Beaufort Securities Breakfast Alert: Amryt Pharmaceuticals, Berkeley Group, GlaxoSmithKline plc, Prospex Oil & Gas, Quadrise Fuels International


Prospex Oil & Gas (LON:PXOG)

Amryt Pharma (LON:AMYT)

Berkeley Group Holdings (LON:BKG)

GlaxoSmithKline (LON:GSK)

Quadrise Fuels International (LON:QFI)

"Ciao Matteo! Does Italy's decisive 'No' vote against Prime Minister Renzi's constitutional reform mean that European populists have now picked up the revolutionary baton? A tremor was certainly felt by the Euro as it became clear that around 60% of voters rejected the referendum, in a poll that had become more of a confidence vote on the Italian establishment which had only been seen to deliver low growth, falling standards of living, a banking crisis and 40% youth unemployment. Such an obvious rebuke suggests the caretaker government that will now be put in place, possibly let by the current Finance Minister Pier Carlo Padoan, will necessarily have a short tenure, leading to new parliamentary elections early next year, rather than running through to its scheduled February 2018. Whether that sets the scene for Beppe Grillo's anti-Euro Five Star Movement to go to the polls around that same time as France's own Presidential Election in May 2017, where current favourite Conservative Francois Fillon will be facing the National Front's Marine Le Pen, remains to be seen. Eitherway, the Euro is likely to become the principal casualty, as the markets look to Angela Merkel as the only leader capable of putting up a fight, as she herself heads to Germany's own Federal Election for a fourth term in the fall. Such fears were enough to unhinge Trump's bull run in the US last week, with the S&P-500 posting its first weekly decline since his election, with the Dow seeing profit taking amongst financials while other indices made just fractional gains as investors tried to judge whether the President-elect's overtures to Taiwan and Pakistan, to the apparent offence to major trading partners China and India, are in fact part of a sophisticated plan to strengthen the US's negotiating position or whether he is simply blind to the potential collateral damage being created. Asia meanwhile appeared to take fright from the Italian vote, fearing that without a strong government in place, the US$400bn of bad debt in its banking system could result in the collapse of as many as eight of the country's major banks, which could in turn to lead to systematic contagion around the globe. All principal indices in the region ended down, with the Shanghai Composite the biggest faller, although it was closely followed by the Nikkei as investors reverted to safe-haven buying of the Yen once again. Against this background, the UK is due to release Services PMI data and car registration figures this morning, while later this afternoon the Fed's William Dudley is due to speak followed by release of the ISM non-Manufacturing index. UK corporates due to report earnings or trading updates today include Evgen Pharma (EVG.L), Rex Bionics (RXB.L) and St Modwen Properties (SMP.L), while Ryanair (RYA.L) and International Consolidated Airlines (IAG.L) release November traffic data. European futures are, not surprisingly, all pointed down this morning, with the FTSE-100 expected to fall around 20 points in early trading."

- Barry Gibb, Research Analyst



The FTSE-100 finished Friday's session 0.33% lower at 6,730.72, whilst the FTSE AIM All-Share index closed 0.08% up at 813.97. In continental Europe, the CAC-40 finished 0.70% lower at 4,528.82 whilst the DAX was 0.20% off at 10,513.35.

Wall Street

In New York on Friday, the Dow Jones fell 0.11% to 19,170.42, the S&P-500 gained 0.04% to 2,191.95 and the Nasdaq added 0.09% to 5,255.65.


In Asian markets this morning, the Nikkei 225 had fallen 0.92% to 18,257.4, while the Hang Seng lost 0.28% to 22,501.34.


In early trade today, WTI crude was down 0.77% to $51.28/bbl and Brent was down 0.72% to $54.07/bbl.


Euro wobbles after Italian referendum

The euro fell sharply against the dollar after Italian Prime Minister Matteo Renzi suffered a heavy defeat in Sunday's referendum. The fall continued after Mr Renzi announced his intention to resign. At one stage the euro hit $1.0507, its lowest level since March 2015. But it rebounded from that low and a short while ago was at $1.0563, still down 0.96% from Friday's close. Analysts say that there is caution among investors but not panic. "While the markets are likely to remain nervous as we start a new week, they haven't fallen off a cliff, so far," said Kathleen Brooks, research director at City Index Direct. "Either markets are becoming immune to political risk, or they are taking the view that the Italian issue will be a slow-burner, even if the president can't form a government, he still has 70 days to try, and that seems quite far away at this stage," she said. However, the Italian economy is in a fragile state and a period of political uncertainty could do it further damage.

Company news

Prospex Oil & Gas (LON:PXOG, 2.62p) – Speculative Buy

Prospex announced on Friday it has received drilling approval for its high impact Boleslaw-1 gas well on the Kolo License. The drilling plan or "Plan Ruchu" was the last of the approvals required and we now expect spudding mid December as per the original target. Prospex has 49% of the Boleslaw-1 well while Hutton Poland, the operator, has 51%.

Our view: 2016 has been a successful year for Prospex. It started the year as an E&P investment vehicle with no investments yet will end with a drill turning on its first prospect. Management has delivered to its strategy and we look forward to (hopefully) positive well results in 1Q17. Our valuation for Prospex included a 75% risk factor which we planned to reduce to 70% when the Plan Ruchu was approved. As a result we increase our target price from 3.0p to 3.4p and reiterate a Speculative Buy recommendation.

Amryt Pharma (LON:AMYT, 16.50p) – Speculative Buy

Amryt Pharma plc, the clinical stage specialty pharmaceutical company focused on best in class treatments for orphan diseases, on Friday, announced that it has entered into a €20m Facility Agreement with the European Investment Bank ('EIB'), a leading European investment body. The Facility has an interest rate of 3% over the Euro Interbank Offered Rate to be paid periodically, with a further 10% accruing and payable in a bullet together with the outstanding principal amount on expiry of the Facility. The Facility has a 5-year term from drawdown and the associated repayment schedule is expected to present a minimal cash burden to the Group during the term, ahead of repayment. The Facility is split into three tranches; €10m available immediately and two further tranches of €5m available upon the achievement of certain milestones in relation to the Group's lead product, Episalvan. The Group has already submitted its protocol for the pivotal Phase III study for Episalvan, to test its safety and efficacy profile for the treatment of Epidermolysis Bullosa ('EB'), which has been granted US and EU orphan drug designation. The Phase III clinical trial in EB is expected to be commence in Q1 FY2017 with top-line data anticipated to be available in mid-2018 and commercial launch expected in 2019. European Investment Bank's Vice President, Andrew McDowell commented "Continued investment in innovation is crucial to improve lives and build on European strengths to develop world-leading pharmaceutical products. The European Investment Bank is pleased to support innovation and development of new treatment of painful skin disorders by Amryt Pharma. This represents the EIB's first-ever direct support for investment by an Irish pharma company and I am pleased to confirm the EIB's intention to increase support for private sector innovation in Ireland in the years ahead".

Our view: This is a significant milestone for Amryt. The Facility fully funds the pivotal Phase III study for Episalvan at an attractive rate without the need for dilution to shareholders. Episalvan received marketing approval for the treatment of partial-thickness wounds from the European Commission in January 2016 and Amryt is developing Episalvan as a new treatment for EB, a rare and inherited skin disorder that causes the skin to become very fragile, affecting c.500,000 patients worldwide, for which, there is currently no available treatment. The EB market in the US and Europe alone is estimated to be worth c.US$1.5bn per annum. The Group has patent for the use of Episalvan in the treatment of EB in US and Europe for the treatment of all partial thickness wounds, including those derived from EB. The Facility also provides the funding required to progress its earlier stage AP102, a US orphan designated acromegaly drug compound through pre-clinical development and into the clinic. AP102 focuses on somatostatin analogue peptide medicines for patients with rare neuroendocrine diseases, where there is a high unmet medical need, including acromegaly and Cushing's disease. Shareholders cheered on Friday as Amryt showed its ability to secure Facility Agreement with EIB, a high profile long-term lending institution owned by the Member States of the European Union, demonstrating their confidence in management's capability to progress it pipelines of products, particularly the Episalvan. The Group has acted in shareholder's best interests and we look forward to further updates in due course. Beaufort reiterate a Speculative Buy rating on the Shares.

Berkeley Group Holdings (LON:BKG, 2,760.00p) – Buy

On Friday, the Berkeley Group announced its unaudited interim results for the six months ended 31 October 2016, together with an evolution of its shareholder returns programme. Highlights included profit before tax for the period of £392.7 million, up 33.9% from £293.3 million and NAV up 7.9% to 1,418 pence/share. The Group's net cash position was £207.9 million (April 2016: £107.4 million) after dividend payments of £137.0 million and £20.1 million of share purchases. Forward sales stood at £2.90 billion (April 2016: £3.25 billion) and landbank containing £5.9 billion of estimated future gross margin (April 2016: £6.1 billion) across 42,125 plots (April 2016: 42,858 plots). Management summarised market conditions by noting that for the London-heavy group excluding "the hiatus around Brexit, reservations are 20% down on the same period last year, as a result of the market adjusting to increased stamp duty and the economic uncertainty arising from the result of the EU Referendum". The Board also reviewed its mechanism for making the remaining £10.00 per share payments under the Shareholder Returns Programme that was put in place in 2011, and enhanced this time last year from £13.00 per share to £16.34 per share. Within this, it noted that the current heightened macro uncertainty has led to significant market volatility and that there is a dislocation between this and both underlying strength of Berkeley's operating model. As a consequence, the Board is proposing to introduce flexibility such that the remaining £10.00 per share payments can be made through a combination of share buy-backs and dividends, as opposed to solely dividends. This recognises that, at certain price points, the Board is of the opinion that the Group is materially undervalued and share buy-backs will be in the best interests of all shareholders. In making this change, the Board is also proposing that the payments should be re-characterised from being a value per share, to be an absolute value per annum. This ensures that the same quantum of cash will be returned as previously anticipated, but on a smaller number of shares, to the extent share buy-backs occur. This absolute value will be increased appropriately for any new shares issued.

Our view: That did the shares a power of good! And a jolly good job too, considering the undervaluation of Berkeley, whose forward 2017E multiple and dividend yield crossed over months ago! Its forward guidance, coming by targeting delivery of 3-year pre-tax profit of £2.0 billion from 1 May 2015 and the announcement of a new 5-year target to deliver at least £3.0 billion of pre-tax profit in five years beginning 1 May 2016, should provide comfort to those considering that UK housebuilders are standing on the precipice of another violent cyclical downturn. Most certainly recent mortgage data suggests this is far from the truth and the Bank of England is very unlikely to being hasty with prospective tightening, which still appears some way away. All positive housing market dynamics from structural shortage of supply, funding availability, government incentives and even the Chancellor enlarging his contribution to fund new affordable housing, all works in favour of the UK's major housebuilders while small jobbing builders continue to be squeezed out by banks unwilling to lend. Berkeley, having been the UK-quoted sector's main casualty of higher stamp duties on premium house purchases has, in fact, become a beneficiary of Sterling's Brexit-inspired tumble, as international buyers suddenly find their purchasing power magnified. Reservations, which remain consistent both with the group's previous announcement and the current experience of its peer group, provides shareholders with no sign of a slowdown on the horizon, while its estimated future gross margin on the landbank represents a highly prudent risk-adjusted assessment of future potential for each site. The shares trade on a 1.55x price/NAV, a 2017E P/E multiple of 6.2x and a yield of 7.5%. Too cheap on anybody's book! Beaufort retains its Buy rating on the shares.

GlaxoSmithKline (LON:GSK, 1,467.00p) – Buy

GlaxoSmithKline plc, one of the world's leading research-based pharmaceutical and healthcare companies, and its partner, Innoviva, on Friday announced that their Relvar Ellipta for the treatment for Chronic Obstructive Pulmonary Disease ('COPD') has been approved in Japan. Relvar is a combination of the inhaled corticosteroid ('ICS'), fluticasone furoate ('FF'), and the long-acting beta2 agonist ('LABA'), vilanterol ('VI'). GSK Global Respiratory Franchise's SVP & Head, Eric Dube, commented "COPD affects people in different ways, and a range of treatments are needed so that physicians can determine the right treatment for the right patient. We are delighted with this approval of Relvar Ellipta, our third COPD treatment to gain marketing authorisation in Japan in under three years, and believe it will be an important new option for appropriate patients with COPD, as well as those with asthma".

Our view: Positive progress for GlaxoSmithKline. The announcement follows approval of Relvar Ellipta in Japan for the treatment of bronchial asthma since 2013 in 2 different strengths, namely 100/25 mcg and 200/25 mcg. This time, the treatment is for COPD and the approved dose of FF/VI is 100/25 mcg, which is administered once a day. COPD is a disease of the lungs that includes chronic bronchitis, emphysema or both, interfering with normal breathing by obstructing the airflow, caused by cigarette smoke, breathing in second hand smoke, air pollution, chemical fumes or dust from the environment or workplace. It is estimated that c.8.6% of the people aged over 40 in Japan are affected, according to Yoshinosuke Fukuchi from Juntendo University. In light of the on-going developments, Beaufort maintain a Buy rating on the Shares.

Quadrise Fuels International (LON:QFI, 11.25p) – Speculative Buy

Quadrise Fuels, the emerging supplier of MSAR emulsion technology and fuel, enabling a low-cost alternative to heavy fuel oil (one of the world's largest fuel markets, comprising over 450 million tonnes per annum) in the global shipping, refining and power generation markets, on Friday provided an update on its key projects and operational developments ahead of its AGM meeting. Management confirmed its marine project continues to make excellent progress. MSAR fuel is produced in regular campaigns and transferred to the nominated Maersk vessel by a bunker barge in the Bay of Algeciras. The Maersk vessel has been continuing to burn MSAR successfully on its regular scheduled route, whilst outside of the European Emission Control Area. Also since the Memorandum of Understanding with the Kingdom of Saudi Arabia in August 2016, Quadrise has been working collaboratively with all parties to move this large-scale production to combustion trial forward. In September, the Group also extended its current agreements until November 2018 with its technology partner, Akzo Nobel, for the exclusive purchase and supply of chemicals for the production of MSAR and the exclusive joint development of emulsion fuels. These agreements underpin Quadrise's ability to migrate the business to long-term commercial revenues.

Our view: The first half of 2017 is going to be 'make-or-break' for Quadrise. The outcome of two very important trials are now pending, both of which offer the potential to create genuine bonanza returns for the Group. A 'thumbs up' from Maersk in their interim assessment, which management expects to receive in the Spring of next year, ahead of completion of current trials in the early Summer, could schedule a route to large scale adoption of MSAR for fuelling its ocean going fleet and potentially generate a huge, ongoing, stream of royalties. Having also dedicated significant management resource to move Saudi Aramco's large-scale production-to-combustion project forward, most recent discussions suggest contracts will be formally entered during the first half of 2017, with volume trials then likely to commence during the second half. Having raised gross proceeds of £5.25 million from October's Placing and Open Offer, Quadrise is now finds itself adequately funded to build on this progress and, potentially, take its first steps toward commercial operations, before needing to tap shareholders for additional funding once again. The upbeat nature of the Board's announcement, particularly given that landmark events are anticipated within a brief six months might normally have been expected to push the share price back to the top of its established trading range between 9.0p and 15.0p. In the event, however, the shares were under pressure from the start, as shorter-term traders to profits on the new equity allocated five weeks back, which was priced at 10.0p/share. Once this supply tails off, this level perhaps identifies a new support at which investors confident of positive news might consider entering the equity. Clearly investment in Quadrise carries a lot of risk, although it needs to be recognised that giant institutions like Maersk and Saudi Aramco would never dream of dirtying their hands with a minnow like Quadrise unless it genuinely has the potential to bring value for their operations. Taking this on board, Beaufort retains its Speculative Buy recommendation on the shares.

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