Beaufort Securities Breakfast Alert: Finsbury Food Group and Ilika


Finsbury Food Group (LON:FIF)
Ilika (LON:IKA)

"The Autumn Statement, as expected, contained little in the way of surprises. Even the proposed ban on letting agents charging tenants fees had been leaked beforehand, meaning the small basket of UK-quoted estate agents were hit from first thing, while later on housebuilders ran into profit taking due to unrealistic expectations of a relaxation in stamp duty on premium properties not being delivered along with the lack of detail regarding the funding policy for new housing. But if there was a message, it was that the nation's public finances have not been fixed, with borrowings heading for a painful 90% of GDP next year. That aside, Hammond's £23bn spending plan, which is due to be injected through a so-called National Productivity Investment Fund, is his effort to improve efficiencies and counter an expected Brexit-inspired slowdown, of which the OBR projects could cost as much as £66bn in the £220bn larger than previously expected government debt by the end of this parliament. With this providing little inspiration, however, traders are likely to seek their lead from the overnight markets which saw the USS surge higher on strong durable goods data, leading both the Dow Jones and S&P-500 to new record highs as a split amongst FOMC officials raised expectations of a December hike one notch further. Asia by comparison was mostly fractionally down, with only the Nikkei, which was playing catch up following yesterday's Labour Thanksgiving Day holiday, rising around 1%. All this spells for a rather lacklustre European opening, with the FTSE-100 seen putting in a rise of five points or so early trading. Macro releases from the UK include BBA statistics, while the ECB's financial stability review is also due. UK corporates due to report earnings or trading updates include Countryside (CSP.L), Hornby (HRN.L), HSS Hire (HSS.L), Imaginatik (IMTK.L), Marston's (MARS.L), Mothercare (MTC.L), Pets at Home (PETS.L) and Severn Trent (SVT.L). Daily trading is expected to be relatively light given that the US markets are closed for Thanksgiving, although market watchers will be intrigued by any further media comment following suggestions contained within the FOMC minutes that alternatives to national benchmark rates were being discussed."
- Barry Gibb, Research Analyst


The FTSE-100 finished yesterday's session 0.02% lower at 6,818.09, whilst the FTSE AIM All-Share index closed 0.13% down at 815.05. In continental Europe, the CAC-40 finished 0.42% lower at 4,529.21 whilst the DAX was 0.48% down at 10,662.44.

Wall Street
On Wall Street overnight, the Dow Jones gained 0.31% to stand at 19,083.18 ahead of the Thanksgiving holiday, the S&P-500 firmed 0.08% to 2,204.72 and the Nasdaq shed 0.11% to end the session at 5,380.68.

In Asian markets this morning, the Nikkei 225 had risen 0.94% to 18,333.41, while the Hang Seng lost 0.27% to stand at 22,615.58.

In early trade today, WTI crude was up 0.21% to $48.06/bbl and Brent was up 0.05% to $49.00/bbl.


Autumn Statement shows cost of casual work 'gig economy'

The UK's "gig economy", powered by self-employment and casual work, is starting to hit government revenues. Wednesday's Autumn Statement for the first time showed how it is cutting into the government tax-take. The Office of Budget Responsibility (OBR) estimates that in 2020/21 it will cost the Treasury £3.5bn. Chancellor of the Exchequer Philip Hammond said he would find more effective ways to tax workers in the shifting labour environment. "Technological progress is changing the way people live, and the way they work," he said. "The tax system needs to keep pace." But the Association of Independent Professionals and the Self Employed (IPSE) said the government is ignoring the importance of the self-employed sector.

Company news

Finsbury Food Group (LON:FIF, 124.50p) – Buy

Finsbury Food, a leading UK speciality bakery manufacturer of cake, bread and morning goods for both the retail and foodservice channels, yesterday provided an update on trading for the first four months of the new financial year. Trading growth has been maintained at the level seen in recent years and performance remains in line with expectations. Total Group sales revenues were £101.5m during the first four months, despite an established trend of UK retail food market deflation. The UK Bakery division declined by 4.0% however the Overseas division, the Group's 50% owned European business, grew by 36.5% continuing to demonstrate the strengths of its strategic diversification.

Our view: The market appeared quite shocked by yesterday's statement. Yet there was nothing disclosed in the brief announcement that investors should not have had their eyes wide open to already. While consumer confidence has remained stronger than anticipated, input costs, which are globally priced in dollars or euros, have increased substantially following Sterling's Brexit-originated decline. In fact, it was comforting that management has been able to respond to these challenges, which will include planned national minimum wage increases, by modifying promotional activity whist also reviewing potential opportunities for reformulation changes to minimise the on-cost and maintain affordability. To this extent, Beaufort has not seen fit to change its 140p target and considers Wednesday's share price hit presents a buying opportunity. A 12.2x P/E multiple, a 6.5x EV/EBITDA together with a 2.2% yield for the current year is too cheap for such a quality company. Beaufort retains its Buy recommendation expecting the shares to return to their out-performing trend of the past 24 months.

Ilika (LON:IKA, 42.50p) – Speculative Buy

Ilika, the AIM-quoted pioneer in materials innovation and solid-state battery technology, yesterday announced a trading update for the six months ended 31 October 2016. Management confirmed it remains focused on developing and licensing its solid state battery Intellectual Property in line with its roadmap. Commercialisation activity increased in the period and Ilika continued to deploy the majority of its operational resource on its battery development programme, whilst the materials development programmes in its portfolio also progressed to plan. The major materials development programmes in the period have been plasmonic lenses with Seagate and aerospace alloys, in collaboration with partners including Rolls Royce, GKN and BAE Systems. Financial results for the half year are expected to show total revenue for the period of £330k (H1 2015: £254k) and an operating loss, excluding share based payment charge, of around £1.9m (H1 2015: £1.8m). As a result of the placing in October, cash and cash equivalents at the period end were £7.1m (H1 2015: £4.5m). The Company will announce half-year results for the six months ended 31 October 2016 on 9 January 2017.

Our view: Progress is being made, although significant underperformance during the past year tells us that investors are growing weary of Ilika's forever jam-tomorrow stories. They want to hear of tangible progress toward commercialisation of the Company's solid state batteries, preferable with an industrial major(s) promising significant long-term royalties through secure licensing deals. This would see visibility and valuation improve quite dramatically. Ilika's Stereax roadmap hopes to deliver this, by focusing on three main battery requirements, namely miniaturisation, capacity in a small footprint and increased performance, through which its highly-protected technologies should be capable of delivering the knock-out blow. Positive steps post period include notifications of intent to award three new grants, two of which involve solid state battery integration programmes, amounting to an aggregate revenue value to the Company of £1.4m over two years, along with an expected commercially-funded materials development programme from an existing customer to the value of around US$1m over 12 months. Now valued on around a £35m market capitalisation, with around 24 months of cash based on current burn rate, the share price currently factors in very little of the potential upside. Hoping the Company delivers something significant on the commercial front before asking shareholders to top up its cash pile once again, Beaufort retains its Speculative Buy rating on the shares.

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