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Beaufort Securities Breakfast Alert: AstraZeneca, Bovis Home, Halfords Group, Young & Co's Brewery

Published: 03:18 11 Nov 2016 EST

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Today's edition features:
AstraZeneca (LON:AZN)
Bovis Homes (LON:BVS)
Halfords Group (LON:HFD)
• Young & Co.'s Brewery (LON:YNGA)

"Just when investors though they would be waking up to the mother of all Trump hangovers, the Dow Jones surges to a fresh all-time record. But what's going on in the debt markets? After all, recent successful presidencies can be traced back to stability in US government bonds. Yesterday, the fixed income sell-off that started with Treasuries on Wednesday began to spread across the world as traders reacted to the prospect of a giant US fiscal stimulus, and have even started to ask whether Trump's victory in fact spells the end of their market's extended bull run. For sure, his proposal to hit US corporates with large offshore cash deposits with a one-time 10% charges, irrespective of whether the funds are repatriated or not, would go some way filling the IRS's coffers, even if there can be no certainty whether they would then choose to invest the surplus or simply give it back to shareholders. Indeed, this point was seen to unsettle tech stocks last night, with the NASDAQ quite sharply down while the Dow and S&P-500 remained well supported. Whatever, an unsettled and divided US yearns for clear vision and immediate action on where the economy is going and Trump knows that his credibility will be tested during his first 100 days in office. But even with control of both congressional chambers his far-reaching plans, ranging from tax reform to renegotiating global trade pacts, will still take as much as two years to become law. European leaders appear anxious to use this breathing space in order to consider their own position within a changing world order, as German Finance Minister, Wolfgang Schaeuble made clear in a speech yesterday. Meanwhile, with the Fed's Jeffrey Lacker overnight noted that the case for raising interest rates remains strong, Janet Yellen's scheduled testimony on Capitol Hill will undoubtedly be one of next week's highlights. Asia also put in a more sombre performance earlier today, as counterarguments circulated between brokers regarding the prospect of high import tariffs/international trade war and a reflated global economy, with the US$-biased Hang Seng being the only loser amongst other modestly firmer indices. With just UK construction figures due for release this morning and no major corporates due to report, London's markets are expected to largely tread water today awaiting more news from Washington; the FTSE-100 is seen fluctuating some 5 or so points either side of unchanged in early trading."
- Barry Gibb, Research Analyst
 

Markets


Europe
The FTSE-100 finished yesterday's session 1.21% lower at 6,827.98, whilst the FTSE AIM All-Share index closed 0.30% higher at 801.71. In continental Europe, the CAC-40 finished 0.28% down at 4,530.95 whilst the DAX was 0.15% lower at 10,630.12.
Wall Street
On Wall Street last night, the Dow Jones added 1.17% to 18,807.88, the S&P-500 rose 0.2% to 2,167.48 and the Nasdaq lost 0.81% to stand at 5,208.8.


Asia
In Asian markets this morning, the Nikkei 225 had gained 0.13% to 17,366.63 and the Hang Seng had eased 1.29% to 22,544.98.
Oil
In early trade today, WTI crude was down 0.25% to $44.55/bbl and Brent was down 0.15% to $45.77/bbl.

Headlines
Beaufort awarded 'Best Advisory Stockbroker' at Shares Awards for third year running
We are delighted to announce the Beaufort Securities was named 'Best Advisory Stockbroker' at the Shares Awards for the third straight year at an award ceremony held at the Grosvenor Park Hotel in London last night. Unlike many awards ceremonies, the Shares Awards are voted for by the general public and we'd like to thank our loyal clients for taking the time to vote for us in large numbers once again.


Company news
AstraZeneca (LON:AZN, 4,404.50p) - Hold
The Group yesterday reported year-to-date and Q3'2016 results. Overall, performance was said to have remained in line with the Board's own expectations and its full-year financial guidance remains unchanged. Total Revenue declined by 3% in the year to date to $17,417m, reflecting a decline in Product Sales that was driven by the entry in the US of multiple Crestor generic medicines. Continued good progress on cost control with reported and core R&D expenses growing by 4% to $1,402m and were stable at $1,337m in the third quarter, respectively. Reported and Core SG&A expenses reduced by 8% to $2,403m and by 12% to $1,892m in the third quarter. Reported EPS declined by 26% in the year to date, reflecting the fall in Product Sales, while core EPS declined by 10%, reflecting the phasing of Other Operating Income towards the final quarter of the year. The Growth Platforms grew by 6% in the year to date (Q3 2016: +3%), with Emerging Markets: +6% supported by China (+10%); Latin America sales declined by 11%, impacted by the reduction of activities in Venezuela. Product wise, Dabetes saw growth of 13%, with Farxiga became the Company's largest-selling Diabetes medicine, while slower Diabetes growth of 6% in the third quarter, reflected expected decline in the sales of Onglyza. In Respiratory, a decline of 2%, with marked declines in the sale of Symbicort in the US and Europe, reflecting the competitive environment and a Q3 rebate true-up in the US. Brilinta on the other hand saw growth of 39%, decelerating in the third quarter as function of wholesaler stocking in the comparative period, while New Oncology experienced strong sales of $197m in Q3 2016 (H1: $251m), driven by Tagrisso and Lynparza.

Our view: There were positives and negatives in the Q3 report which, overall suggests no need for a change of our 2016E or 2017E forecasts or recommendations. Despite the loss of high margin Crestor, the overall Group figure was not significantly dented. The quarter was very slightly below best guess on product sales but eps was almost spot-on with the benefit of one-off transfer pricing agreements amongst various tax authorities. So not much to report regarding existing products, while forward sentiment now appears to be resting on firmly on developments within the immune-oncology portfolio. The recent news regarding occurrence of bleeding during the Neck and head trials ('Eagle' and 'Kestral') although not considered significant, means follow up announcements will be carefully scrutinised, as will the lung study results ('Mystic') which might be anticipated with the next six or so months. So this is possibly where the risk now remains, as the Group attempts to catch up with its major peers in this therapeutic class through the introduction of combination therapy. With this in mind, and the fact that CEO, Pascal Soriot, points out that Obamacare is likely to be subject to substantial change under Trump, Beaufort choses to adopt a 'wait and see' approach before having the confidence to return the shares to a Buy rating. Beaufort continues to recommend AstraZeneca as a Hold.


Bovis Homes (LON:BVS, 804.50p) – Buy
The UK housebuilder yesterday released a pre-close trading update. The Board noted Bovis was enjoying another year of both growth in volume and increase in average sales price, while expecting to deliver record revenues for the year to end-December 2016. As a result, it is on track to deliver increased profit and a further improvement in return on capital employed, which was in line with expectations. Bovis continues to trade well, drive production across all sites, while investing in people and acquiring high quality land outside London. Housing market fundamentals remain supportive and despite greater market uncertainty, expects to continue to manage the business through the cycle with a view to delivering sustainable shareholder returns. Aside from the weeks immediately after the EU referendum, the Group's sales during the year to date have followed a normal seasonal pattern with the weekly private sales rate per site having averaged 0.6 (2015: 0.59). Reservations are in place to achieve over 5% growth in legal completion volume in the year and sales prices remain robust as it continues to sell homes at prices in line with expectations. The average sales price for 2016 is expected to be around 10% ahead of last year, driven by improving mix and increased underlying market pricing.

Our view: Another reassuring statement from Bovis. The backdrop for housebuilding in the UK continues to be positive with demand for new homes running ahead of housing supply. Political support remains in place as evidenced by the improved planning regime and the continuation of the Help to Buy equity loan scheme, while, at the same time unemployment continues to be low and the mortgage market remains competitive. Production to date is running some 5% ahead of the prior year. While tempered marginally by availability of labour constraining activity across the sector, sub-contract cost inflation rate has moderated since the second half of 2015, resulting in an overall modest market cost increase. As expected, management has remained disciplined in its land investment as it focusses on purchase of high quality consented land in prime locations outside London as it drives planning consent on strategic land, delivering circa 1,300 plots in the second half of 2016. On this basis, the Group is set to deliver about a 16% increase in pre-tax for the current year, followed by half that amount in 2017E. Trading on a 2017E P/NTAV multiple of 0.93x and a sub-7x P/E together with a well-covered yield of 6.1%, these shares cannot be considered expensive. Beaufort retains its Buy recommendation on Bovis Homes, with a price target of 960p/share.


Halfords Group (LON:HFD, 320.00p) – Hold
Halfords Group ('Halfords'), the UK's leading retailer of motoring and cycling products and an operator of autocentres, yesterday announced its interim results for the 26 weeks ended 30 September 2016 ('H1 FY2017'). During the period, total Group revenue increased by +6.3% to £567.3m but pre-tax profit (before non-recurring items) fell -12.1% to £40.8m due to +4.5% increase in total operating costs, against the comparable period (H1 FY2016). Basic earnings per share (before non-recurring items) therefore fell -13.5% to 16.6p. Free cash flow rose +24.1% to £24.2m and net debt increased £2.4m to £64.8m. Like-for-like ('LFL') revenue growth for the Group was +2.2%, comprised of +2.4% increase in Retail division (Motoring +1.1% and Cycling +4.6% on a LFL basis, with total Cycling sales up 15.4%) and +0.9% increase in Autocentres division (+3.6% in total). On the operational front, the Group opened 2 Autocentres and 2 Cycle Republic stores, while refurbished 12 Retail stores and 12 Autocentres. Halfords introduces new products, services and collaborations, including Wiggins and Trott bike ranges, Orla Kiely camping and travel accessories, and re-launched of Tradecard. The Group declared an interim dividend of 5.83p per share, up +3%, to be paid on 20 January 2017.

Our view: Halfords registered reasonable LFL growth during the H1 with growth across all divisions and market share gains in both Motoring and Cycling. The Group, however, saw pre-tax profit fell sharply down as operating costs increased, together with decline in Retail gross margin (86% of revenue) by -2.75%. The margin was impacted due to promotional activity and investment in staff remuneration to lower the staff turnover. Beyond this, weaker Sterling against the US Dollar will bring cost headwinds going forward, having already seen the average hedged US$ rate declined from US$1.56 to US$1.46 during the period. To cope with this, the management said it has a number of mitigation plan for the foreign exchange movement in place, including working with suppliers, price, cost/process efficiencies and alternative product sourcing. The Group also reiterated its full year pre-tax profit guidance, which remains in line with market consensus. We believe the Group will increasingly feel pressured from the adverse foreign currency movement having spot rate now down to c.US$1.25 as well as from National Living Wage pressures along with continued investment to service their 'Moving Up a Gear' initiative. The shares are valued at FY2017E and FY2018E P/E multiples of both 10.5x periods with dividend yields of 5.3% and 5.4%. This represents a slight discount to the sector 2016E average of 12.0x, which is probably correct given the limited opportunity to surprise on the positive during the second half. Beaufort therefore has decided to downgrades Halfords from Buy to Hold while expecting the shares to range trade between 300p and 330p.


Young & Co.'s Brewery (LON:YNGA, 1,329.00p) – Buy
Young & Co.'s Brewery ('Young'), an operator of British pubs and hotels, yesterday announced its interim results for the 26 weeks ended 26 September 2016 ('H1 FY2017'). During the period, revenue advanced by +7.7% to £136.0m and operating profit increased by +10.2% to £24.9m, against the comparable period (H1 FY2016). Pre-tax profit jumped by +11.6% to £22.1m and consequently basic earnings per share rose +17.1% to 38.35p. On an adjusted basis, in absence of restructuring and goodwill impairment during the period, operating profit and pre-tax profit advanced by +7.7% and +8.7% respectively and basic earnings per share increased +8.1%. Net debt reduced by -£2.9m to £127.3m. Revenue in managed estate increased by +7.6% with Like-for-like ('LFL') growth of +5.4%, while Ram Pub Company (tenanted division) revenue rose +9.2%, with LFL growth of +3.8%. On the operational front, the Group made £20.4m investment, including acquisition of two freeholds pubs and launched its new app, Young's on Tap, available free from the App Store to further optimise the customer experience. The Group opened 12 individually designed boutique bedrooms during the period, bringing total room stock to 487 rooms meaning half of the rooms are now boutique standard. The Group now operate 172 managed pubs, 132 as Young's (including 22 hotels) and 40 under the Geronimo brand. Steve Robinson has joined the board as CFO. Young's CEO, Patrick Dardis commented "We have a proven strategy and an outstanding and well-invested estate, we also have the financial and management capacity to grow and there is real energy in our people across the business to take Young's forward. We therefore feel confident about the future." The Group declared an interim dividend of 8.88p per share, up +6%, to be paid on 9 December 2016.

Our view: Young performed strongly in the H1, recording positive LFL growth in all its divisions. The Group delivered above 5% LFL growth for the 5th consecutive summers while confirming its 20th consecutive year of interim dividend growth. Managed house's total LFL was up +5.4%, comprised of Young's +6.0% and Geronimo +3.5%. Of these, Drink sales were up +8.4% with LFL +6.4%, and Food sales up +6.9% with LFL +4.0%. Its hotels business saw total occupancy improved +1.3% to 78.6%, despite the strong comparatives, with revenue per available room (RevPAR) remained at £63.80. Ram Pub Company (tenanted division) saw +3.8% LFL growth. The Group maintained its adjusted operating margin at 18.5% during the period despite the -£1m impact of National Living Wage and managed to reduce its net debt alongside the high level of investments made. Net debt/EBITDA is now reduced to 2.06x, leaving gearing at 28%. Post the period, the Group completed one acquisition and exchanged one contracts, as well as completing the transformational development of the White Bear in Kennington. Young is also working in partnership with Berkeley Homes to create two new pubs at their Woodberry and Kidbrooke developments. Looking ahead, the Group's profit will be under pressure due to the Government's recently announced revaluation of rateable values (+c.£1.8m to annual cost base), another +c.£1m impact from National Living Wage as well as the apprenticeship levy. Having said this, for the current trading, in the last 13 weeks, total sales grew by +4.8% and +3.0% on a LFL basis despite the stronger comparative where Young benefited from the Rugby World Cup last year. Considering the Group's strong H1 progress as well as ongoing extensive investment in its estates for better customer experience, we reiterate a Buy rating on the stock.

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