(MENAFN- ProactiveInvestors - UK) 08:10
Today's edition features:
DekelOil Public Limited (LON:DKL)
AstraZeneca (LON:AZN)
Evgen Pharma (LON:EVG)
Hotel Chocolat (LON:HOTC)
"While advanced media notice of key aspects from Theresa May's speech took the sting out of the event itself, Sterling undertook its biggest rally since 2008 on the basis of her exacting presentation and the fact that UK corporates can now at least plan for a formal exit from the single market. Most commentators thought the PM was demanding both to have her cake and eat it, while injecting veiled threats should the EU decide to adopt a hard line for good measure but, in reality, this has to be her starting point. Considering the two or three months of ground preparation needed following the enacting of Article 50, plus the 4 or 5 months required to gain approval from all the EU's national parliaments, the remaining 16 to 18 months barely looks enough to get a comprehensive framework in place, particularly given that it will also be subject to approval here by both MPs and Peers. To hope that the process will also have been sufficiently engineered to permit what she wishes to be 'a smooth and orderly Brexit', is possibly asking for too much. So something looks like it will have to give, which is a concern given that pricing data released yesterday morning confirmed December's UK inflation had accelerated to its fastest pace in more than two years with Sterling's step decline driving a surge in import cost. Now at 1.6%, CPI is within striking distance of the Bank of England's 2% target which it believes will be breached early summer. Although Mark Carney is expected permit the economy to 'run hot' for the whole of 2017 unless the figure spikes a full percent above his preferred ceiling, UK's highly indebted economy will likely already be slowing the following year just when it will be knocked further by a series of interest rate hikes. Not the best circumstances to confront the realities of life outside the EU! Having thrown the markets yet another googly, Donald Trump describing the US$ as 'too strong' was enough to unnerve the principal US equity indices which all ended in negative territory. Asia also suffered from his apparently haphazard commentary, closing mixed to down as the US$ recovered slightly from its earlier dive to a 1-month low against the international basket, with Chinese equities the only ones confident enough to stay in the positive. While Theresa May heads for Davos in order to convince world leaders she has a winning Brexit strategy, the UK is due to release unemployment data as the also EU publishes its December Consumer Price Index. A batch of US macro releases, such as the Redbook, Consumer Prices, Industrial Production and the NAHB Housing Market Index, can be expected this afternoon. A batch of US macro releases, such as the Redbook, Consumer Prices, Industrial Production and the NAHB Housing Market Index, can also be expected. UK corporates due to provide earnings or trading updates include Anglo Pacific (APF.L), Diploma (DPLM.L), Experian (EXPN.L), Ladbrokes Coral (LCL.L), Pearson (PSON.L), Premier Foods (PFD.L), Watkin Jones (WJG.L) and Weatherspoons (JDW.L). While media comment regarding Rolls-Royce's involvement in contract bribery will generate some market gossip this morning, traders will also be more focussed on quarterly earnings anticipated from a number of US majors this afternoon. Against this background, London is seen opening gently firmer this morning, with the FTSE-100 rising 15 points or so in early trade. "
- Barry Gibb, Research Analyst
Markets
Europe
The FTSE-100 finished yesterday's session 1.46% lower at 7,220.38, whilst the FTSE AIM All-Share index closed 0.41% down at 872.19. In continental Europe, the CAC-40 finished 0.46% lower at 4,859.69 whilst the DAX was down 0.13% at 11,540.00.
Wall Street
In New York last night, the Dow Jones fell 0.3% to 19,826.77, the S & P-500 lost 0.3% to 2,267.89 and the Nasdaq dropped 0.63% to 5,538.73.
Asia
In Asian markets this morning, Nikkei 225 had risen 1.23% to 18,996.37, while the Hang Seng firmed 1.19% to stand at 23,112.4.
Oil
In early trade today, WTI crude was up 0.38% to $52.68/bbl and Brent was down 0.36% to $55.67/bbl.
Headlines
EE mobile firm fined £2.7m for overcharging customers
Mobile operator EE has been fined £2.7m by the telecoms regulator, Ofcom, for overcharging tens of thousands of customers. The watchdog found that the UK's biggest mobile network broke a billing rule on two occasions. Users who called its '150' customer services number while roaming within the EU were incorrectly charged as if they had called the US. That meant customers were charged £1.20 a minute, rather than 19p. As a result, more than 32,145 customers were overcharged a Total of £245,000. Despite calls or texts to the '150' number from within the EU becoming free from 18 November 2015, EE continued to bill more than 7,600 customers until 11 January 2016 who were overcharged £2,203. Lindsey Fussell, Ofcom's consumer group director, said: "EE didn't take enough care to ensure that its customers were billed accurately. This ended up costing customers thousands of pounds, which is completely unacceptable. "We monitor how phone companies bill their customers, and will not tolerate careless mistakes. Any company that breaks Ofcom's rules should expect similar consequences."
Source: BBC News
Company news
DekelOil Public Limited (LON:DKL, 13.21p) – Buy
The operator and 100% owner of the vertically integrated Ayenouan palm oil project in Côte d'Ivoire yesterday provided the market with two separate announcements. Firstly a production update for the year ended 31 December 2016; secondly a formal declaration of its long-awaited dividend policy and maiden payout. It confirmed production for full year 2016 totalled 39,111 tonnes of CPO, 9% higher than 35,770 tonnes of CPO in FY 2015. Following strong like for like sales in October 2016 fresh fruit bunches ('FFB'), quantities were lower than expected in November and December. This was a West African region-wide issue where all key players experienced a similar situation. Agriculture experts have been unable to point to any one specific reason, although January 2017 has seen FFB quantities pick up considerably. Crude Palm Oil prices are currently at their highest level for three years; the CPO price has consistently increased over the course of 2016 with sales prices in December of €700 per tonne, 29% higher than H1'2016 at €542 per tonne. Sales prices have continued to increase in January 2017. Production and sales at the Group's Kernel Crushing plant continue to exceed management's expectations with the Palm Kernel Oil extraction rate consistently above 42% (H1 2016 41%) and the average sales prices in December of €899, 15% higher than H1 2016 at €781 per tonne. Regarding the adoption of a progressive dividend policy, management confirmed its intention to pay a maiden dividend in H1'2017 in respect of the year ended 31 December 2016. This follows the progress made both in terms of operations on the ground at Ayenouan and at the corporate level, including the refinancing of senior debt on improved terms and the cancellation of certain capital notes, the settlement of which ranked above the payment of dividends to ordinary shareholders. In addition, following the increase in its interest in Ayenouan to 100% from 51% over the last nine months, DekelOil's share of the Project's revenues and net profits is expected to show a significant increase going forward. Dividends will be distributed to qualifying shareholders following the release of the Group's audited results for the financial year ended 31 December 2016. An update detailing the relevant record and ex-dividend dates will be provided in due course. The total maiden dividend to be paid in 2017 is expected to amount to approximately £500,000 and shareholders will have the option to receive either cash or shares by way of a scrip dividend. Shareholders are advised that the default option is cash and that the appropriate documentation will be sent to shareholders in due course. Certain executive directors of the Group intend to receive all or part of their dividends in new ordinary shares.
Our view: DekelOil is delivering on its promises. Joining the dividend list is a major achievement for any company, let alone one that only came to market in 2013 with the vision to provide a much-needed outlet for fresh fruit bunches grown by thousands of local smallholders by building one of West Africa's largest crude palm oil extraction mills. With its state of the art site entering its fourth year of operations, the Group's balance sheet is now more reflective of the profitable palm oil producer it is today. Having recently confirmed a 100% interest in Ayenouan, it has a cash generative platform in place that can fund not only regular dividends, but also its future expansion plans both at Ayenouan and elsewhere. Such news is transforming non-believers who often remain sceptical of African agri operations, while also discounting the significance of yesterday's disappointing sales volumes during Q4'2016. During this period, a 25% decline in gathered FFBs, knocked production by 19% and sales by 50%. Recovery from such a seasonal aberration is already underway, however, with average local CPO prices spiking back to around €700/tonne which should repair much of the damage inflicted. Volumes, pricing and extraction levels for the kernel oil crushing plant also remain ahead of management expectations. All-in-all the overall message for shareholders must be that they cannot discount some form of annual production interruption, to the extent that it is prudent for Beaufort to trim back its most ambitious revenue and profit expectations, until activity levels are seen to regularise. The shares nevertheless still remain much too chap for what DekelOil now appears capable of delivering. Based on a 0.17p/share dividend, the equity yielded 1.4% for FY2016, which rises to an estimated 1.7% this year. Based on a reduced 2017E revenues of £35.0m, followed by £38m in 2018E, the shares presently trade on earnings multiples of just 7.3x and 5.4x respectively. The shares remain on Beaufort's Buy list.
Beaufort Securities acts as corporate broker to DekelOil Public Limited
AstraZeneca (LON:AZN, 4,539.23p) – Hold
AstraZeneca, a global, science-led biopharmaceutical company focused on three main therapy areas - Oncology, Cardiovascular & Metabolic Diseases and Respiratory, yesterday announced that it has expanded its 1st-line non-small cell lung cancer ('NSCLC') Immuno-Oncology ('IO') development opportunities. The Phase III MYSTIC trial was initially designed to assess the benefit of durvalumab monotherapy and durvalumab and tremelimumab (durva + treme) combination therapy against standard-of-care ('SoC') chemotherapy, focused on progression-free survival ('PFS'). The Group has now refined endpoints and statistical analysis plan for MYSTIC trial that it will now assess PFS and overall survival ('OS') endpoints in patients with programmed death ligand-1 ('PD-L1') expressing tumours for both durvalumab monotherapy and the combination of durva + treme, as well as in 'all comers' for the combination of durva + treme, against SoC chemotherapy. This reflects recent internal and external data showing durvalumab's strong efficacy in monotherapy, as well as significant opportunities in the competitive landscape. The Group anticipates MYSTIC PFS data in mid-2017 and final OS data at the latest in 2018. Further to this, its Phase III NEPTUNE trial (durvalumab in combination with tremelimumab against SoC platinum-based chemotherapy) will be expanded with local patients to support regulatory submission of durva + treme combination therapy in China for 1st-line NSCLC patients without delaying the anticipated OS data readout in 2018 from the global cohort, which is approaching full recruitment. The Group has also initiated the new Phase III PEARL trial of durvalumab monotherapy against SoC chemotherapy in 1st-line NSCLC patients whose tumours express PD-L1. The PEARL trial will focus on Asian countries, primarily China, due to the high prevalence of NSCLC in the region.
Our view: The amendments in MYSTIC trial has delayed production of its PFS data readout to 'mid-2017' instead of the previously guided 'H1 2017'. The MYSTIC trial amendments, along with expansion in NEPTUNE trial and initiation of the new PEARL trial, however has potential to enhance its options in 1st-line NSCLC for IO-IO combination as well as for IO monotherapy. IO is a therapeutic approach designed to stimulate the body's immune system to destroy tumours with a potential to offer life-changing cancer treatments. The Group continues to attempt to catch up with its major peers in this therapeutic class through the introduction of combination therapies. Given delay in MYSTIC PFS data readout, uncertainty and risk towards its trial success and subsequent potential impact to its revenue due to unfavourable results, Beaufort maintains its 'wait and see' approach before having the confidence to return the shares to a Buy rating. Concern over Obamacare in the US that is likely to be subject to substantial change under Trump is also something to be monitored carefully. Beaufort continues to recommend AstraZeneca as a Hold.
Evgen Pharma (LON:EVG, 23.75p) – Speculative Buy
Evgen Pharma ('Evgen'), a clinical stage drug development company focused on cancer and neurological conditions, yesterday announced that it has dosed its first patient for Phase II clinical trial of SFX-01 in breast cancer on 16 January 2017. The STEM trial (SFX-01 in the Treatment and Evaluation of Metastatic Breast Cancer) is investigating SFX-01 in combination with different hormone-based therapies in 60 metastatic breast cancer patients whose cancer cells are estrogen-receptor positive (ER+). The primary objectives is to evaluate safety and efficacy (via tumour imaging) in patients starting to become resistant to mainstream hormone therapy. Patients will be enrolled into one of three study arms (SFX-01 in combination with either aromatase inhibitors, tamoxifen or fulvestrant) based on their current therapy. One proposed mechanism for the generation of resistance to hormone therapy is via the proliferation of hormone-independent breast cancer stem cells. Earlier work by the Group with xenograft models suggests that SFX-01 has the effect of reducing the number of hormone-independent cancer stem cells. Separately, the Group has announced appointment of new CFO, Richard Moulson, effective on 1 March 2017.
Our view: Evgen has passed another key milestone. Following its first patient dose, the Group will need to complete recruitment of 60 metastatic breast cancer patients and demonstrate the safety and efficacy of its SFX-01 in combination with different hormone-based therapies. Evgen's lead product, SFX-01, is a synthetic and stabilised version of the naturally occurring plant compound sulforaphane, a known anti-cancer agent and neuro-protective. The Group has also announced recently, receipt of a positive first interim safety review for its Phase II SAS trial of SFX-01 for subarachnoid haemorrhage ('SAH') indication. Both SAS and STEM trials are expected to report in the H1 2018. Considering £5.5m cash held at 30 September 2016, given estimated monthly burn of around £330k during 2017, there should be sufficient funding to complete its current clinical trials and lay the foundations for the follow-on Phase III trials, as may be necessary. Orphan status for SAH offers a prospective route to commercialisation in a market that is prospectively valued at US$1.7bn, just 12 or so months following release of Phase II data, while STEM could be developed further as foundation drug to be used in combination therapy for an indication valued at a multiple of this. Both have high unmet need while also offering strategic entry portals to further therapeutic opportunities in oncology and neurology. For a company presently valued at just £17.0m, investors appear not to have fully recognised the value Evgen might deliver over the coming 18 months or so. Beaufort reiterates its Speculative Buy rating on the shares.
Hotel Chocolat (LON:HOTC, 292.00p) – Sell
The premium British chocolatier and omni-channel retailer, yesterday announced a trading update for the 13 weeks ended 25 December 2016. Total Group revenue for the period increased 16.2 per cent compared to the prior year (14.6 per cent on a proforma constant currency basis). Retail expansion was driven by increases in footfall and items per basket, with customers also choosing to buy more high-priced gift items. The digital business reported similar momentum, further benefitted from this month's launch of a new website which included optimisation for smartphones and tablets, a bespoke 'gift creator' service for delivered gifts, and better integration of the tasting club subscription service. The business opened 10 new stores during the six months and now has 90 outlets in the UK, seven of which include the signature drinks offer of Hot Chocolat, coffee-chocolate and light cocoa infusions. Management confirmed that trading since December continues to be in line with management's expectations. The Board expects to announce the Group's results for the six months ended 25 December 2016 on 22 February 2017.
Our view: Well that was not particularly helpful! Investors would be much more interested in knowing what the same-store, like-for-like revenue improvement was. Being told that Group revenues were up 16.2% in total, during a period when the comparative number of UK outlets has in fact expanded by 12.5%, while the customer offering has been adjusted somewhat without providing guidance regarding its effect on overall margins, does not really provide the desired transparency. Adjusting for the expected enhancement from new openings during the period, suggests the like-for-like may in fact be down to just single digit during a period when retail sales experienced a 'bigger than expected pre-Christmas boost' according to the CBI. Given that the Group's equity rating is already demanding an awful lot, that's not really what shareholders want to hear. The reality is that Hotel Chocolat has created a powerful brand, from which it has developed a loyal and engaged customer base centered on its core competence in chocolate. But have UK investors not been on a similar journey before? Some will recall another chocolatier, Thorntons, having a similar booming experience back in the 1990's; then, exceptional near-term, but ultimately faddish, success led to its dramatic over-expansion (600 national stores at one stage), which was followed by implosion and subsequent financial collapse. It is true this is not really comparing like-with-like, but it is a stark reminder of just how painfully fickle the consumer can be, particularly when dealing with narrow product offerings and rapidly changing tastes. The reality is that having created outlets in the most obvious high-footfall, international and wealthy UK customer locations already, Hotel Chocolat is likely to find that going forward it is more difficult to sustain a profitable domestic expansion, while more intense competition will possibly limit international ambitions to all but the costliest locations, like airports and luxury malls. Successfully transferring the model overseas into continental Europe, for example, has additional complication, not least due to the number of established peers in sophisticated, high cacao product that already saturates the region. Post BREXIT, operating margins are also likely to be squeezed, weighing the fact that the majority of Group revenues are derived from the UK (2015 Revenue Split: UK 92%, Europe 5%, Rest of the World 2%) while, the Group purchases ingredients in Euros and US$ which of course have appreciated sharply against Sterling. More to the point, Hotel Chocolat's product will be impacted by any fall in consumer confidence, given that it has set its pricing at the premium end of such discretionary purchases. October's full year maiden preliminaries provided limited excitement, with just a 0.2% improvement in gross margins despite scale efficiencies, while operating expenses remained stubbornly above 50% and providing little comfort regarding like-for-like sales. Based on revenue forecasts to June 2017E and June 2018E of £103m and £115m, the shares trade on a current year earnings multiple of almost 39x, followed by 37x respectively, on a price/book of around 8x with negligible yield. That's expensive for a management new on the block, that cannot be judged by past form, operates with high structural cost and whose business opportunity looks too expensive to sustain. While appreciating the fact that Hotel Chocolat has rapidly created a quality brand, its narrow business model makes the shares vulnerable to disappointment. Beaufort recommends taking profits. Sell.