Dixons Carphone (LON:DC)
"Yellen yesterday delivered a dose of reality to the market! It was not the FOMC's unanimous decision to hike short-term rates by 25bp, taking federal-funds rate range to between 0.5% to 0.75% due to near full employment as inflation creeps toward the target level, that was the surprise but the fact officials are now predicting three similar moves during 2017. Furthermore, the Fed stuck to its forecast for three further hikes in both 2018 and 2019, in the process nudging its long-run target for fed funds back up to 3% from 2.9%. The net result was for the already surging US$ Index to spike to a 13-year high, rising by 0.7% during the Asian session while also reaching a 20-month peak against the Euro. US equities took fright, having got close to testing the 20,000 barrier on Tuesday, the Dow Jones suffered its worst drop since October, with broad sector-wide selling knocking all principal indices similarly. Macro data due from the States this afternoon may provide further grounding for the Fed Chair's aggressive decision, with release of Consumer Prices, Jobless Claims and the Philadelphia Fed Business Outlook Survey; beyond this, of course, is the understanding that Trump's 'Make America great Again' campaign was predicated on his ability to ensure the working class vote that powered him to the White House can deliver both the employment and wages boost required to make his vision a reality or, presumably, he will pay the price. Asian equities followed the US lead, with almost all regional bourses under pressure, led sharply by the Hang Seng as the US$-based territory's central bank followed the Fed's lead by also raising rates, knocking its recently booming property shares in the process. The Nikkei stood out from the crowd with a fractional gain, as traders focussed in on the benefits of US$ strength against the Yen for it's export dependent businesses. Today London will receive both the Bank of England's interest rate decision and MPC Minutes. No change in the figure itself is expected, but yesterday's higher than expected November inflation data does suggest that Brexit devaluation effects continue to filter through, against which it must be realistic to expect a slightly more hawkish tenor coming through the text in order to keep a floor under Sterling. The ONS will also release Retail Sales figures, while the CML provides lending data and the CBI publishes its Industrial Trends Survey. UK corporates expected to release earnings or trading updates this morning include Bunzl (BNZL.L), Centrica (CNA.L), Go-Ahead (GOG.L), Petrofac (PFC.L), PZ Cussons (PZC.L) and SyQic (SYQ.L). Traders will also be keeping a cautious eye on oil prices despite yesterday's encouraging US crude inventory report, with Iraqi government reports suggesting plans to increase its exports in January while Libya also restarts operations at its key oil fields, creating further doubts as to OPEC's ability to enforce the wide-ranging international production cuts agreed earlier this month. London is seen opening nervously this morning, with the FTSE-100 expected down some 15 points during early trading."
- Barry Gibb, Research Analyst
The FTSE-100 finished yesterday's session 0.28% lower at 6,949.19, whilst the FTSE AIM All-Share index closed 0.49% higher at 825.35. In continental Europe, the CAC-40 finished 0.72% lower at 4,769.24 whilst the DAX was 0.35% lower at 11,244.84.
In New York last night, the Dow Jones lost 0.6% to stand at 19,792.53, the S&P-500 declined 0.81% to 2,253.28 and the Nasdaq ended the session 0.5% lower at 5,436.67.
In Asian markets this morning, the Nikkei 225 had advanced 0.28% to 19,307.99, but the Hang Seng shed 1.9% to 22,029.22.
In early trade today, WTI crude was down 0.16% to $50.96/bbl and Brent was up 0.04% to $53.92/bbl.
'One billion' affected by Yahoo hack
Yahoo has said more than one billion user accounts may have been affected in a hacking attack dating back to 2013. The internet giant said it appeared separate from a 2014 breach disclosed in September, when Yahoo revealed 500 million accounts had been accessed. Yahoo said names, phone numbers, passwords and email addresses were stolen, but not bank and payment data. The company, which is being taken over by Verizon, said it was working closely with the police and authorities. Yahoo said in a statement that it "believes an unauthorized third party, in August 2013, stole data associated with more than one billion user accounts." The breach "is likely distinct from the incident the company disclosed on September 22, 2016". However, the three-year-old hack was uncovered as part of continuing investigations by authorities and security experts into the 2014 breach, Yahoo said. Account users were urged to change their passwords and security questions.
Orogen Gold (LON:ORE, 0.02p) – Speculative Buy
Orogen Gold announced yesterday results from its 2016 drill programme at the Mutsk gold project in southern Armenia. All assays have now been received for the 2016 step-out drill programme with the final two holes drilled at 200m and 400m respectively to the north of the previously defined North Gold Zone. The purpose of these holes was to test for continuity of mineralisation towards the north. Drill hole OG16-59 intercepted several meters of hydrothermal alteration including a gold-bearing zone grading 0.35g/t over 4.5m. Hole 16-60, drilled further to the north, failed to return any significant gold values. Overall, based on the 2016 drill programme the strike length of Mutsk has been increased from 0.5km to 1.3km and remains open towards the south and the east.
Our view: Whilst the final drill results for the 2016 drill programme are far from spectacular in terms of gold intercepts, they have served their purpose by defining the northern extent of mineralisation of the North Gold Zone. We note that the deposit remains open towards and east and to the south. It is also worth noting that Mutsk is located only 30km from Lydian International's 5Moz Amuslar gold deposit which recently secured financing for the US$420m project. We look forward to updates on the Mutsk geological model as well as the 2017 programme to explore further extensions and a JORC-compliant resource estimate. In the meantime, we maintain a Speculative Buy on the stock.
boohoo.com (LON:BOO, 133.25p) – Buy
boohoo.com ('boohoo'), one of the UK's largest online own-brand fashion retailers, yesterday provided trading update for the period since its interim results on 27 September 2016. The Group said it continued to perform well during the period, recorded strong Black Friday weekend and noted that peak season trading remains encouraging. boohoo therefore upgraded its revenue and EBITDA margin guidance, now expects revenue growth of between 38-42% (previous guidance: 30-35%) and EBITDA margin of between 11-12% (previous guidance: 11%), for the FY2017. boohoo also announced its acquisition of 66% stake in 21 Three Clothing Company Ltd ('PrettyLittleThing') for a cash consideration of £3.3m on a cash free, debt free basis. The remaining 34% will be used as incentive for PrettyLittleThing's management, before the Group have the option to acquire this at market value post 28 February 2022. In addition to the revenue guidance above, the Group said it will also benefit from PrettyLittleThing following completion of the transaction expected on 3 January 2017. boohoo's Chairman, Peter Williams commented "PrettyLittleThing was always going to be a natural fit with boohoo. …[PrettyLittleThing] complements boohoo's own inclusive and innovative brand, and we are delighted to add this fast growing, international business to the Group. We believe this is an excellent opportunity to extend the Group's overall customer appeal through two distinct, complementary brands while further enhancing the Group's strong growth trajectory." boohoo will provide trading update for the 4 months ended 31 December 2016 on 10 January 2017.
Our view: Unstoppable! Having already revised its full year revenue growth upward three times during the period, the Board one further time has raised the upper and lower ends of its target range, now to 38%-42% (previous guidance: 30%-35%). The EBITDA margin was also slightly upgraded from 11% to 11-12% having already lifted it from 9.6% at the interim. The Group continue to see strong trading and they expect this to continue during the key Christmas and New Year trading period. The acquisition of PrettyLittleThing is also an encouraging move, having had an option to acquire its entire share capital of the company for £5m since March 2014. boohoo evaluated all aspects of the acquisition thoroughly and concluded that it should complement the Group's presence both in the UK and internationally, while boosting its overall customer appeal through two brands. Founded in 2012, PrettyLittleThing is a fast-growing online women's fashion retailer. In the financial year ended 29 February 2016 ('FY2016'), its revenues soared by over +400% to £17m, while achieving £19m in the first half of the FY2017 (H1 FY2016: £6.4m). PrettyLittleThing is expected to book revenue growth of over +150% in FY2017 to broadly breakeven at the EBITDA level. boohoo plans to review and invest in PrettyLittleThing's operations, including its warehousing, in FY2018 to ensure the company is well positioned for the future. As such, revenue growth for PrettyLittleThing is expected to grow at a similar rate to boohoo in FY2018. The cost of £3.3m for a 66% stake was in line with option agreement and this will be financed through the Group's existing cash resources. Beaufort believes that the worldwide market for internet fashion sales will continue to expand as shopping preferences shift towards the convenience and competitive pricing affordable by online retailers, such as boohoo and PrettyLittleThing. We view acquisition as an excellent strategic fit and expect it to accelerate the enlarged Group's growth momentum while maintaining ability to meet the rapidly changing customer demand. The shares have performed extraordinarily, yet we believe there remains further upside for the share price. Beaufort reiterate its Buy rating on the shares.
Dixons Carphone (LON:DC, 342.60p) – Buy
Dixons Carphone ('Dixons'), the Europe's leading specialist electrical and telecommunications retailer and services company, yesterday released its interim results for the 26 weeks ended 29 October 2016 ('H1 2017'). During the period, on a statutory basis, revenue advanced +11% to £4,869m, pre-tax profit soared by +33% to £104m and basic earnings per share jumped by +69% to 8.1p, against the comparable period (H1 FY2016). On a headline basis, EBIT grew by +13% to £153m and pre-tax profit increased by +19% to £144m, leading to basic earnings per share rose by +45% to 10.9p. Free cashflow remained flat at £65m, while net debt reduced to £285m from £378m at H1 FY2015. On the operational front, the Group said it has successfully integrated the Simplifydigital and InfoCare businesses acquired last year. These businesses have contributed revenues of £20m and £24m, respectively, during the period. For its Connected World Services ('CWS'), the Sprint joint venture stores totaled to 42 stores operational across 7 states as at the period end, and the Group said store rollout remains on track. Dixons' CEO, Seb James, commented "Looking forward, we remain optimistic about our ability to continue to gain market share in all our key markets, and, while we have still not seen any effect on consumer demand as a consequence of Brexit, we have been planning for the possibility of more uncertain times ahead." The Group declared an interim dividend of 3.5p per share, up +8%, to be paid on 27 January 2017.
Our view: Dixons Carphone delivered a strong performance during the H1 FY2017, reporting market share expansions across all its markets, while headline pre-tax profits came ahead of consensus analysts' estimates by +2%. Group like-for-like revenue growth was +4%, comprised of UK & Ireland +5%, Nordics +2% and Southern Europe +7%. The Strong performance in UK & Ireland was driven by +6% like-for-like growth during Q2 due to reduced store numbers as part of the Group's property rationalisation programme. Its CWS division, a small unit that sells technology to other retailers, performed well during the period with revenue up +46% and headline EBIT up +67% as it secured a consultancy agreement with Sprint, licensing of the honeyBee platform, as well as a new distribution agreement with Talk Talk from last year. The Group also announced yesterday CWS's new strategic partnership with SSE, who will be using its honeyBee software to develop an interactive platform that will enable customers to monitor, control and maintain their homes and appliances "at the touch of a button". The shares fell sharply yesterday following the announcement as its CEO's comment regarding "future uncertainties", which created some selling pressure from anxious investors. The CEO went on to say that the Group is focusing on fixed cost reductions and is looking for areas with potential market share growth, "just in case" if the environment becomes more challenging. We took these initiatives as cautionary but positive in that the Group has long-term strategies in place with the willingness to act quickly. Ultimately, these initiatives will create a more competitive group during challenging times, while improving profitability in more favourable times. Dixons Carphone is a quality stock that proactively re-shapes itself to cope with a changing environment. Beaufort reiterates its Buy rating on the shares.
Micro Focus International (LON:MCRO, 2,219.00p) – Buy
Micro Focus, the international software product group, yesterday announced unaudited interim results for the six months ended 31 October 2016. Completion of the Serena acquisition took place on 2 May 2016 for an Enterprise Value of US$540.0m on a cash and debt free basis, partially funded by a share placing in FY16 of 10.9m shares at a price of 1455 pence raising £158.2m (US$225.7m) before expenses. Therefore, on a pro-forma constant currency basis to provide a better comparison of like-for-like performance, key highlights were total revenues of US$684.7m (2015: pro-forma CCY US$676.8m), an increase of 1.2%; Adjusted EBITDA of US$332.5m (2015: pro-forma CCY US$308.3m), an increase of 7.8% and, Underlying Adjusted EBITDA of US$320.3m (2015: pro-forma CCY US$301.5m), an increase of 6.2%. The period under review was one of considerable economic and political uncertainty. Against this backdrop, Micro Focus' strategy remained constant, together with its ongoing merger and acquisition activity. More recently, this has included in March 2016 the Group entering into a definitive agreement to acquire the entire share capital of Spartacus Acquisition Holdings Corp. the holding company of Serena Software Inc. and its subsidiaries. This acquisition completed on 2 May 2016 and consequently trading results of Serena are included in the half year results. In September 2016, it also announced agreement with Hewlett Packard Enterprises to merge with the software business assets of HPE by way of merger with a wholly owned subsidiary of HPE. The transaction is expected to complete in the third quarter of the calendar year 2017. Exceptional pre-acquisition costs were incurred in the period and further exceptional costs will be incurred for the remainder of the FY17 and to completion in FY18. The proposed interim dividend is 29.73 cents (2015: 16.94 cents per share), which represents a 75.5% increase on last year's interim dividend.
Our view: The focus of the Micro Focus Portfolio is to deliver innovation that matters to customers. This means helping them solve real problems today within the context of the opportunities and challenges they face in their business and the realities of their existing IT environment. In essence, this enables them to deliver more value from prior investments in existing infrastructure whilst also exploiting the opportunities presented by cloud, mobile and emerging opportunities such as DevOps and the Internet of Things. During the half-year period, the Micro Focus Product Portfolio delivered performance in line with management expectations. Progress in North America was encouraging with overall execution levels and more importantly consistency of execution continuing to improve. International regions (EMEA and LATAM) saw strength driven from the U.K and France but offset by weakness in Brazil and a mixed performance across the rest of Europe. Asia Pacific & Japan delivered a good performance with notable strength in Australia and stability in Japan. Operationally, there was notable strength in COBOL Development & Mainframe Solutions (+14% on a pro-forma CCY basis) offset by expected declines in Collaboration & Networking (-14.1%), Development & ITOM (-8.4%) and Host Connectivity (-10.6%). Revenues declined marginally in Identity, Access & Security but significant progress was made in the product portfolio to deliver much stronger foundations for sustainable growth over the longer term in this highly competitive and growing market. Importantly, the Group's cash generated from operations was US$201.9m (2015: US$162.7m). This represented a cash conversion ratio when compared to Adjusted EBITDA less exceptional items of 69.3% (2015: 62.6%). The first half of the Group's financial year typically has a lower cash conversion than its second half ratio as a result of the timing of the maintenance and subscription renewals which are weighted to the second half of the year. This year also incurred greater exceptionals, including HPE-related pre-completion costs of up to US$140m may weight somewhat over the coming period, but hopefully balanced against somewhat lower capex. Micro Focus shares were a net beneficiary of the completed take-out of ARM by Softback at end of the summer, when its ambitious deal with HPE meant prompted investors to consider it as replacement technology champion for the UK. Since then, the shares have largely trod water, with the shares now sitting on a April 2017E multiple of just 16.8x, while coming with dividend income of 3.2%. Given that the Group stands to deliver far more than its management's prudent growth goals, Beaufort retains its Buy recommendation with a price target of 2,600.