"Confidence in UK equities was knocked yesterday, as Standard life reminded investors that Brexit-shock ramifications have not gone away. Midday yesterday, the benchmark Scottish long-term savings and fund management business suspended trading in its £2.9bn domestic commercial real estate fund due to lack of available liquidity, as a number of holders concerned the sector would become a casualty of the EU vote simultaneously attempted to pull their investment. Recognising the similarity with events back in 2008, when various hedged investments subject to heavy capital flight momentarily became unable to offer two-way prices, the London market appears set to open in the red this morning with the FTSE-100 seen down some 5 points, with Eurozone equities seen reacting similarly. While US shares were modestly firmed across the board by the close, Asian markets mostly snapped their post-Brexit rally as oil prices fell back below $50 a barrel knocking energy stocks quite sharply. Only China remained positive, with the Shanghai Composite enjoying the reported rebound in June service sector growth, remaining hopeful that the President will effect calls for reform of state-owned enterprises, while also taking confidence as the Yuan was allowed to slip to its weakest against the US dollar since December 2010 as the People’s Bank of China trimmed its daily fixing by 0.2%. Today Investors will be listening intently for more reports regarding the Nigerian Oil Union threatened strike, understanding prolonged action will likely result in benchmark crude pushing decisively back above the US$50 level again. Later this morning the Bank of England is due to publish its Financial Stability Report and the Eurozone will release services PMI data. This afternoon, a speech is due from the Fed’s William Dudley. No major UK corporates are due to release results."
– Barry Gibb, Research Analyst
The FTSE-100 finished yesterday’s session 0.84% lower at 6,522.26, whilst the FTSE AIM All-Share index closed 0.05% better-off at 713.86. In continental Europe, markets ended in the red, as sharp declines in banking stocks offset gains in commodity stocks. In addition, poor economic data hurt investor sentiment. France’s CAC 40 and Germany’s DAX shed 0.9% and 0.7%, respectively.
Wall Street remained yesterday closed for the Independence Day holiday.
Equities are trading lower tracking the European markets amid renewed concerns over the consequences of Brexit. The Nikkei 225 fell 0.7%, as a stronger yen exerted pressure on export-driven stocks. The Hang Seng was trading 0.6% lower at 7:00 am.
Yesterday, Brent oil prices declined 0.5% to US$50.10 per barrel, while WTI did not trade and remained at US$48.99 per barrel.
UK’s construction PMI slumps to lowest in seven years in June
According to Markit, the UK’s construction PMI fell to 46.0 in June from 51.2 in May, marking its lowest level since June 2009. This is the first time since April 2013 that the index fell below 50, which implies a decline in the construction sector. The sharp fall can be ascribed to uncertainty surrounding pre- and post-Brexit.
UK plans to lower corporation taxes
George Osborne, the UK’s Chancellor, stated that the country would cut its corporation tax to less than 15% to mitigate the consequences of the Brexit. He added that lower taxes would help in attracting US and European companies, which may have lost confidence in the UK’s economy after the Brexit.
Eurasia Mining (LON:EUA, 0.55p) – Speculative Buy
Eurasia yesterday published good gold assay results from its Semenovsky gold tailings project. 54 samples were assayed by SGS in Chita and the results confirmed what management already knew/were very confident about i.e. that Semensovsky’s grade is approximately 1.2g/t gold. Separately, an updated reserves report has been submitted to the local authorities while metallurgical testwork is ongoing.
Our view: When Eurasia acquired Semenovsky, it came with a Russian-standard 2.5mt resource grading 1.2g/t gold and 20g/t silver. Although management’s experience in Russia gave them confidence in the historic estimates, having up to date confirmatory assays from SGS is obviously comforting. We look forward to metallurgical testwork which, if positive, should make the project financeable. We have a Spec Buy recommendation.
Beaufort Securities acts as corporate broker to Eurasia Mining plc
Orogen Gold (LON:ORE, 0.02p) – Speculative Buy
Orogen Gold announced yesterday it is restarting drilling at the Mutsk gold project in Armenia. Orogen has an earn-in agreement to earn 80% by spending $2.5m. Much of this has already been spent and management expect to achieve 80% by the end of August. Note that Mutsk is only 30km from Lydian’s 4Moz Amulsar gold project and previous drilling at Mutsk has delivered some nice results including 21m at 2.68g/t and 60m at 1.21g/t.
Our view: Orogen’s Mutsk project has had a number of very interesting drill intersects with high grade narrow vein zones as well as lower grade wide zones. In addition to the 21m at 2.68g/t mentioned above, best intercepts include 60m at 1.21g/t, 46.5m at 0.93g/t and 38m at 0.84g/t. These zones of mineralisation are relatively shallow and gently dipping so perfect for open pit mining. Bear in mind that Lydian’s nearby project is a 2.3Moz open pit with a grade of 0.8g/t – so a natural target at Mutsk is for something similar. The main aim now is to prove or disprove that Mutsk has tonnage potential to be a decent sized mine. We have a Spec Buy recommendation.
Beaufort Securities acts as corporate broker to Orogen Gold plc
Central Asia Metals (LON:CAML, 160.0p) – Speculative Buy
Central Asia Metals gave an operations update yesterday with a production and Stage 2 Expansion update for the six months to 30 June 2016 (H1 2016) for the Kounrad dump leach, solvent extraction and electro-winning (SX-EW) copper recovery plant in Kazakhstan (“Kounrad”). The Q2 2016 copper production was up 20% to 3,701 tonnes (Q2 2015: 3,093 tonnes) and thus for the first half of 2016 copper production was up 27% to 6,908 tonnes (H1 2015: 5,444 tonnes). Cathode sales in H1 were up 24% to 6,355 tonnes (H1 2015: 5,120 tonnes). The Company confirmed that they are on track to achieve 2016 production guidance of between 13,000 and 14,000 tonnes. The Company gave details about the Stage 2 expansion. Construction of the buildings, collector trenches, ponds and pipeline infrastructure to connect the SX-EW plant to the Western Dumps area is progressing on schedule and under budget. Construction of the main buildings consisting of pump houses and a boiler house are nearing completion, with boilers in position and the chimney erected. Three solution ponds have been excavated and will be lined in July, whilst the installation of the 24km solution transfer pipeline infrastructure for pregnant leach solution (PLS) and raffinate (leach solution minus its copper) is now 30% complete. The water pipeline that will supply water to the site from Lake Balkhash is 95% complete and will be commissioned during Q3 2016. The scheduled completion date of the Stage 2 Expansion is October 2016 with leaching operations on the Western Dumps planned to commence in Q2 2017. Completion of this project will extend the life of the operation beyond 2030.
Our view: As of 30 June 2016, CAML had cash in the bank of $30.2m and no debt. The reduction of cash since 31 December 2015 is due to payment of the $12.5m 2015 final dividend, and capital expenditure to fund the Stage 2 Expansion project. Excellent record half yearly production and sales figures from the Kounrad plant, and the Company report the Stage 2 Expansion work is progressing on schedule and under budget. Central Asia Metals reiterate the 2016 copper production guidance range of between 13,000 and 14,000 tonnes. In H2 2016, the Company aim to complete Stage 2 Expansion works, which will be the last major capital programme required at Kounrad, and in addition aim to conclude the definitive feasibility study for Copper Bay. We believe the Company are being sensibly cautious on the guidance. If the Company pays its historic 30% of revenues in dividends then at 14.5p (12.5p, 2015 dividend) the yield is in excess of 9%. An excellent Update and we reiterate our Speculative Buy.
HSBC (LON:HSBA., 463.75p) – Buy
Yesterday, HSBC announced it successfully completed the sale of its entire business in Brazil on 1 July 2016. The sale was in line with an announcement made on 8 June 2016 wherein the company confirmed the receipt of all the necessary regulatory approvals. The company, however, maintained a presence in Brazil to serve large corporate clients for their international needs. HSBC confirmed the deal was worth US$5.2bn in an all-cash transaction. Based on the net assets of HSBC Brazil, including allocated goodwill of US$4.3bn on 31 March 2016, the transaction would have generated a gain on sale (net of tax and transaction costs) of c.US$0.6bn before the recycling of foreign exchange losses previously recognised in other comprehensive income. After the recycling of foreign exchange losses, there would have been an accounting loss on sale of c.US$1.7bn. However, these are not likely to impact the regulatory capital that would be generated from the disposal at the group level.
Our view: The sale of HSBC Brazil represents a significant step in HSBC’s stated goal to optimise its global network and reduce complexity. As on 31 March 2016, the transaction was expected to decrease HSBC Group’s risk-weighted assets by around US$37bn and increase its common equity tier 1 ratio by c.65bps. The company seemed determined to streamline its global business and the sale deal with Banco Bradesco helped the company do that. Earlier this year, the company delivered a resilient performance in 2015 despite difficult market conditions. The company also plans to tap into existing opportunities in untapped Asian markets and capitalise on rising disposable income in the UK and growing stability in the US economy. Overall, HSBC’s outlook remains strong, led by its plans to build a robust capital base and reorganise risk-weighted assets. In view of the above argument, we maintain a Buy rating on the stock.
Kier Group (LON:KIE, 987.0p) – Buy
Yesterday, the company released trading update for the year ended 30 June 2016. The company continued to trade in line with management expectations and although the EU referendum result did not impact the business adversely, it added to the uncertainty. In current trading, the acquisition of May Gurney and Mouchel bolstered the Construction and Services divisions, whereas the Property division boasts of a healthy pipeline of projects totalling more than £1bn. Meanwhile, the Residential division’s mixed tenure business has a pipeline of more than £600m and more than 85% of the Services division’s targeted revenue for FY2017 was already covered by the current order book. The integration of the Mouchel business progressed as planned and delivered a cost savings of £4m in FY2016. On the financial front, the company’s net debt position stood at less than £140m on 30 June 2016, including cash expenditure of £44m on the Mouchel integration and £25m on new systems and upgrades. This was ahead of the forecasted range of £150–170m. Also, the company concluded the raising of £82m (€100m) of additional finance via the Schuldschein market. The company’s current trading is positive and the outlook for the year remains upbeat.
Our view: Kier Group performed well in an uncertain trading period leading up to the EU referendum in the UK. Although there was added uncertainty, no adverse impact on the company’s business operations was noted as the company’s breadth of activities and strong order books provided visibility and resilience. The successful integration of Mouchel and the acquisition of May Gurney augmented the company’s visible, long-term earnings from the Construction and Services division. Meanwhile, the company continues to maintain a disciplined approach towards work and risk management. We expect the company to drive further efficiencies and continue to perform robustly as the economic environment stabilises. Thus, in view of the above developments, we reiterate a Buy rating on the stock.
Oncimmune (LON:ONC, 120.0p) – Speculative Buy
Yesterday, Oncimmune Holdings announced it signed research agreements with private research company Egybiotech and Aarhus University Hospital in Denmark to further validate its EarlyCDT platform technology in liver and ovarian cancer. As per the agreement, the company would be provided with prospectively collected blood samples and associated clinical data on each patient by Egybiotech and Aarhus. These samples would be used by the company to validate panels of autoantibodies as diagnostic tests capable of distinguishing between malignant and non-malignant liver and ovarian diseases, particularly in the early stage.
Our view: Oncimmune is an early cancer detection company, and its EarlyCDT technology has the potential to allow earlier diagnosis of liver and ovarian cancer and improve patient outcomes. The company has developed certain antibody tests that may detect cancer up to four years earlier than other methods and can be applied to a wide range of solid tumour types. Oncimmune’s technology has a significant advantage over the current biomarkers available in the market. The aforementioned agreements are significant steps in the final clinical validation of EarlyCDT liver and ovarian and will enable the company to remain on track towards the goal of launching the tests commercially in 2017. Thus, in view of the potential EarlyCDT technology has to offer, we begin the coverage of Oncimmune with a Speculative Buy rating.