Moody’s downgrades China’s credit rating


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Today’s edition features:

  • Katoro Gold (KAT.L)
  • KEFI Minerals (KEFI.L)
  • Obtala Limited (OBT.L)
  • Tiziana Life Sciences (TILS.L)
  • Severn Trent (SVT.L)

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"A lack of new drivers amongst US stocks resulted in a virtually unchanged close across all three of the principal indices yesterday evening, with some pointing to today’s scheduled release of FOMC Minutes for their lack of activity. They may still be seeking further insight into whether or not the Fed will indeed hike rates at its June meeting, but Money Market Futures suggest most have already made up their minds with probability put at 78.5% for an additional 25bp, albeit down from the 83% indicated before turmoil broke out in Washington last week. With this in mind, there was relief that President Trump’s first full budget plan details were largely as expected, although his plans in favouring defence and border security at the expense of welfare, foreign aid and government spending appear wildly optimistic, while a report from the Commerce Department showing a substantial pullback in new home sales in the month of April provided another excuse for traders to pause for breath; elsewhere the latest set of PMIs were seen to effectively cancelled one-another with the manufacturing reading unexpectedly dropping while the services figure jumped higher than consensus. There were few features amongst the individual shares, although strength reflected in the steel sector, with the NYSE Arca Index spiking by 2.3%, while bears sold off various of the auto-components quotes as Autozone missed quarterly expectations. The biggest news from Asia was Moody’s decision to cut China’s sovereign credit rating, from A1 to Aa3, citing expectations that the country’s financial strength will deteriorate in coming years as debt keeps rising and the economy slows. Its principal indices were punished accordingly, while the S&P/ASX 200 and Nikkei remained positive. The major European markets also turned in a mixed performance yesterday. The UK’s FTSE-100 dipped by 0.15% in the wake of the terrorist attack in Manchester, although the FTSE-250 still achieved a new intraday high. Amongst the different shares, easyJet, Babcock and Severn Trent led the way, while M&S was amongst the worst performers ahead of this morning’s earnings release. The pan-European STOXX 600 by contrast rose by 0.22% on a strong Composite PMI number, as Germany’s Xetra DAX lifted 0.3% having been boosted by data confirming the country enjoying record high business sentiment, a one-year high economic growth and a six-year high growth in the private sector signal strong positive momentum, while the French CAC 40 Index climbed by 0.5% on news its private sector expanded at its sharpest pace in six years. The Spanish IBEX 35, however was easily the Bloc’s strongest country performer, led by a strong banking sector. Brightening growth statistics will add further pressure on the ECB to use its June policy meeting to signal a reduction to its existing monetary stimulus measures – something market watchers will be listening out for in the President’s speech due later today. No UK macro releases are scheduled for this morning, although the EU provides its Financial Stability Review which will be followed by statements from Mario Draghi. The US details its March Housing Price Index along with Existing Homes Sales and the EIA Crude Oil Stocks change numbers; the FOMC Minutes will be released and Member Robert Kaplan is also due to make a speech. UK corporates due to publish earning or trading updates include Babcock International (BAB.L), Pennon Group (PNN.L), Kingfisher (KGF.L), Marks & Spencer (MKS.L), Hogg Robinson (HRG.L), Dixons Carphone (DC..L), Great Portland Estates (GPOR.L), HSS Hire (HSS.L) and Vedanta Resources (VED.L). London trading will remain nervous in response to Theresa May raising the threat level to ‘critical’ Tuesday evening, following a meeting of the government’s crisis response committee; in the absence of any particular stimulus from the overnight markets, the FTSE-100 is seen edging lower, falling between 5 and 10 points in early trade."
– Barry Gibb, Research Analyst


The FTSE-100 finished yesterday’s session 0.15% lower at 7,485.29 whilst the FTSE AIM All-Share index was up 0.50% at 985.56. In continental Europe, the CAC-40 finished up 0.47% at 5,348.16 whilst the DAX was 0.31% higher at 12,659.15.

Wall Street
In New York last night, the Dow Jones Industrial Average rose 0.21% to 20,937.91, the S&P 500 firmed 0.18% to 2398.42 and the Nasdaq gained 0.08% to 6138.71.

In Asian markets this morning, the Nikkei 225 had risen 0.46% to 19,703.25, while the Hang Seng lost 0.15% to 25,365.26.

In early trade today, WTI crude was up 0.02% to $51.48/bbl and Brent was up 0.06% to $54.18/bbl.


Moody’s downgrades China’s credit rating
China has received a downgrade on its credit score, on worries about the future state of the economy. Moody’s Investors Services brought down China’s long-term local currency and foreign currency issuer ratings by one notch to A1 from Aa3. But China’s finance ministry said Moody’s was exaggerating the mainland’s economic difficulties and underestimating reform efforts. The downgrade could raise the cost of borrowing for the Chinese government. The ratings agency also changed its outlook for China to stable from negative. Moody’s said in a statement that the downgrade reflected expectations that China’s financial strength would “erode somewhat over the coming years, with the economy-wide debt continuing to rise as potential growth slows”. The Chinese economy expanded by 6.7% in 2016 compared with 6.9% the previous year, the slowest growth since 1990.

Source: BBC News

Company news

Katoro Gold (KAT.L, 5.25p) – Speculative Buy
Katoro Gold (formerly Opera Investments), the Tanzania focused gold exploration and development company, was admitted to the AIM market yesterday after completing a reverse takeover of Kibo Gold, a subsidiary of Kibo Mining (KIBO.L). As part of the transaction, the Imweru and Lubando gold projects were transferred to Katoro Gold for a total consideration of £3.7m satisfied by the issuance of 61M new ordinary shares to Kibo Mining at a price of 6p per share. On aggregate, the Imweru and Lubando gold deposits have a compliant resource estimate of 754,980oz of gold.

Our view: The newly formed Katoro Gold began trading yesterday following the reverse takeover of Kibo Gold. As part of the transaction, Katoro raised gross proceeds of £1.5m and plans to develop the Imweru gold project through additional drilling, completion of a pre-feasibility study and application of a mining licence before the end of 2017. We look forward to further announcements regarding the development of the Imweru project and have initiated coverage on Katoro Gold (view note) with a 11.7p target price and a Speculative Buy recommendation.

Beaufort Securities acts as a corporate broker to Katoro Gold plc


KEFI Minerals (KEFI.L, 5.23p) – Speculative Buy
KEFI has published an update to its 2015 DFS using numbers from proposed or contracted (engineering, construction, mining, support service, consumables etc.) agreements. This Updated 2017 DFS is therefore more accurate although importantly delivers very similar numbers to the 2015 DFS. Key numbers include capex of $161m although after contract deferrals it falls to $145m, AISC of $777/oz and $933/oz including capex. The NPV8 from the start of production using flat $1250/oz is $272m and gold production averages 115koz over the first 8 years. Below the headline numbers a few important changes have been made including higher throughput, coarser grind size, and design changes to access roads and the tailings facility. Construction is targeted to start end 2017 or early 2018 with first gold end 2019. Mining will be circa 80% bulk mining and 20% selective.

Our view: The major change to the 2015 DFS is throughput increase from 1.2mt to 1.5mt and higher average production. Capex is slightly higher than the 2015 DFS but in line with KEFI’s estimate from 2016. Its worth noting that under Nyota, capex was $289m and even KEFI’s first feasibility study which was owner operated (with its own mining fleet) had capex of $176m. This is a positive DFS, a slight improvement with no nasty surprises and doesn’t include upside from the higher grade underground mine which is likely to be an important aspect of Tulu Kapi’s life. We look forward to KEFI completing financing and breaking ground and maintain our Speculative Buy recommendation.

Beaufort Securities acts as a corporate broker to KEFI Minerals plc


Obtala Limited (OBT.L, 19.00p) – Speculative Buy
The African focused agricultural and forestry company, this morning announced the acquisition, through Argento Limited (its 75% owned forestry subsidiary) of WoodBois International ApS (‘WBI’), a global trader and producer of sawn timber, for a total consideration of US$14.8 million (approximately £11.4 million). Argento will acquire 100% of the share capital of WBI, including all land, fixed assets, inventory and the forestry concessions in Gabon. Founded in 2004, WBI is engaged in the global trading of sawn timber sourced from 100s of exclusive timber producers throughout Africa, as well as the production of sawn timber planks and veneer from its concessions in Gabon. It is headquartered in Copenhagen, Denmark, with African trading operations based in Abidjan, Ivory Coast, where the company leases warehouse space for inventory. Importantly, WBI has an existing diverse buyer base with no pronounced customer or regional concentration with sales into the Middle East (33%), Europe (17%), USA & Canada (15%) as well as into Africa (14%), South America (13%) and Asia (9%). WBI’s concessions in Gabon total 102,000 acres (41,278 hectares) with an annual permitted cut of 70,000m3, the primary species of which is Okoume. The concession rights have no expiration and are all located within 70km of WBI’s sawmill and veneer facility in Mouila, Gabon. WBI, like Obtala, is committed to sustainable forestry management and intends to seek FSC (or similar) certification in the near future.

Obtala will acquire the entire issued share capital of WBI, for a total consideration of approximately US$14.8 million to be satisfied by a mixture of cash and new Obtala ordinary shares payable in three tranches, subject to satisfactory completion of Obtala’s due diligence:

  • Tranche 1: Initial cash consideration of US$3 million (approximately £2.31 million); and the issue of 15,641,499 new Obtala ordinary shares within five business days of completion of the due diligence period (“Completion”);
  • Tranche 2: Further cash consideration of US$3 million (approximately £2.31 million) on the earlier of 30 September 2017 and 120 days after Completion; and
  • Tranche3: Deferred cash consideration of US$5 million (approximately £3.85 million) payable over five years in equal quarterly payments commencing 30 September 2017.

The consideration shares to be issued as part of the Tranche 1 consideration, with a value at 19.00p per share of £2.97 million (approximately US$3.84 million), are subject to a 24 month lock up period, with any disposal subject to Obtala’s consent and orderly market provisions. They represent approximately 5.63% of Obtala’s current issued ordinary share capital. Any shortfall (or excess) in working capital relative to debt assumed on completion, though not expected to be material, will be offset by a purchase price adjustment to Tranche 2 and Tranche 3 payments. Tranche 2 and 3 payments are conditional on the continued employment of WBI’s two founder directors, Zahid Abbas and Jacob Hansen.

Our view: Africa is pending a giant green revolution. The extent of its premium land resources, across a continent that is rapidly urbanising, makes it the obvious candidate to become a world powerhouse for cash crops. Recognising the potential, its Governments have become increasingly willing to think of farming and harvesting as a business, rather than a means for subsistence. This story has, of course, been told countless times before; realisation for most is measured in terms of decades, but Obtala’s FSC-certified forestry and agricultural divisions are genuine and significant near-term commercial opportunities. Obtala brings with it a highly experienced operational and financial management team with a vision on how to capitalised on sustainable forestry assets by building-out concessions and rising up the value chain. Having finally begun to recognise the true extent of the Group’s opportunity, investors have nevertheless remained concerned regarding the likely time and resource required to secure a truly visible and hard-currency international customer base, rather than simply supplying local and regional needs as has been the case until recently. In this respect, the acquisition of WBI provides an ideal solution, with its distribution arm already supplying a broad spread of foreign buyers, through which it has capacity to secure premium prices for a much larger volume of value-added product. Reassuringly also, an elementary discounted assessment of WBI’s Gabon concessions, on parameters similar to Honour Capital’s own 2014 review of Obtala’s forestry assets suggests these alone hold value well in excess of today’s acquisition price, in which case, everything else appears to come for free! Operationally, the Board’s immediate plan is to accelerate the expansion of WBI’s sawmill (current annual capacity of 24,000m3 sawn timber) and complete the upgrade of their veneer facility (planned annual capacity of 18,000m3 veneer) within 2017. Expansion of both business lines is estimated to have a capital cost of some US$500,000 and will generate cost savings and support entry into higher margin product lines, in line with Argento’s existing strategy in Mozambique. Gross margins in the range of 60% to 70% (largely weighted by transportation costs) can be achieved for global demand that appears insatiable. As such, the acquisition of WBI marks a step-up the value chain as management looks to position the enlarged-Group to capture long-term sustainable growth and synergies. The fact that the existing management has agreed to a substantial deferred consideration and committed to remaining with Obtala for at least 5 years, underlines their confidence that with the access to capital through the enlarged Group there is substantial opportunity for value-creation. During the year to 2015, WBI recorded earnings before interest and tax in Danish Krone of DKK2.54 million (then equivalent to approximately £247,000) on turnover of DKK 106.8 million (then approximately £10.40 million), and as at 31 December 2015 had total assets of DKK 56.92 million (then approximately £5.61 million). On this basis, Obtala will have secure have assets that fit ‘hand-in-glove’ with its existing operations at around 1x 2016E revenues. Even after factoring in all the normal risks and concerns associated with labour-intensive operations on the Continent, that remains something of a bargain. Beaufort initiates its coverage on Obtala Limited with a Speculative Buy recommendation.

Beaufort Securities acts as a corporate broker to Obtala Limited plc


Tiziana Life Sciences (TILS.L, 190.00p) – Speculative Buy
The clinical stage biotechnology company developing targeted drugs for cancer and autoimmune diseases, yesterday announced its financial results for the year ended 31 December 2016. R&D highlights during the period included the achievement of a key milestone foralumab as new data demonstrated oral efficacy in humanised mouse models and the outlining of its clinical development plan with initial focus in two clinical indications: graft vs host disease and non-alcoholic steatohepatitis (NASH). Milciclib also continued to progress through phase II trials for thymic carcinoma (thymoma) in patients previously treated with chemotherapy. A research agreement with Cardiff University for TZLS-101, focused on developing Bcl-3 inhibitors as potential drugs to treat cancer, has led to the identification of a first-in-class lead clinical candidate, CB1, with potent anti-metastatic activity, and with an impressive in vivo efficacy and safety profile, while TZLS-214 / c-FLIP remains under analysis to identify a lead candidate. Very much in line with expectations, For the 12-month period, the consolidated Group made a loss of £7.21m (2015: £8.63m), ending the period with £4.70m cash as at 31 December 2016 (2015: £8.90m) after having raised £0.71m (gross) raised through a convertible loan note in January 2016 and following exercise of warrants £0.29m in total. During the period, the Board was also strengthened with the appointment of Tiziano Lazzaretti was appointed as Chief Financial Officer while Dr. Kevan Herold, Professor of Immunobiology and of Medicine (Endocrinology) as well as Deputy Director, Yale Center for Clinical Investigation, and Dr. Howard Weiner, the Robert L. Kroc Professor of Neurology at the Harvard Medical School, were added to the Group’s Scientific Advisory Board.

Our view: Tiziana’s major development programmes are well positioned to progress to their next respective value inflection points. Liver diseases today list amongst the therapeutic industry’s fastest growth areas, with NASH and PBC seen expanding at double-digits for the next decade, potentially creating a market opportunity in excess of US$25bn by 2026. Oral bioavailability of foralumab (TZLS-401), a fully human anti-CD3 monoclonal antibody, is key to addressing this, significantly broadening use and dosing options which, when combined with best-in-class effectivity, suggests potential to become one of the world’s largest selling antibodies. The Group’s other clinical-stage asset is a small molecule drug, milciclib, which targets Hepatic Cellular Carcinoma (‘HCC’). Now de-risked for safety and tolerability, a valuation based on risk-based DCF methodology to arrive at a Net Present Value (NPV) for these two molecules can be derived. Ignoring the Group’s remaining pipeline of products and opportunities, while applying a relatively aggressive 18% discount to the remaining model, creates a Group valuation more than twice the current level based on anticipated milestone fees & royalties. Beaufort reiterates its Speculative Buy rating on the shares together with a price target of 400p/share.

Beaufort Securities acts as a corporate broker to Tiziana Life Sciences plc


Severn Trent (SVT.L, 2,491.00p) – Buy
Severn Trent, a leading UK water company provides clean water and waste water services, yesterday announced preliminary results for the 12 months ended 31 March 2017 (‘FY2017’). During the period, turnover advanced by +3.7% to £1,819m, comprised of +1.5% growth in Regulated Water and Waste Water division and +11.9% growth in Business Services division, against the comparative period (FY2016). Underlying profit before interest and tax grew by +4.3% to £525.1m, supported by operating cost savings, while on a reported basis, it increased by +7.8% to £543.7m. Underlying basic earnings per share increased by +19.9% to 122.4p, and basic earnings per share (from continuing operations) rose +4.9% to 140.1p. Cash from operations improved by +6.7% to £53.5m. Net debt at the period end stood at £5,082.4m (end-FY2016: £4,823.4m) while cash and cash equivalents was £44.6m (FY2016: £55.2m). On the operational front, the Group spent c.£680m in network investments. The Group delivered most of its Final Determination performance commitment ahead of its target, reducing sewer floodings, supply interruptions and leakages. Looking down the key performance indicator (KPI), the Group achieved Return on Regulatory Equity (‘RORE’) of 11% during the year, comprised of; 5.6% Base Return, 2.1% (£138m) total expenditure (‘Totex’) outperformance, 1.3% Outcome Delivery Incentives (‘ODI’) outperformance (£47.6m net reward) and 1.8% financing outperformance. Severn Trent’s CEO, Liv Garfield commented “We are delivering both strong customer-focused and financial outperformance this regulatory period, and we feel it is now appropriate to share this with our investors. The Board is therefore pleased to announce an upgrade to our ordinary dividend policy, to growth of at least RPI +4%”. The Group declared a final dividend of 48.9p per share, bringing total dividend for the full year to 81.50p, up +1.0%, to be paid on 21 July 2017.

Our view: Severn Trent delivered strong results, both financially and operationally, for the FY2017. The growth of +3.7% in turnover was supported by +1.5% increase in price for Regulated Water and Waste Water division (83.2% of turnover) and +11.9% growth in Business Services division (16.8% of turnover), boosted by favourable exchange rate movement from its US contracts. Operationally, the Group delivered exceptional 11% RORE during the year (FY2016: 8.4%), resulted cumulative RORE during AMP6 (Asset Management Plan regulatory period 2015 to 2020) to date of 9.7%. The Group continued to work to improve this, with identifying an additional Totex savings of £100m during the year, taking total forecasted savings of £770m (of which, £610m are locked in) during AMP6. Customer ODI reward of £47.6m was helped by strong operational outperformance as well as mild winter, while financing cost reduced by -0.1% to 4.4% despite rising Retail Price Index (‘RPI’). ODI is a regulatory condition under which companies are incentivised to outperform the permitted regulatory return. Any outperformance in ODIs along with Totex and financing will translate into RORE, a key indicator of the underlying performance of the regulated business. Looking ahead, for the FY2018, the Group expect revenue from Regulated Water and Waste Water division to be in the range of £1.57bn to £1.60bn, Customer ODI at c.£23m with wholesale Totex of £1.2bn-£1.3bn. Division’s operating cost is expected to be higher than this year. For Business Services division, revenue is expected to be flat due to exit of Italian business, while profit before interest and tax to improve year-on-year. As per its enhanced dividend policy of at least +4% growth per annum above RPI inflation to 2020, dividend for FY2018 will be 86.55p per share, up +6.2%. The shares are valued at FY2018E and FY2019E P/E multiple of 23.0x and 21.6x along with dividend yield of 3.4% and 3.5%, respectively. Given positive progress, improved Totex savings potentials, with enhanced dividend policy, Beaufort reiterates its Buy rating on the Shares, although our top pick in the sector remains Pennon Group (FY2017E P/E 20.9x, yield 4.0%).


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

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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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