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Beaufort Securities Breakfast Alert: Acacia Mining, Avanti Communications, Rosslyn Data Technologies, Tullow Oil

Published: 03:33 19 Sep 2016 EDT

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Markets
Europe

The FTSE-100 finished Friday's session 0.30% lower at 6,710.28, whilst the FTSE AIM All-Share index closed 0.73% higher at 808.02. In continental Europe, markets ended in the red as Deutsche Bank's shares plunged, setting the pace of loss in banking stocks. Germany's DAX and France's CAC 40 shed 1.5% and 0.9%, respectively.
Wall Street
Wall Street ended in the red as weak oil prices pressured energy stocks. Moreover, investors remained concerned ahead of the Fed's meetings later this week. The S&P 500 edged down 0.4% on Friday. For the week, the markets ended 0.5% higher.
Asia
Equities are trading higher as investors await the outcome of the central bank's meetings in the US and Japan later this week. Oil prices increased amid news that OPEC and non-OPEC producers could reach an agreement to limit production. The Nikkei 225 rose 0.7%, and the Hang Seng was trading 0.8% up at 7:00am.
Oil
On Friday, WTI prices decreased 2.0% to US$43.03 per barrel, while Brent oil prices fell 1.8% to US$45.77 per barrel.

Headlines
UK house prices rise in September

As per property tracking website Rightmove, the average asking price of houses in the UK increased 0.7% m-o-m in September to £306,499 after a 1.2% drop in August. On a y-o-y basis, house prices expanded 4.0%, following a 4.1% rise in the previous month. This sharp increase in prices is partially due to a surge in buy-to-let investors, which snapped up properties before the 3% rise in stamp duty in April.

Company news

Acacia Mining (LON:ACA, 473p) - Speculative Buy
In a operations update Acacia announced during the third quarter, the Company undertook a planned two-week shutdown of the vertical shaft at Bulyanhulu to refurbish and modernise the production and service winders. In parallel with this, the Company undertook a programme of works on the process plant over a similar time frame. The planned maintenance was concluded successfully and Acacia recommenced full scale hoisting in early September, however the Company have not been able to run the plant consistently since the shutdown due to repeated overheating of the ball mill trunnion bearing. A team of specialists is working with personnel on site in order to establish the root cause of the problem and a timeline for resuming normal operations. Whilst the plant has been down, Acacia state they have built a surface stockpile of 11,300 ounces, with a further 7,400 ounces in stockpiles underground. They have put stoping operations on hold until the plant is running and providing consistent paste fill. The treatment of reclaimed tailings will continue, as will underground development and drilling activities.

Our view: Due to strong performance in the quarter to date at North Mara, Acacia continue to expect Q3 production to be broadly in line with Q1 2016, as guided at the interim results. At this stage, full year guidance for both Bulyanhulu and Acacia remain unchanged and we await an update to the market as appropriate. The fall presents an opportunity to continue to back the management. This is one of our Top Picks for 2016 and we reiterate our Speculative Buy stance.

Avanti Communications (LON:AVN, 31.25p) - Speculative Buy
Avanti Communications (Avanti) provided an update on the strategic review. The company initiated a two-phase funding strategy and was involved in discussions with several interested parties about a potential sale. Avanti informed that on the completion of due diligence by interested parties, it will seek best, final indicative offers for a potential acquisition or a strategic investment in the company. In order to meet short-term liquidity needs, Avanti announced the launch of a consent solicitation process to pay the US$32.25m October 2016 coupon by issuing additional Senior secured notes due 2019, for which bondholders owning around 60% of Senior Secured Notes have provided support. The company entered into binding agreements with certain suppliers to defer approximately US$39m of capital expenditure payments relating to HYLAS 4 to Q3 FY2017. Avanti also updated its outlook on future revenue, capex and working capital. Revenue is now expected to grow at a rate of 35–40% per annum over the next 2–3 years. In Q4 FY2016, utilisation of the existing fleet was in the 35–40% range, including the full pro-forma impact of significant new customer wins in the period, demonstrating strong momentum. Capital expenditure was aboutUS$96m in FY 2016 and is expected to be US$110m, US$80m and US$25m in FY 2017, FY 2018 and FY 2019, respectively. Separately, Avanti signed a new contract with the European Space Agency (ESA) through its ARTES Partner programme. ESA would contribute up to €10.7m in funding that Avanti will use to bring rural communities across Africa online. To deploy the advanced new technology platform, Avanti will partner with Newtec and a group of leading service providers, combining satellite, Wi-Fi and solar power, to deliver the programme in the market.

Our view: The aforementioned update highlights Avanti's ongoing discussions with potential acquirers or investors after a strategic review of its business plan and financial position. The company has initiated a two-phase funding strategy to meet its short-term liquidity needs. Avanti has commenced work on an as yet undisclosed long-term funding solution, forming the second phase of funding. The company has also begun the process to pay the debt due in October by issuing debt that would mature in 2019. Avanti's revenue and capital expenditure guidance looks promising. Meanwhile, the contract signed with ESA is a positive development. Avanti would provide affordable satellite broadband connectivity to 1,400 community sites across sub-Saharan Africa over the next two years, using its new ECO Wi-Fi hotspot initiative. In light of the ongoing developments, we maintain a Speculative Buy rating on the stock.

Rosslyn Data Technologies (LON:RDT, 10.50p) - Speculative Buy
Rosslyn, the provider of a leading cloud-based enterprise data analytics platform, on Friday announced its audited results for the year ended 30 April 2016. Financial highlights included Group revenues of £3.9m in line with projections and up 37% from 2015, a loss before tax of £2.4m (2015: £3.4m), cash used in operations of £2.8m (2015: £4.0m) with net cash as at 30th April 2016 standing at £1.9m (2015: £4.7m). Management emphasised tight financial and operational controls had delivered a lower cash burn than expected. Operational highlights included encouraging growth in revenues since the new financial year began, with improvement in key metrics and continues to win contracts in respected global companies. Client renewal rates remain strong with churn rate remaining below 5%, while gross margin remains strong at 87.5% (2015: 84.3%). The new CEO, Roger Bullen noted "Our continued development of the partner channel is exciting and is seeing the RAPid platform being progressively embedded in a number of organisations and I expect this list to increase. These Partnerships play an important role in closing the gap between the firm and the market place enabling us to grab market share far easier than through the direct channels."

Our view: More 'jam tomorrow' or has Rosslyn finally turned the corner? Having been tightly range bound since the 2015/16 fiscal year end, it is clear investors still do not have the answer. The simple fact is that Rosslyn's technology does appear to have something 'the rest of the crowd' do not. This is evident by the fact that RAPid is able to attract and retain blue-chip global customers, who would not normally go near a minnow like Rosslyn. RAPid's dynamic ability to update and react to a constantly changing 'Big Data' environment ensures it remains one step ahead, while costly bespoke systems commissioned by other giant enterprises that are unable to react and 'learn' in this fashion can become the out-of-date or rapidly losing effective operability shortly after being installed. So it appears Rosslyn's real problem is not its technology, but its credibility. In this respect, one sentence hidden away in the depth of the CEO's annual results statement, suggesting it is "in advanced talks with a significant US based strategic partner and look forward to announcing this in due course" might well be the answer. Should such a forthcoming agreement provide both the marketing muscle and permit it to leverage a much larger balance sheet, Rosslyn could well be off to the races. Indeed, the fact the departure of the previous CEO provided Roger Bullen with an ideal opportunity to reset short-term investor expectations but instead, he chose to repeat the previous management's goal to "transform to profitability and organic cash generation….during the current financial year". That's quite a call, particularly given the Group's remaining cash resource is now limited, but is probably shareholder's best reassurance that he expects the Group to start securing much greater traction in the relatively near term. At this time, Beaufort gives RDT the benefit of the doubt. Even if the opportunity presented by Rosslyn's unique technologies have not yet have been recognised by investors, they are 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 3x to 4x 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.

Tullow Oil (LON:TLW, 218.70p) - Speculative Buy
Tullow Oil (Tullow) completed drilling and testing of the Cara prospect in licence 636 in the Norwegian North Sea. The well was drilled to a total depth of 2,702 metres in 349 metres of water, 6 kilometres northeast of the Gjøa field. It found a gas column of 51 metres and an oil column of 60 metres. The operator estimated a discovery of 25–70 million barrels of oil equivalent (boe). In addition, extensive data acquisition was undertaken, including wireline logging and three successful core runs and a successful production test.

Our view: The discovery of oil and gas at the Cara prospect licence is positive news for Tullow. The company owns a 20% stake in the licence. The partners would now assess the prospect of linking this discovery to existing infrastructure at the nearby Gjøa field. Last month, Tullow informed that first oil flowed from the Tweneboa, Enyenra, Ntomme (TEN) fields off-shore Ghana. The project was completed on time and within budget. The TEN start-up process is now well advanced and Tullow expects oil production to ramp up gradually towards the FPSO capacity of 80,000 bopd during the remainder of 2016. Tullow estimates that the TEN average annualised production in 2016 would be 23,000 bopd gross (net: 11,000 bopd). In view of the above argument, we retain a Speculative Buy rating on the stock.

Economic news
US CPI

US consumer price index (CPI) grew 1.1% y-o-y in August, after a 0.8% increase in July, the US Bureau of Labour Statistics stated yesterday. The markets expected a 1.0% rise in prices.
US University of Michigan sentiment
The US University of Michigan's consumer sentiment index for September remained at 89.8, preliminary data indicated on Friday. Economists expected a reading of 90.6. The consumer expectations index, which closely forecasts the direction of consumer spending, increased to 81.1 from 78.7, while the current economic conditions index slipped to 103.5 from 107.0.

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