Beaufort Securities Breakfast Alert: DekelOil, AFC Energy, Taylor Wimpy, Venture Life Group


Today's edition features:
• DekelOil Public Limited (LON:DKL)
• AFC Energy (LON:AFC)
Taylor Wimpey (LON:TW.)
Venture Life Group (LON:VLG)

The global bond markets saw another major sell-off yesterday, with the 30-year US T-bill yield rising above 3% for the first time since January. This is weighing the implication of the President-elect's wholly unorthodox policy proposals, the general expectation that Yellen will go ahead with the first Fed rate hike since 2006 in December and a growing expectation that Trump will champion an international reversal in the current fiscal-monetary mix of western economies. A looser fiscal policy together with a harder monetary policy, of course, demands a much-diluted version of present 'central bank independence' for whom the main proponents, Donald Trump and Theresa May, could well be the first to move toward subverting the system through the appointment of politically compliant governors to replace the conservative academic postings of the past couple of decades. So has 'Trumpism' started to be priced in? After the hostile takeover, might the populist outsider simply surround himself with insiders? Some optimists seem to believe in this rosy scenario. The Dow Jones inched up to its third consecutive record close yesterday after the Fed's Jeffrey Lacker noted in a speech that fiscal stimulus 'would bolster the case for raising rates' while, by comparison, the NASDAQ drifted lower on continuing concerns over tax imposition proposed on their international cash piles. Asia ended mix to fractionally down, avoiding the broad sell-off seen amongst emerging markets, as their currencies rallied marginally against the US$. Today the UK is due to publish monthly inflation figures, while the Eurozone will release GDP data. Being deep in the results season, earnings or trading updates are expected from the likes of BTG (LON:BTG), Card Factory (LON:CARD), Crest Nicholson (LON:CRST), easyJet (LON:EZJ), Enterprise Inns (LON:ETI), First Group (LON:FGP), Hayward Tyler (LON:HAYT), Land Securities (LON:LAND), McCarthy & Stone (LON:MCS), Premier Foods (LON:PFD) and Vodafone (LON:VOD). Investors will also be listing out for more details from Rudy Giuliani, the former Mayor of New York, regarding his overnight suggestion that defeating ISIS will be an early focus of Donald Trump's foreign policy. The FTSE-100 is seen rising 10 or so pints in early trading."
- Barry Gibb, Research Analyst

The FTSE-100 finished yesterday's session 0.34% higher at 6,753.18, whilst the FTSE AIM All-Share index closed 0.21% up at 802.64. In continental Europe, the CAC-40 finished 0.43% higher at 4,508.55 whilst the DAX was 0.24% better-off at 10,693.69.
Wall Street
On Wall Street last night, the Dow Jones added 0.11% to stand at 18,868.69, the S&P-500 fell 0.01% to 2,164.2 and the Nasdaq shed 0.36% to end at 5,218.4.
In Asian markets this morning, the Nikkei 225 had fallen 0.03% to 17,668.15, while the Hang Seng gained 0.4% to stand at 22,311.38.
In early trade today, WTI crude was up 1.71% to $44.06/bbl and Brent was up 1.53% to $45.11/bbl.

Tobacco firm Reynolds 'stubs out $47bn BAT offer'
US cigarette maker Reynolds American has rejected a buyout offer worth $47bn (£38bn) from British American Tobacco (BATS.L), according to reports. British American already owns 42% of Reynolds, the company behind brands including Camel and Newport. Last month it proposed buying the rest of the business to create the world's biggest tobacco firm. But both Reuters and Bloomberg report the deal has been rejected. Reynolds declined to comment on the reports. British American, which makes brands including Rothmans, has been a shareholder in Reynolds since 2004. The FTSE 100 company is offering $20bn in cash and $27bn in shares for the US business. At the time of the bid BAT said the merger was "the logical progression in our relationship" and estimated it could produce cost savings worth $400m.

DekelOil Public Limited (LON:DKL, 11.75p) – Buy
DekelOil Public Limited, operator and 85.75% owner of the profitable and vertically integrated Ayenouan palm oil project in Côte d'Ivoire (the 'Project'), yesterday announced three key capital investments focused on increasing the Project's profitability and further de-risking its operations ahead of the peak harvesting season expected to run from March-June 2017. The first is the acquisition of an Empty Fruit Press to extract additional crude palm oil ('CPO') from empty fruit bunches - expected to increase the total CPO extraction rate by at least 0.5 percentage points, thereby improving the Project's margins. Coming with an anticipated payback of under a year on capital investment of €485,000, it is expected while being operational in time for the peak harvesting period. The second is the €390,000 construction of an additional 3,000t tank to increase overall CPO storage capacity to 8,000 tn – providing the Group with flexibility to choose when to sell its CPO enabling achieved sales prices to be maximised. The third investment is an additional back up boiler for the Project's 60tn per hour CPO extraction mill to minimise downtime in the event of a break-down. While this is unlikely given that the existing machinery is new and state of the art, the Board deems it prudent to de-risk this component. Here a €0.2 million deposit has been paid on €1.25 million capital investment, which is expected to be operational within 17 months.

Our view: More positive steps from DekelOil as it moves toward high volume production. Positively, all these investments will be funded internally from excess funds following the recent debt refinance and internal cash resources of the Project. These capital investments, which have been in the Board's sights since the Mill first became operational, are expected to improve operating margins, de-risk operations and provide more flexibility with sales pricing going forward. The ability to make these investments, without impacting the prospect of returning capital to shareholders in the form of dividends, is reflective of DekelOil's strong balance sheet and the Board's commitment to proactively manage performance and risks on behalf of shareholders. Importantly, and as previously noted, DekelOil is also a Brexit winner with the appreciation of the Euro against the Pound of well over 10% post Brexit translating into higher Sterling earnings. Having positioned itself so, Beaufort believes the Group will be able to support its long-term operational ambitions while also producing a sustainable surplus. As these are realised, shareholders can expect to be rewarded by management implementing a formal dividend policy which, in itself, remains key to investor confidence in what is otherwise an obviously undervalued investment. Beaufort retains its Buy recommendation on the shares and repeats its price target of 23p for the shares.

Beaufort Securities acts as corporate broker to DekelOil Public Limited plc

AFC Energy (LON:AFC, 22.75p) – Speculative Buy
AFC Energy ('AFC'), the industrial fuel cell power company, yesterday announced that it has successfully completed the development of its Generation 2 ('Gen2') fuel cell system. The Gen2 system extends the operating life of the fuel cell stack whilst increasing stack availability and reducing stack cost, representing 3 of the Group's key metrics of commercialisation, relative to the KORE fuel cell system commissioned in Stade in January 2016. The successful delivery of the Gen2 design follows testing of multiple fuel cell stacks at Stade, Germany and Dunsfold, UK, to deliver power continuously for over a one month period, each at high levels of availability. Two of these stacks continue to generate power today. Moreover, the Gen2 testing programme demonstrated a further 2 key incremental outcomes, showing its fuel cell system is: 1) capable of accepting lower grade hydrogen and 2) cycles (on/off) with total operation of a cycled stack for over one month at greater than 90% availability. AFC Energy's CEO, Adam Bond, commented "The technical progression achieved materially supports our discussions with prospective commercial partners and in being able to utilise lower grade hydrogen has the potential to reduce the final cost of electricity generation from AFC's systems. These two milestones, in addition to those achieved earlier in the year, positions us for delivery of commercial contracts which we continue to pursue and in turn provides the traction needed with our partners for the deployment of units and the fulfilment of the outstanding 2016 milestones."

Our view: A completion of the development of its Gen2 fuel cell system means AFC has successfully achieved Milestone 1 (Develop a second generation fuel cell stack and Balance of Plant during the second half of 2016) and Milestone 2 (Operate the Gen2 fuel cell stack and Balance of Plant over an extended test period (over one month) before the end of 2016) of the eight 2016 Strategic Milestones. Along with those achieved earlier in the year, such progress is a key to be able to meet the expectations of project partners. On top of this, capability to use lower grade hydrogen will increase the supply broadening AFC's addressable market potential, whilst also lowering the likely cost of hydrogen in commercial applications. We are encouraged by the Group's progress and the shares performed strongly yesterday. In view of positive development and future economic benefit potential opened to the AFC, we maintain a Speculative Buy rating on the shares.

Taylor Wimpey (LON:TW., 150.10p) – Buy
Management yesterday provided a trading statement for shareholders. It confirmed that the UK housing market had remained positive in the second half of 2016, with a high level of customer confidence, who continue to benefit from a competitive mortgage environment, with a wide choice of products available, in a continuingly undersupplied market . Underlying trading remains stable across the Group's core geographies. Whilst the wider London market remains positive and in line with the rest of the UK, as previously guided the central London market has slowed during 2016. Zones 1 and 2 have seen prices softened slightly at the upper end during the second half of the year, although there remain high levels of demand in this market. Sales rates for the year to date remained strong at 0.75 sales per outlet per week (2015 equivalent period: 0.76). For the second half of the year to date, sales rates are 0.70 (2015 equivalent period: 0.74), while cancellation rates for the year to date remain low at 13% (2015 equivalent period: 11%). The Board confirmed that Taylor Wimpey was sold for targeted 2016 completions and is now building its order book for 2017 and beyond. As at 6 November 2016, the Group was some23% forward sold for its expected 2017 private completions. The current total order book, excluding joint ventures, is ahead of last year and in total represents 8,981 homes (week ended 1 November 2015: 8,529), standing at £2.3 billion (week ended 1 November 2015: £2.1 billion).

Our view: Whilst the implications following the EU Referendum are still unclear, the UK housing market has remained resilient, with long-term fundamentals underpinned by strong demand. Looking ahead, Taylor Wimpey's Board remains confident that its business model and strategy focused on managing the business through the cycle, positions to performs well through all market conditions. In so doing, it focusses on delivering enhanced medium term financial and quality objectives, embedding customer service processes and driving improvement in operational discipline. With a positive land market and build costs staying in-line with the 3% - 4% increase already anticipated, it is realistic to expect the Group to deliver an improvement in operating profit margin in 2016 (FY 2015: 20.3%) as previously guided, along with a return on net operating assets of around 30%. Reiterating also its commitment to the announced £450 million total dividend payment to shareholders in 2017, the shares now offer an exceptional prospective 9.3% yield, the highest in the sector after having suffered a 25% share price fall year-to-date. Trading on a 2016E price/NAV of 1.61x (against 1.75x for the sector) while offering an after-tax ROE of 20.2%, suggests the shares are already discounting an imminent downturn in this a highly cyclical sector. Right now, however, this still remains some way off; forward visibility is high and comes with sufficient management confidence to offer shareholders quite exceptional 2017E dividend income. Beaufort 

Venture Life Group (LON:VLG, 56.50p) – Speculative Buy
Venture Life Group, an international consumer self-care company focused on developing, manufacturing and commercialising products for the ageing population, yesterday provided a trading update for the year-ending 31 December 2016 ('FY2016'). The Group said the strong revenue growth saw in H1 has continued into the H2 with the strong order book. The Group has also benefitted from the weaker Sterling against the Euro. The Group expects revenue to grow over +50% for the FY2016 to "not less than" £14m against the comparative period (FY2015). On the operational front, the Group has fully integrated UltraDEX business and manufacturing processes have been fully established at the Group's manufacturing facility in Italy. Venture Life has launched an advertising campaign and it has helped uplift UltraDEX revenue. As noted previously, the Group has signed 3 long-term international distribution agreements for the UltraDEX range, during the period and the first of these partners to launch the product in market is Serra Pamies in Spain, initiated the launch during October 2016. The Group appointed new UK Sales Director, Tim Scott in November to develop key account strategy and sales of its branded products into the UK market. Venture Life's CEO, Jerry Randall, commented "The strong revenue growth this year is further evidence that the Group is on a trajectory towards achieving its strategic goal of becoming sustainably profitable. I am particularly pleased that we have now fully integrated the UltraDEX business into the Group and that we already have international partners preparing to launch the UltraDEX brand in overseas markets."

Our view: Venture Life provided investors with a strong full year outlook, indicating a record year for revenue growth of over +50%, driven by a strong order book as well as favourable foreign exchange rates. The Group's acquisition of Periproducts Limited in March 2016 turn out well, as the addition of UltraDEX to its brand portfolio boosted the order book. Looking ahead, the FY2017 order book is said to be "building steadily" and the order book for the Development & Manufacturing business for the month of January 2017 is already 45% higher than comparable revenue recognised in January 2016, excluding intercompany sales. Of the three long-term international distribution agreements for the UltraDEX range, Malaysia will be the next market to launch (in January 2017) with the product already in production. In view of this positive progress and continuing momentum into FY2017, Beaufort reiterates its Speculative Buy rating on the shares.

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