participant in the rapidly growing multi-billion dollar liquid biopsy market. Even ahead of this, adoption of Parsortix into the customers’ routine laboratory practice is evident from a substantial increase in revenues from cassette sales, which are up over 500% from last year. Overall revenues for the year are up over 40% and sales are expected to be c. £0.5 million for the year. There are also a further 20 prospective customers evaluating the systems with a view to purchase. The Directors believe that the conversion rates to date and the number of institutions currently engaged point to a positive profile of growth in research use. The ‘thumbs up’ from the FDA, however, is clearly the major event that investors are now waiting for. Once ANG-002 has completed, a further multi-site United States ‘validation study’ will be needed to secure FDA clearance for the ovarian application, which will then enable the sale of the application throughout hospitals in the United States. Based on this, Beaufort’s financial model sees ANGLE achieving only relatively limited revenues and remaining in quite deep losses for this year, before ramping sharply upward toward the end of 2018 to become cash flow positive for the first time during 1H’2019. Based on a cash position of around £5.5m by the end of the April 2017 and assuming the R&D tax credit is received, Beaufort considers the Group will be in the position to demonstrate a strong sales growth trajectory and modest positive earnings before tapping shareholders once again for additional funding. During this time, Beaufort also believes that ANGLE will have been recognised as the only viable, non-invasive cancer detection test for hospitals and medical institutes. This will accrue significant value to Parsortix. Beaufort retains its Speculative Buy recommendation on ANGLE plc.


JD Wetherspoon (JDW.L, 1,038.30p) – Hold
JD Wetherspoon (‘Wetherspoon’), UK’s leading owner-operator of pubs, yesterday provided its trading update for the 13 weeks ended 23 April 2017 (‘Q3 FY2017’). During the period, total sales advanced by +1.3%, while like-for-like (‘LFL’) sales increased by +4%, against the comparative period (Q1 FY2016). Operating margin improved by +0.9% to 7.3%. On the operational front, the Group opened 7 new pubs and closed 17 pubs during the period, bringing total number of pubs at the period end to 896.

Our view: Wetherspoon performed better than expected during Q3, with LFL sales growth of +4% on improved operating margin to +7.3% (although latter fell from +8.1% achieved in H1). The result show first 9 months’ total sales were up +1.4%, LFL sales up +3.5% with operating margin of 7.8%, up +1.5%, against the same period last year. Having estimated lower LFL growth in the H2, the strong Q3 result leads management to anticipate a “slightly improved trading outcome” for the FY2017. Looking ahead, the Group said it expect to open 1 new pub in Q4, and expect £16m of exceptional, non-cash losses in FY2017, primarily due to the disposal programme. Net debt is now expected to be about £70m higher than a year ago (FY2016: £650.8m), mainly as a result of expenditure on freehold reversions (where the Company was previously the tenant) and share buybacks. The Group has also warned that in the FY2018, it will require LFL sales of c.3% to 4% in order to maintain profits at current levels due to aforementioned cost pressures. As previously noted, in FY2018, there will be additional costs of some £20m expected to incur due to combination of business rates, electricity taxes, excise duty and Apprenticeship Levy. The proposed sugar tax will also impact the Group from April 2018 at a cost of some £4m. Wetherspoon’s high debt levels (net debt/EBITDA guidance is now 3.7x) will remain as concern as it increases capital investment. A continued dividend payment also suggests share buybacks this year will need to be reduced. FY2017E and FY2018E P/E multiples of 18.5x and 18.2x, with dividend yield for both of just 1.1%, looks just about correct given the continuing challenges faced by the management. Beaufort maintains its Hold rating on the shares.


Ryanair Holdings (RYA.L, EUR 16.54) – Buy
Ryanair, a low-cost European short-haul airline company, yesterday provided a traffic update for April 2017. During the month, passenger traffic increased by +14% y-o-y to 11.3 million customers, while the load factor grew +3% y-o-y to 96%. The rolling annual traffic to April rose +13% to 121.3 million customers. Passenger traffic represents the number of earned seats flown, while load factor represents the number of passengers as a proportion of the number of seats available for passengers.

Our view: Ryanair reported strong passenger traffic and load factor data for April. Ryanair said the good result was driven by lower fares and the continuing success of its ‘Always Getting Better’ customer experience programme. These strong statistics follow last month’s +10% increase in passenger traffic and flat load factor of 94%. For the year-ended 31 March 2017, the Group achieved its target of 120.0 million (FY2016: 106.4m) passenger traffic, while its full year load factor was +1% ahead of its guidance to 94%. At its Q3 FY2017 result announced in February, the Group said it expect average fare to fall by c.-15% in Q4, and upgraded full year ex-fuel unit cost saving to c.-4% (previously guided c.-3%) given Q3 saw better than expected ex-fuel unit cost saving of -6%. Overall, the management reiterated its FY2017 profit after tax guidance of €1.30bn-€1.35bn, subject to normal levels of disruption. We shall wait for release of final result scheduled for 30 May 2017 for confirmation that this was achieved. Looking ahead to FY2018, Ryanair stated with its Q3 results that the challenging pricing environment is expected to continue, which the Group hopes to tackle by boosting passenger traffic and further reducing unit costs. The management also said at its Analyst’s conference call that it expects the Group load factor to stabilise at around 93% to 93.5%, going forward. Ryanair has already hedged over 85% of FY2018 fuel at an average price of US$49bbl, which is set to deliver fuel savings of c.€65m in coming year. Beaufort is encouraged by the Group’s ability offering lower fares while still retaining its net profit guidance. The key differences for Ryanair is its ability to continue lowering its unit costs, while delivering “lowest passenger costs” amongst its EU peers, at the time of traffic growth and a time when competitors are “forecasting flat or rising” costs. This gap between Ryanair and its rivals should enable Group to maintain its current momentum and continue winning market share. Beaufort retains its Buy rating on Ryanair.


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) [email protected]

Weekly diary

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

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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