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Beaufort Securities Breakfast Alert: Keras Resources,Westminster Group, Zenith Energy, Motif Bio

Published: 03:07 19 Apr 2017 EDT

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That sure took everyone by surprise! The FTSE-100 index plummeted 2.5% yesterday, its worst fall since the aftermath of the EU referendum pushing it back to February’s low, as market weighed a 1.6% jump in Sterling to a four-month peak against the US$ following Theresa May’s announcement of a snap general election on June 8th. Behind the PM’s ‘one-issue’ campaign is the prospect of an increased majority for the ruling Conservatives with the expectation this will strengthen the Government’s hand with forthcoming Brexit negotiations. Tumbling iron ore prices, which fell to a near six-month low on Tuesday, also contributed to the fall and left a number of major mining stocks were severely punished. BHP Billiton, Glencore and Anglo American, for example, all lost more than 5% during the European session. US indices tracked this with banking and health-care sectors sliding as individual quarterly results disappointed. Leading the former was Goldman Sachs Group, whose trading gains fell short of those recently posted by peers, while Johnson & Johnson tumbled after it detailed what analysts considered to be rather underwhelming sales. After a batch of disappointing recent US macro releases and a sharp rise in geopolitical tensions, with more than 60 firms in the S&P 500 expected to report this week, including more top tier banks and major industrials, continued evidence of good corporate health remains absolutely key to equities sustaining their positive momentum. Reflecting on this, some investors yesterday took opportunity yesterday to lock-in profits of recent months, reinvesting instead into safe havens like Gold, the Yen and Government Bonds. The yield on 10-year U.S. Treasuries, for example, fell to 2.177%, from 2.248% Monday, its lowest close since 10th November. Asian equities also suffered broad declines this morning amid continuing regional tensions, led by the Shanghai Composite Index which was down more than 1% to a two-month low, putting losses since Friday at more than 3%; elsewhere, Australia's S&P/ASX 200 fell around 0.5%, while the Nikkei slipped between gains and losses to end marginally in the positive helped by a softer Yen. National security concerns meanwhile remain high and rising, with the US being forced overnight to intercept Russian bombers off the coast of Alaska for the first time since 2015, while Washington expressed concerns regarding Iran’s role in supporting terrorism and two men were detained on suspicion of planning an imminent terror attack in the French city of Marseille after pledging allegiance to Islamic State. Traders consider the US$ will remain under pressure until next Tuesday’s Military Foundation Day in North Korea, which some believe may be the most obvious day for premier Kim Jong-un to make a defiant military gesture to Donald Trump’s administration. Selling pressure in crude futures continued during the Asian session, amid renewed worries about oversupply following weeks of gains on hopes of more constrained global output. UK corporates due to release earnings or trading updates today include AB Foods (LON:ABF), Burberry Group (LON:BRBY), Bunzl (LON:BNZ), Rio Tinto (LON:RIO) and Rentokil Initial (LON:RTO). No macro releases are due from the UK on Wednesday, but the EU is due to publish its harmonised Consumer Prices for March along with its February trade balance. The US meanwhile is schedule to provide its MBA Mortgage Applications and the Fed Beige Book. With investors convinced that Theresa May will enjoy an improved majority post 8th June, Sterling may well continue to appreciate against the presently out of favour US$ and Euro. This, along with heightened international uncertainty reducing appetite for risk, suggests equities in London will again open weaker once again, with the FTSE-100 seen down over 20 points in early trade. "
- Barry Gibb, Research Analyst
 

Markets
Europe
The FTSE-100 finished yesterday's session 2.46% lower at 7,147.50 whilst the FTSE AIM All-Share index lost 0.65% to stand at 940.29. In continental Europe, the CAC-40 finished down 1.59% at 4,990.25 whilst the DAX was 0.90% lower at 12,000.44.
Wall Street
In New York last night, the Dow Jones fell 0.55% to 20,523.28, the S&P-500 slipped 0.29% to 2,342.19 and the Nasdaq lost 0.12% to 5,849.47.
Asia
In Asian markets this morning, the Nikkei 225 had risen 0.07% to 18,432.20, while the Hang Seng shed 0.50% to 23,804.77.
Oil
In early trade today, WTI crude had fallen 0.1% to $52.36/bbl and Brent had lost 0.16% to $54.80/bbl.

Headlines
RBS stake may be sold at a loss, chancellor admits
The chancellor has admitted for the first time that the government is prepared to sell its stake in Royal Bank of Scotland (RBS) at a loss. The Treasury bailed out the bank by buying a 72% stake for £45bn, at 502p a share, at the height of the financial crisis in 2008. Shares in the loss-making lender are now trading at less than half that price at 223p. Philip Hammond told MPs on Tuesday: "We have to live in the real world." He added: "Our policy remains to return the bank to private hands as soon as we can achieve fair value for the shares, recognising that fair value could well be below what the previous government paid for them. "We have to live in the real world and make decisions on the future of our holding in RBS in the best interests of taxpayers."

Company news

Keras Resources (LON:KRS, 0.42p) – Speculative Buy
Keras' spin off of its Australian gold assets is progressing well. It's acquirer, an Australian listed vehicle (which will be called Calidus Resources) has raised the A$620k it needs to get the RTO process started. The placing was oversubscribed. The next stage is a larger up to A$8m raise to fund a major drilling campaign and development programme at the Warrawoona Gold Project. Post RTO, and assuming an A$8m raise, Keras will own 31% of Calidus which increases (potentially to 60%) if certain milestones are achieved.

Our view: It is good news that the RTO is going to plan and that the placing was oversubscribed. Keras' gold assets should attract the funding they need on ASX while Keras can focus on its African portfolio of projects which includes manganese in Togo and potentially a nickel and cobalt project in west Africa (licences under application). Bear in mind that two of Keras' board members will be on the board of Calidus including Dave Reeves who will be managing director, so very well positioned to advance Warrawoona and win the milestone share payments for Keras and its shareholders. We have a Speculative Buy recommendation on Keras Resources.

Beaufort Securities acts as Corporate Broker to Keras Resources plc

Westminster Group (LON:WSG, 10.38p) – Speculative Buy
The AIM listed supplier of managed services and technology-based security solutions to governments and government agencies, non-governmental organisations (NGO's) and blue-chip commercial organisations worldwide, yesterday announced a placing of 10,000,000 new ordinary shares of 10p each to raise £1million before expenses. It also confirmed the conversion of the balance of the Convertible Loan Notes issued to Darwin Capital Limited, thereby eliminating the facility. Application will be made for the New Shares, which will rank pari passu with the Company's existing issued, to be admitted to trading on AIM, which is expected that will become effective for commencing on or around 2 May 2017. The new funding will support the development of the Company, with a particular focus on investment in its Managed Services division.

Our view: This new funding, together with the elimination of the Darwin facility, places the shares on a much firmer footing. Strategically, Westminster’s Aviation Security business identifies a highly compelling customer with powerful regulatory, political and economic drivers. It is an area at the forefront of many government’s security concerns, as was highlighted by UN Security Council Resolution 2909 which was passed in September 2016 following pressure from the British Government. With the Group’s strong governmental and industry connections and a proven business model, it is positioned to demonstrate strong cash and margin generation capability from long-term contracts, together with the potential to expand revenues by an order of magnitude. Indeed, its trading update from just two months back, confirmed the Board expects to report a much-improved financial performance for the year ending 31 December 2016, with revenue growth up 22% year-on-year and an expected break-even at the adjusted EBITDA level. The Managed Services division continues to make progress on a number of fronts. It's West African airport operations have experienced steady growth in embarking passenger numbers as the recovery from the Ebola crisis continues. In January 2017 (a seasonally strong month), for example, the airport operation recorded its second highest number of embarking passengers since commencing operations there in 2012, showing a 40% increase on the comparable period and following on from a 35% increase year on year in December 2016 (albeit December 2015 and January 2016 were still affected by the tail end of Ebola). The continuation of this growth pattern will potentially benefit both the Group's airport and ferry operations. Westminster's Cargo screening operations in Sierra Leone also commenced in West Africa during 2016, following the cargo operations and security screening service achieving the coveted RA3 status. The new cargo sheds currently have far greater capacity than current utilisation and the authorities are looking to build on this with create a regional hub for cargo services. In September 2016, management provided an update on its various airport opportunities under previously announced MoU's, all of which remain live and with certain opportunities having made good progress in recent weeks. Foremost amongst these is a major 15-year term, Middle Eastern airport contract opportunity which is expected to have annual revenues in excess of £35m. Elsewhere, Sovereign Ferries commenced operations utilising its Sierra Princess vessel in December 2016. Passenger numbers to date are in line with management expectations following a planned soft start in December designed to trial services and timetables. It is now operating 68 crossings a week to coincide with flight schedules and at full capacity is capable of carrying around 9,000 passengers a month. Marketing exercises have now begun including street video screen displays in country and plans are in place for ticketing sales through airlines, travel agents and hotels using its online booking system due to go live in the near future. This new service has been well received by passengers and the aim is to reach a minimum of 50% capacity during the second half of 2017, which should make a healthy contribution with continuing growth as the service expands. Having secured over £100,000 of annual recurring revenue maintenance contracts and further recurring contracts, the Technology division has also made a strong start to the year and continues to make a positive contribution to the Group with increasing margins. The long-term cash flow profile of these businesses, which require only limited additional capital support to fully secure their opportunity, make for a strong operational and financial business model, albeit with the risks incumbent with the geographical locations from which it operates. Beaufort commence coverage of Westminster Group with a Speculative Buy recommendation.

Beaufort Securities acts as Corporate Broker to Westminster Group PLC

Zenith Energy (LON:ZEN, 10.12p) – Speculative Buy
Zenith has published detailed updates on its workover activities in Azerbaijan. At well M-195, workover Team B has started a sidetrack operation due to metal debris encountered towards the bottom of the hole. Although this is a change from the original plan, it should be a positive as it will test an undisturbed section of the reservoir. Meanwhile, Zenith’s own team (named Team A which operates Zenith’s rig) recently replaced pumps at four wells and is now tackling some more challenging work. First is the recompletion of M-45 (in the Muradkhanli field) which requires reperforating and some production tubing replacement. Second is at Jafarli (J-2) which also requires removal of stuck production tubing and metal debris. Third is at Zardab (Z-28) where the whole length of production tubing needs removing and replacing if necessary. Team A is starting work on M-45 this week.

Our view: It is good to see a detailed description of Zenith’s workover programme. With two teams (and two rigs) active and plenty of wells to work on, we should see an uplift in production throughout 2017. Management has an ambitious target of 1,000 bopd by the end of 1Q18 which if achieved would push Zenith in to a different category of junior and clearly demonstrate the quality of its Azerbaijani asset. Bearing in mind Zenith's three fields in Azerbaijan have 2P reserves of 76 million barrels. We look forward to operational updates throughout the rest of 2017 and reiterate our Speculative Buy recommendation.

Beaufort Securities provides Investor Relations services to Zenith Energy plc

Diversified Gas & Oil (LON:DGOC, 66.50p) – Speculative Buy
Diversified Gas & Oil plc (‘DGOC’), the US based gas and oil producer, yesterday announced that it has acquired a package of 1,300 producing oil and gas wells in the states of Ohio and Pennsylvania, as per the announcement made on 24 February 2017. This expanded DGOC’s held production acreage by approximately 75,250 acres (in existing operating geography), gross gas production by +14% to approximately 30,000 Mcfd and gross oil production by +23% to approximately 585 bopd. For a purchase price of US$1.75 million, being funded through existing cash resources, the acquisition is expected to contribute operating cash flow for the Company of approximately US$1.0 million per annum, represents less than a 2-times multiple of forward operating cash flows, in line with the Company's acquisition criteria for acquiring mature assets. The wells generated net revenues of approximately US$3.0 million in the year to 31 December 2016.

Our view: : Doing exactly what they promised! This acquisition is immediately accretive to cash flow and represents a sizeable addition to existing Group assets. Given the Board’s IPO pledge to return 40% of Free Operating Cash Flow to shareholders in the form of dividends, based on the current share price this means the Group’s 2017E yield can now be expected to be in excess of 7%. Its existing portfolio comprises a large inventory of mature, conventional wells (75% gas, 25% oil), with very long lives, slow decline rates and minimal maintenance. This provides an ideal formula for high visibility free cash generation. Operating in an environment that presently lacks intense competition for the purchase of new assets, DGOC finds itself spoiled for choice from existing large shale gas operators in the Appalachian basis that are currently offloading non-core conventional production at bargain basement prices. By retaining rights to the shale opportunity below the conventional resource, however, continuation of production above entitles the shale operator to return to the deeper opportunity at a later stage without the need to secure new exploration permits. DGOC’s management, not surprisingly, has taken this exceptional opportunity to grab one of these and more can be expected to follow. Six packages have now been acquired over the past 18 months at highly favourable multiples of between 1x and 3x EBITDA, and there is presently another half-a-dozen or so being reviewed right now. DGOC is favourably aligned to the US gas market’s tight fundamentals, against a background of rising demand and flattening shale supply. As and when commodity prices do rise, the Group can also be expected to take advantage of over one million gross acres it holds as available for drilling out. DGOC look far too cheap on both peer group and DCF assessments for both income and growth investors. Beaufort reiterates its Speculative Buy rating with a price target of 95p per share.

Motif Bio (LON:MTFB, 32.50p) – Speculative Buy
The clinical stage biopharmaceutical company specialising in developing novel antibiotics, yesterday announced positive Topline results from REVIVE-1, a global Phase 3 clinical trial of its investigational drug candidate iclaprim in patients with acute bacterial skin and skin structure infections (ABSSSI). Iclaprim achieved the primary endpoint of non-inferiority (NI) (10% margin) compared to vancomycin at the early time point (ETP), 48 to 72 hours after the start of administration of the study drug, in the intent-to-treat (ITT) patient population. Iclaprim also achieved NI (10% margin) at the test of cure (TOC) endpoint, 7 to 14 days after study drug discontinuation, in the ITT patient population. In an analysis of a pre-specified secondary endpoint, 60.4% of patients receiving iclaprim demonstrated resolution or near resolution at end of therapy (EOT), compared to 58.3% of patients receiving vancomycin (treatment difference: 2.07%, 95% CI: -5.80% to 9.94%). In another pre-specified secondary endpoint analysis, using a modified clinical cure TOC endpoint defined by a >90% reduction in lesion size at TOC, no increase in lesion size since ETP and no requirement for additional antibiotics, clinical cure was seen in 68.5% of patients receiving iclaprim and 73.0% of patients receiving vancomycin (treatment difference: -4.54%, 95% CI: -11.83% to 2.74%). REVIVE-1 is a 600-patient double-blinded, active-controlled, global, multicentre trial, in patients with ABSSSI that compares the safety and efficacy of an 80mg intravenous dose of iclaprim with a 15mg/kg intravenous dose of vancomycin. Treatments were administered every 12 hours for 5 to 14 days. Iclaprim was well tolerated in the study, with most adverse events categorised as mild.

Our view: : Hooray!! Exactly the news we have been patiently waiting for! Early completion of the REVIVE-1 trials is an excellent sign in all respects. Not only has iclaprim’s primary end-point been met, but it was well tolerated, data from the second Phase 3 ABSSSI is expected in 2H’2017 and the NDA submission is expected in 1H’2018. This successful completion is a significant achievement in that iclaprim could be an important option for such patients, especially those with severe infections who may also have kidney disease with or without diabetes. It will come with it FDA Fast track approval followed by 10 years or market exclusivity. Unlike current standard of care antibiotics, in clinical trials to date, nephrotoxicity has not been observed with iclaprim and dosage adjustment has not been required in renally impaired patients. It is estimated that up to 26% of the 3.6 million ABSSSI patients hospitalised annually in the U.S. have kidney disease. This, of course, suggests very significant prospective demand for this novel antibiotic for this particular indication; investors should, however, recognise that much greater potential prospectively comes from the molecule becoming the foundation for a platform of drugs across several other key hospital conditions (beyond the skin and pulmonary that have already been cited). In this respect, the opportunity for iclaprim is very large indeed. Beaufort retains its 110p target price for Motif Bio and points to US peer Achaogen Inc. [NASDAQ:AKAO] as an obvious comparative that experienced a 500% share price appreciation on the days that immediately followed its own, similar positive antibiotic Topline data release. The fact that yesterday’s share price reaction for Motif was rather modest by comparison perhaps is more a reflection of London’s typical caution when in receipt of blockbuster news from early stage drug development companies. Thankfully, Motif has now achieved its own NASDAQ listing and, as such, New York can be expected shortly to start dominating daily trading in the shares, given that specialists in the territory appear to have a greater understanding as to the significance of yesterday’s news. As it stands, the current Motif Bio share price presents an important buying opportunity. Beaufort reiterate its Speculative Buy rating on the Shares.

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