Beaufort Securities Breakfast Alert: Advanced Oncotherapy, Bushveld Minerals, Savannah Resources and Pennon Group


"Oil is likely to hold the centre ground this week, with fears that the anticipated deal to trim almost 2% off global output might have fallen at the last hurdle. Cruse prices fell in Asia after Saudi Arabia said it would not meet with Russia ahead of the 171st meeting scheduled to take place on Wednesday in Vienna, suggesting it would not have discussions with non-OPEC members until a clear decision has been concluded within the Organisation itself. While some traders considered a successful outcome would be sufficient to spike prices into a new US$60 trading range, others speculated that such a level would simply encourage US shale produces to switch idle capacity back on, meaning that Saudi would find itself giving up share of the global market for real long-term benefit. On the other hand, failure to deliver some sort of deal in the near-term could well mean excess capacity and high inventories drive benchmark crude back to the US$30 range. Aware of the high stakes, the US$ weakened sharply during the Asian session, falling more than 1.6% against the Yen, as investors ran toward the safe-haven currency while cashing in on the rally powered by Donald trump’s election victory amid nervousness ahead of the raft of North American economic data due this week. Looking back to Friday, however, US equities rather half-heartedly notched up new record highs, as all three principal indices rose modestly to mark a third consecutive week of gains, as investors continued to weighed up the prospective equity boost that could be derived from lower corporation taxes in a higher inflationary environment as the long-run bull market in international bonds draws to a close. Asia, by comparison, ended mixed, with the Nikkei and ASX, not surprisingly the main casualties, with the former being hit by Yen appreciation on this export-led economy and the latter taking profits in anticipation of a disappointing outcome at this week’s OPEC meeting, while Chinese and Korean equities chose to ignore the international noise and instead rallied on domestic factors. Away from Oil, Europe’s concentration this week will likely fall on both the Italian constitutional referendum, taking place on 4th December, and speculation on whether or not Francois Fillon’s appointment as leader of the centre-right, means that France is finally lining itself up for its own, long overdue, ‘Margaret Thatcher moment’ as he promises economic recovery and national renewal. The UK today can look forward to releases including the OECD Economic Outlook and CBI Services Sector survey. UK corporates due to release earnings or trading updates include Aberdeen Asset Management (LON:ADN), Cerillion (LON:CER), Rosslyn Data Technologies (LON:RDT) and Sirius Real Estate (LON:SRE). London is seen opening slightly weaker this morning, with the FTSE-100 expected to be 5 or more points lower in early trading. "
- Barry Gibb, Research Analyst


The FTSE-100 finished yesterday's session 0.17% higher at 6,840.75, whilst the FTSE AIM All-Share index closed 0.25% better-off at 820.54. In continental Europe, the CAC-40 finished 0.17% higher at 4,550.27 whilst the DAX was 0.09% higher at 10,699.27.
Wall Street
On Wall Street following Thanksgiving, the Dow Jones gained 0.36% to stand at 19,152.14, the S&P-500 added 0.39% to 2,213.35 and the Nasdaq shed 0.34% to end the session at 5,398.92.
In Asian markets this morning, the Nikkei fell 0.29%, to stand at 18,327.88, while the Hang Seng rose 0.84% to stand at 22,915.12.
In early trade today, WTI crude was down 0.09% to $46.02/bbl and Brent was down 0.19% to $47.15/bbl.

'Cherry picking' warning on Brexit trade
Campaigners are urging the government not to "cherry pick" different parts of the economy for special trade agreements with the EU after Brexit. Three pro-EU MPs argue this approach risks creating "losers" because almost all sectors are linked to the EU. Tory Anna Soubry, Labour's Chuka Umunna and Lib Dem Nick Clegg all want the UK to remain in the EU single market. Pro-Brexit Tory Michael Gove says the single market is a "bureaucratic web" which the UK should leave. The three pro-EU MPs are part of Open Britain, which replaced the official Remain campaign after the EU referendum. At an event in London, they will present a report looking at different sectors of the UK economy and their links with the EU. Written by the Centre for Economics and Business Research, it says every sector appeared to benefit from trade within the single market with 3.25 million UK jobs directly or indirectly linked to EU trade.

Company news
Advanced Oncotherapy (LON:AVO, 73.50p) – Speculative Buy
Late Thursday afternoon AVO, the developer of next-generation proton therapy systems for cancer treatment, made two import disclosures regarding prospective installations of its LIGHT system. Firstly, that the building work for the Harley Street site is expected to start in early January with completion of the building works now seen by March 2018. ‎This follows the successful planning permission granted by Westminster Council on 19 October 2016. The Harley Street Proton Treatment Facility will be jointly operated by Circle Health and the Group. Secondly, that AVO has been informed by Sinophi Healthcare Limited, its exclusive partner for the Chinese market, that Sinophi's customers will not now be proceeding with the installation of AVO's LIGHT technology in the hospitals of China-Japan Union Hospital of Jilin University in Changchun and First People's Hospital of Huai'An. AVO confirmed, however, that the orders for the two machines from Sinophi remain in place and as per its agreement Sinophi plus AVO are now assessing other sites in the same cities as well as pursuing other framework agreements in China.

Our view: That’s a bit of a shock! Not so much the planning complication with planning complications at Harley Street, but the fact that the much-heralded Jilin and Huai’An installations will now not be going ahead. Planning, particularly in a sensitive conservation areas like Harley Street, is always a complex and unpredictable process, so having been granted planning permission some slippage with respect to the completion of the expanded building is no massive surprise. Indeed, should it be subject to further delay or restraint, AVO could even consider diverting the first commercial installation to its fall-back site, Pebble Mill in Birmingham, although whether the vendor financing agreement with Metric Capital Partners is sufficiently flexible to accommodate such a revised proposal is uncertain. But what exactly went wrong in China? The finger appears to point at Sinophi, who appears to have placed firm orders for two LIGHT systems on behalf of the two Chinese hospitals, but only on the basis of framework agreements rather than firm conditions. Somehow, the understanding of what actually comprises a legally binding understanding between the two parties appears to have been lost in translation. Whether they, in fact, walked away because AVO could not formally commit to a delivery schedule, lack of confidence in LIGHT, inadequate funding or, perhaps, a wish to instead stick with tried and trusted first generation technology, rather than take a gamble, remains to be seen. Nevertheless, Sinophi is AVO’s customer (rather than the hospitals) and still has two orders in place for which milestone payments have already been made. Its task now, presumably, must be to find new buyers for the systems. AVO’s contracts with Sinophi are composed under UK law, which suggests injunction would quickly follow any threat of default, however unlikely this might be given the likely reputational damage and the fact that its funding is backed by major lenders, including the likes of Morgan Stanley Private Equity. So what can we conclude? AVO’s own reputation has taken a blow; investors are getting fed up with perpetual slippage on the route to first commercialisation, even though this might be due more to planning, rather than scientific risk; maybe also the Group deserves criticism for being less diligent in selecting partners than might have been expected, although with a high reputation operator like Sinophi this would not normally raise an eyebrow. For Beaufort, all this means that AVO’s risk profile has moved up a notch, even if the management pointedly insist that their technology now comes with no scientific risk and offers huge commercial potential. As Beaufort has detailed in numerous research notes, it believes LIGHT has the potential to make all first generation proton therapy systems obsolete while also dramatically expanding the global market opportunity. Many investors will not actually believe LIGHT can do ‘what it says on the tin’ until they see it for themselves (in Harley Street or Pebble Mill), so they will probably have to wait until summer 2018. In the meantime, a broker/media visit to Geneva or CERN (hopefully Q1’2017) for a presentation of their part-assembled demo model might just be enough to persuade some of the non-believers. Despite the higher risk profile that AVO now presents, Beaufort has decided to retain its Speculative Buy recommendation on the shares which fell almost 20% on Friday.

Beaufort Securities acts as corporate broker to Advanced Oncotherapy

Bushveld Minerals (LON:BMN, 1.32p) – Speculative Buy
Bushveld Minerals, a diversified mineral development company with projects in Africa and Madagascar, announced today signing of a Memorandum of Understanding (MoU) with its subsidiary, Greenhills Resources, and VBKom for the joint development of the Mokopane tin project. VBKom is a South African specialist consulting company focused on the mining sector and has extensive experience and knowledge in mine engineering, geology, mineral processing, industrial engineering and project management. Under terms of the MoU and subject to due diligence, VBKom will enter to binding agreements to provide capital investment and technical support for the development of the Grenfontein and Zaaiplaats deposits in exchange for equity participation in the project, not exceeding 50%.

Our view: The above announcement is positive news for Bushveld as it looks to continue to develop its Mokopane tin project. Development can now build on the 2014 scoping study that focused on the high-grade tin zones of the Groenfontein and Zaaiplaats deposits. We are encouraged with the potential for a technical and financial partner that could help build Greenhills Resources into a tin producing company. We look forward to results from VBKom’s on-going due diligence. In the meantime, we maintain a Speculative Buy rating on Bushveld.

Beaufort Securities acts as corporate broker to Bushveld Minerals plc

Savannah Resources (LON:SAV, 7.02p) – Speculative Buy
Savannah Resources announced today that it has commenced ground electromagnetic (EM) surveys at three priority targets in its highly prospective Block 4 and 5 properties in the Sultanate of Oman. Savannah owns a 65% shareholding in Al Fairuz Mining, the owner of the Block 5 licence and is earning a 65% shareholding in Al Thuraya LLC, the owner of Block 4 licence, both are highly prospective for copper and gold. Ground EM survey have commenced on Lasail, Bayda (in Block 4) and Mahab 4 (Block 5) with the work expected to take approximately three weeks to complete. EM surveys are a proven exploration tool that have successfully identified anomalies associated with volcanic massive sulphides (VMS).

Our view: We look forward to the results from the EM surveys as potential anomalies will be drill tested and this could ultimately add to the resource base. We note that VMS type deposits generally occur in clusters. The EM surveys will follow on from the 2015 VTEM survey giving more precision to previously identified anomalies. We look forward to the results which are expected in Q1 2017. In the meantime, we maintain a Speculative Buy rating on the stock.

Pennon Group (LON:PNN, 821.24p) – Buy
Pennon Group, one of the largest environmental infrastructure groups in the UK for water and wasterwater services, on Friday announced a half year results for the 6 months ended 30 September 2016 (‘H1 2017’). During the period, revenue declined by -0.5% to £685.5m against comparable period (H1 FY2016). On underlying basis, EBITDA advanced by +5.9% to £245.4m and Operating profit rose +13.7% to £153.9m. Underlying pre-tax profit jumped by +19.9% to £128.1m, while reported pre-tax profit fell by -4.1% to £102.4m due to shared services restructuring cost and movement in the fair value of derivatives, partially offset by reduced rate of corporation tax. The Group's underlying current tax charge increased due primarily to higher profits at increased effective tax rate to 18% (H1 FY2016: 17.3%), underlying earnings per share grew +1.7% to 23.6p. Net debt stood at £2,566.1m at the period end. On the operational front, the Group has committed to a £252m Energy Recovery Facilities (‘ERF’) at Avonmouth, expanding its portfolio to 12 plants. In water, the Group arranged a new non-household retail venture with South Staffs/Cambridge Water. Pennon’s CEO, Chris Loughlin commented “We believe Pennon is well positioned for the future and is on track to meet management expectations for the full year 2016/17.” The Group declared an interim dividend of 11.09p per share, up +6%, which will be paid on 4 April 2017.

Our view: Pennon reported a good result for the H1 with both businesses delivered double-digit pre-tax profit growth. South West Water recorded revenue increase of +3.1%, EBITDA growth of +5.4% and pre-tax profit rise of +11.5% during the period with grew. Profitability grew faster as a result of £80m total expenditure savings since the start of K6 (2015-2020) regulatory contracts. South West Water’s cumulative indicative annual equivalent Return on Regulated Equity remains sector-leading at 11.7% as it outperforms for its customers, and is expecting momentum and delivery to continue. Viridor delivered -3% fall in revenue but its EBITDA grew +3.8% to £63.3m and pre-tax profit jumped +79.1% to £23.1m, driven by the growth in ERFs and Recycling 'self-help' initiatives, more than offsetting decline in Landfill and Contracts, Collections & Other. The Group said Viridor is on course to reach the targeted c.£100m of EBITDA from its ERF portfolio this year (H1 FY2017: £50.5m) while EBITDA margins for Recycling is set to improve. Now that Shared Services Review completed recently, total Group cost savings is set to increase from previous c.£11m to c.£17m per annum from 2019. The Group’s continuous investment in ERF and its new retail venture with South Staffs/Cambridge Water will ensure growth momentum is continue to be secured. With Pennon continues to deliver a good underlying financial performance, which supports its sector-leading dividend policy of +4% growth per annum above RPI inflation to 2020, and reaffirming that is on track to meet management expectations for FY2017, Beaufort retains its Buy rating on the Shares.


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