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Beaufort Securities Breakfast Alert: Alecto Minerals, Legendary Investments, BT, Bunzl, London Stock Exchange, Rosslyn Data Technologies, RSA Insurance

Published: 03:21 06 May 2016 EDT

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The markets
Europe
The FTSE-100 finished yesterday's session 0.09% higher at 6,117.25, whilst the FTSE AIM All-Share index closed 0.20% lower at 722.39.
Wall Street
On Wall Street last night, the Dow Jones rose 9.45 points to close at 17,660.71, while the Nasdaq dropped 8.55 points lower to 4,717.09 and the S&P-500 moved 0.49 points lower to 2,050.63.
Asia
In Asia this morning, the Nikkei resumed trading after an extended break and was recently down 110.08 points at 16,037.3, while the Hang Seng had lost 259.1 points at 20,190.72.

Headlines
UK economy 'near stalling' as service sector slows
UK economic growth is "near stalling", partly due to uncertainty over the EU referendum, according to a closely-watched survey. Research firm Markit said its Purchasing Managers' Index (PMI) surveys for April pointed to growth of just 0.1% in the month. The latest PMI survey indicated the UK's services sector grew at its slowest pace in three years in April. The services PMI reading fell to 52.3 from 53.7 in March. A reading above 50 indicates growth.

Company news
Alecto Minerals (LON:ALO, 0.12p) – Speculative Buy
Yesterday, Alecto Minerals informed that the validity of its Kerboulé exploration permits, including the Gassel-Manere and Arae mineral exploration permits, has been further extended by three years to 16th January 2019. The additional three-year term is likely to give the company sufficient time to expand the known mineral resource estimate of 230,758 oz Au in the Kerboulé-Yalema corridor and complete further exploration at the highly prospective Palpaga Exploration Target. The permits in the Burkina Faso collectively have an initial independent (non-JORC) in-situ gold resource assessment of 6.2Mt grading at 1.16g/t Au for 230,758 oz Au with a cut-off grade of 0.5g/t Au.

Our View: The extension is likely to benefit the company in securing a potential joint venture partnership and is crucial in maintaining the company's high exposure in West Africa with minimal exploration and development spend. The Kerboulé project covers 399.5 square kilometres of the highly prospective Birimian-age Djibo gold belt in the north of Burkina Faso, and lies 20 kilometres along the strike of the 5Moz Inata gold mine. Since Kerboulé's acquisition in November 2014, Alecto's strategy continues to focus on becoming a producer in the mid to near term through the development of the Matala gold deposit in Zambia. Although Alecto has some way to go before it produces cash flows, it appears to be well on track. We expect the company to continue advancing its early-stage exploration portfolios through joint ventures or early monetisation of opportunities. In the meantime, we reiterate a Speculative Buy on the stock.

Beaufort Securities acts as corporate broker to Alecto Minerals PLC

Legendary Investments (LON:LEG, 0.32p)- Speculative Buy
Legendary yesterday announced that it has raised GBP 1 million (before expenses), by way of an oversubscribed placing of 333,333,333 ordinary shares of 0.10 pence nominal value each at a price of 0.3 pence per new Ordinary Share. The shares were placed with a range of institutional and private investors. Legendary proposes to use the funds to take advantage of new suitable investment opportunities as and when they arise. Having already made investments, some of which have generated returns of several times the initial outlay, Legendary is currently evaluating several opportunities, including in the technology sector. The funds will also be used to continued development of existing investments and increase participations as opportunities arise or become appropriate. Funds will also be utilised for working capital (including the paying down of debt).

Our View: Legendary is a proactive investment company that is focused on highly selective company investment and then assisting management which exhibits the potential to generate multiple returns through added value and capital appreciation. Typically, Legendary invests in small companies that are in sectors exhibiting long term growth potential or key, protectable IP. Examples of such sectors include technology, energy and natural resources. The companies must also have the potential and catalysts for value appreciation, crystallisation and realisation. LEG's current portfolio comprises the following investments: Virtual Stock Holdings Limited, Bosques Energeticos EBE S.A. de C.V., Amedeo Resources PLC, Manas Minerals LLC, Sula Iron and Gold PLC, Medgold Resources Corp and Oracle Coalfields PLC. Indeed, Beaufort has recently completed a review of one of these private equity investments, Virtual Stock (7.1%-owned), that was acquired back in October 2012 for a total of £2.1m. As a technology company, VS provides next generation software solutions to optimise supply chain efficiencies and visibility to a varied range of supplier, retailers and customer service software groups; its USP is found in its key product, 'The Edge', which incorporates 'Python' as an open-source platform with its own powerful programming language, to rapidly add functionality within service orientated architecture. It supplies a complete end-to-end 'drop ship' solution when incorporated with its family of product and order management systems. VS's valuation is now considered to be a multiple of the original cost some three and a half years back. Based on a sum-of-parts of the LEG's participations, its cash holdings following the fund raise announced yesterday and value created by active management of its assets, Beaufort rates Legendary investments as a Speculative Buy, with a price target of 0.5p/share.

Beaufort Securities acts as corporate broker to Legendary Investments plc

BT Group (LON:BT.A, 451.05p) – Buy
BT Group, a global provider of communications services and solutions, yesterday announced its Q4 and final results for the year ended 31 March 2016 ('FY2016'). During the FY2016 (comparing to the FY2015 and including EE from 29 January 2016), revenue advanced +6% to £18.9bn and change in underlying revenue excluding transit (Excludes specific items, foreign exchange movements and the effect of acquisitions and disposals), up by +2%. EBITDA and adjusted pre-tax profit grown by +5% and +9% to £6.6bn and £3.5bn respectively. Consequently, adjusted EPS increased to 33.2p per share, +5% higher than FY2015. Normalised free cashflow stood at £3.1bn, +£268m higher and net debt widened to £9.8bn. The increase in net debt was mainly driven by the acquisition of EE Limited, which included a cash consideration of £3.5bn (along with new BT shares). On the operational front, acquisition of EE has been completed on 29 January 2016. The Group has increased number of BT Consumer TV customer base by +28% to 1.5 million and expanded its fibre broadband reach to over 25 million premises. Its CEO, Gavin Patterson commented "This has been a landmark year for BT. The integration of EE is going well and we now see the opportunity to deliver more synergies than we originally expected, and at a lower cost. Our results and the investments we're making position us well to continue to grow in the coming years". The Group proposed to pay a final dividend of 9.6p per share, bringing full year dividend of 14p per share, both up by +13% from year ago. BT also provided an outlook for next two years indicated growth in underlying revenue, EBITDA (FY2017: c.£7.9bn), normalised free cashflow (FY2017: £3.1bn-£3.2bn, FY2018: >£3.6bn) and dividend per share (both FY2017 and FY2018: ≥+10%). For FY2017, BT announced share buyback of approximately £200m.

Our view: BT delivered robust performance in the Q4, particularly on the basis of underlying revenue, EBITDA and normalised free cashflow, all of which outperformed the consensus estimates. This enhanced the Group's full year results where its underlying revenue (excluding transit) rose +2%, which was the best performance for more than seven years. The acquisition of EE was a great move for the BT, adding £261m to the Group EBITDA, improving normalised free cashflow while providing further opportunity to deliver more synergies with lower cost. Looking ahead, in FY2017 BT plans to make an investment of around £100m against EBITDA by launching handset offerings to BT Mobile customers, which has now built a customer base of over 400,000. The Group expect capital expenditure of £200m for EE integration and £400m for Emergency Services Network contract won by EE in December 2015, in the next two years. Separately, BT also revealed its new investment plans of £6bn over the next three years to extend superfast broadband and 4G coverage beyond 95% of the country by 2020 to help the UK remain the leading digital nation in the G20. We have witnessed the management confidence in lifting its full year dividend as well as detailing its positive outlook for the next two years. BT has clear long term strategy and we believe the Group is well positioned to continue its growth momentum. Beaufort reiterates its Buy rating on the stock.

Bunzl (LON:BNZL, 2,057.00p) – Buy
Yesterday, Bunzl, an international distribution and outsourcing group, informed that it had entered into an agreement to acquire Germany-based Mo Ha Ge Mommsen Handelsgesellschaft mbH and Inkozell Zellstoff-Vertrieb GmbH, subject to clearance of the transaction by the German competition authority. Both companies sell healthcare consumables, principally incontinence products, to various at-home end users and care homes. Their aggregate revenue for the business for the year ended 31st December 2015 was €22m.

Our View: The purchase of Mo Ha Ge and Inkozell is an important development for Bunzl, as they both expand the group's healthcare-related operations in Germany. The company entered the German market through its acquisition of Bäumer in 2014. During 2015, the company continued with its acquisition streak and spent £327m on 22 businesses, entering Turkey and Austria. We expect Bunzl's strong competitive position to remain intact due to the significant acquisition spend in 2015. We believe more such opportunities could emerge and consolidate its fragmented markets further. We remain confident that the company will continue to grow robustly in 2016, riding on the success of its recent acquisitions. Therefore, considering the positives, we reiterate a Buy rating on the stock.

London Stock Exchange (LON:LSE, 2,614.00p) - Buy
On Tuesday, Intercontinental Exchange, Inc. (NYSE: ICE), the leading operator of global exchanges and clearing houses and provider of data and listings services updated investors regarding its Rule 2.4 notice of 1st March 2016, that it was considering making an offer for the London Stock Exchange Group ('LSEG'). Following due diligence on the information made available, ICE determined that there was insufficient engagement to confirm the potential market and shareholder benefits of a strategic combination. Therefore, ICE has confirmed that it has no current intention to make an offer for LSEG. For the purposes of Rule 2.8 of the Code, ICE reserves the right to make or participate in an offer for LSEG (and/or take any other actions which would otherwise be restricted under Rule 2.8 of the Code) within the next six months following the date of this announcement with the consent of the Panel on Takeovers and Mergers, or other conditions, such as the possible lapsing of the Group's proposed merger with Deutsche Börse AG or following the firm intension of a third party to make an offer for LSEG, etc. The LSEG subsequently responded to ICE's formal withdrawal, noting that 'ICE has been provided with information and had access to management under Rule 20.2 of the UK Takeover Code. However, at no time has ICE made an approach to LSEG with a possible proposal or details of any such possible proposal.' The LSEG went on to note it 'continues to progress the proposed all-share merger with Deutsche Börse AG, announced on 16 March 2016. A further update will be provided in due course.'

Our View: Now there's a shock! A clearly interested party, that makes an obvious fit and arrives with funding on tap, only to then cite lack of co-operation as the reason for walking away. Seemingly, ICE's decision was influenced by its apparent inability to derive a valuation on LCH, as well as voicing doubts regarding the extent of merger benefits cited by the LSEG and Deutsche Börse AG said to total US$7bn in capital efficiencies from the pooling of collateral requirements across their combined derivatives platforms. So what really could be the game plan here? Jewels like the LSEG are exceptionally rare and highly desirable. Any reading of the deal cooked up between the LSEG and Deutsche Börse AG tells you quite simply that this is a marriage of convenience devised for and on behalf of their two sets of management. More to the point, given the overwhelming belief that the endgame for the LSEG is now approaching, would it not be a great surprise if a group as experienced in the rules of M&A as ICE clearly is, were to simply throw in the towel following a simple rebuttal from LSEG's Board? And anyway, can we realistically expect existing LSEG shareholders, who will be asked to sacrifice both majority and Board control in a forthcoming vote, not to demand that the LSEG at least be prepared to wholly cooperate with ICE and in so doing invite it to table a, potentially, improved counter-proposal for all to consider? Indeed, one is left believing that there must be more to this than currently meets the eye. Quite how this eventually plays out remains open to conjecture but, of course, ICE was never considered the only other exchange operator potentially interested in LSEG's assets, with players like the CME and HKEx having been extensively cited by the press. In this respect, condition (b) detailed by ICE in its withdrawal announcement under which it reserved 'the right to make or participate in an offer for LSEG', leaves one to speculate whether, in due course, it might instead simply re-appear as part of a new offer proposed by a larger consortium of interested parties' intent on sharing-out LSEG's assets between them. Whatever, this story still has legs and from here the potential must be to surprise LSEG shareholders on the upside. Whether this eventually comes in the form of an improved 'take-over' offer from Deutsche Börse AG, a counter bid from a third party or, simply, more realistic pricing-in of the exceptional cost savings suggested in the current proposal remains unclear. On this basis, LSEG remains on Beaufort's Buy list, although it may be best for shorter-term investors to consider locking in profits before a final proposal finally enters months of regulatory abeyance.

Rosslyn Data Technologies (LON:RDT, 9.50p)– Speculative Buy
Rosslyn Data Technologies PLC, a global leader in big data cloud technology, yesterday provided investors with an update on its financial year to end-April 2016. Although the formal release of results is not expected until early September, management details revenue expectations for the period to be between £3.9m and £4.0m, an increase of over 40% on the previous financial year. The loss for the year, before income tax, is expected to be no more than £2.4m (FY 15, £3.5m loss, excluding exceptional items and share based payments). As at 30 April 2016, Rosslyn had net cash balances of approximately £1.8m (FY 15, £4.7m). It went on to note that it has agreed terms with a number of new customers and that the Directors anticipate revenue growth to remain strong given the Company's high levels of annualised contract revenue and the low churn rate, which remains below 5%. The number of customers over the same period had risen from 38 to 168 and with improving visibility in Rosslyn's partner channel (e.g. PwC and Genpact) and that the pace of client acquisition will remain healthy. The Company also retains tight control over costs and continues to focus on achieving cash flow break even. The Board also confirmed its focus on the three key areas of sales and marketing, R&D and operational and financial management, all of which have delivered material improvements.

Our View: Successful manipulation of big data remains an increasingly important challenge for giant enterprises that find themselves overwhelmed by market, customer and product data. Amid the crowd of solutions providers all jockeying for position in this developing area, however, Rosslyn appears to be delivering something special. Its RAPid platform is emerging as a recognised and well regarded technology that, quite uniquely, is capable learning and responding to highly dynamic data sets within a perpetually changing environment. 2016/17 will see its reputation build significantly further. Forrester Research, the leading global independent technology and market research company that provides advice on the existing and potential impact of technology, for example, ranks RAPid Big Data platform as a "strong performer". This is now being additionally bolstered by the second generation of its award-winning RAPid Data Extract Studio - a new self-service tool from which clients can more effectively tap into all the valuable data held within their diverse ERP platforms. Management consider it has the potential to become disruptive, replacing a customer's existing need for the combination of expensive consultants and complicated tools. Meanwhile the sales pipeline continues to expand while the product remains particularly sticky. Successes of the past year, for example, include a near 100% increase in contracted revenue from a global defence contractor, while also securing a white label arrangement with one partner along with a distribution agreement in the Middle East. As a result, the Directors now believe that "with a lower than expected cost base and continued strong growth, the Company will achieve cashflow breakeven during the calendar year", which it confirmed was a "principal milestone of the Board". While the opportunity presented by Rosslyn's unique technologies may not yet have been recognised by investors, it is clearly being eyed enviously by not only PwC but also by many of its peers, who collectively understand the likely cost and time required to create a comparable, but much needed, product in-house. One way or another Rosslyn's share price should soon start to reflect this, particularly given that an obvious basket of comparable, slower growing enterprises presently trades in a range of 4x to 5x FY16 EV/Sales, which is more than twice Rosslyn's own multiple. Beaufort reiterates its Speculative Buy recommendation and places a price target of 24p on the shares.

RSA Insurance Group (LON:RSA, 478.80p) – Buy
Yesterday, RSA Insurance provided a trading update for Q1 2016. The company performed well, with the UK & Ireland, Canada and Scandinavia all showing a y-o-y improvement in the underwriting business. Premiums across the UK and Irish businesses increased 2% y-o-y to £635m for the quarter. In addition, the attritional loss ratio for Q1 2016 across core regions improved. During the period, the company's net written premiums remained flat compared to the same period last year, reflecting the impact of disposals. Meanwhile, core group net written premiums were up 8% y-o-y. The company's investment portfolio grew 7% to £13.9bn during the quarter, largely driven by a weak Sterling. In terms of other financial parameters, the company's Solvency II capital surplus, a measure of its financial stability, stood at £1.0bn. Large losses for the Core Group stood at £142m for Q1 2016, accounting for 9.5% of net earned premiums (Q1 2015: 8.5%; planning assumption c.8.5%). The overall group-large loss ratio was 8.5% compared to 7.5% in Q1 2015.

Our View: RSA Insurance had a good start to the year, as its streamlined and focused business model continued to reap rich rewards and drove significant performance gains. The company's loss ratios improved and the costs reduced as planned, thereby giving way to higher profits. The company benefitted from more volatile underwriting items going its way. Although the external environment remains challenging, characterised by slow growth, competition and volatile financial markets, the company remains on track with expense reductions and a transformation programme. We are encouraged by the group's performance in Q1 2016 and expect it to perform better after it completes the restructuring programme. Therefore, we maintain a Buy rating on the stock.

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