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April 15, 2015

Beaufort Securities Breakfast Alert Fox Marble, AFC Energy, Petards Group, Horizon Discovery Group and others

The Markets


Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 16.7 points down at 7:00 am.


New York: Wall Street recorded gains amid stabilization in oil prices, which improved investors’ risk appetite. However, the gains were pared by mixed corporate earnings results and discouraging US retail sales in March. The S&P 500 added 0.2% in yesterday’s trading session.


Asia: Equities are trading mixed due to weak economic expansion of 7% in China during the first three months of 2015. The Nikkei 225 edged down 0.2%, while the Hang Seng was trading 0.4% higher at 7:00 am.


Continental Europe: Markets ended lower as investors cautiously await the European Central Bank (ECB)’s meeting this week. Moreover, the commencement of the first-quarter earnings season and a likely deal between Nokia and Alcatel-Lucent remained in focus. Germany’s DAX and France’s CAC 40 lost 0.9% and 0.7%, respectively.


Crude Oil: Yesterday, WTI and Brent Crude Oil prices increased 2.7% and 0.9%, respectively. The spread between the two varieties stood at US$5.1 per barrel.


UK small caps: The FTSE AIM All-Share index closed 0.38% higher yesterday at 741.80. To read our latest research click here.


Today’s news


UK house price growth decelerates in February 2015


The Office for National Statistics (ONS) stated growth in UK house prices slowed to 7.2% y-o-y in February compared with 8.4% in January. Excluding London and the South East, house prices rose 5.9% y-o-y in February. Moreover, the average house price in the UK improved 0.6% m-o-m to £268,000.


IMF trims growth forecast for US, maintains global outlook


The International Monetary Fund cut its US growth forecast for 2015 to 3.1% from the earlier 3.6%, while maintaining the global economic growth at 3.5%. However, the Eurozone is projected to expand at 1.5% compared to the previous estimate of 1.2%.


Company News


Petards Group (LON:PEG) 11.75p) – Speculative Buy


Yesterday, Petards Group informed that it has been awarded a £0.6m contract by a major UK defence systems contractor on behalf of the UK Ministry of Defence (MOD). The contract entails designing, manufacturing and supplying test equipment that would be a part of the Defensive Aids Suite system integration test rig. This rig would enable the customer to verify the electronic countermeasure configurations before they are installed on the aircraft. The expected delivery period for most of the equipment is H2 2015 while the entire project would be completed by 2016.


Our view: After securing a major contract from a prominent client such as the MOD, Petards has consolidated its position as a major provider of the electronic countermeasures in the market especially in this aspect. The test rig under the contract would enhance the MOD’s testing capability and bolster Petards’ prospects for more such contracts in the future. While the company establishes its position in the market, the recent strength in the order book at £20m underpins the revenue growth that more than doubled to £13.5m in 2014. The company witnessed a rise of over 100% in orders from MOD, Siemens, Bombardier and Hyundai Rotem and swung to pre-tax profits of £620,000 in 2014, from a loss of £2.38m the year before. We maintain a Speculative Buy rating on the stock.


Fox Marble (LON:FOX), 20.50p) – Speculative Buy


Yesterday the Group announced its preliminary results for the year ended-December 2014. Operational Highlights included the fact that over 14,000 tonnes of marble extracted during the period. Revenue for the year totalled €0.15m (2013 – €0.05m) with much of the initial 2014 order book being pushed into H1’15. Operating loss for the year was €2.12m (2013: loss of €2.17m) with net loss of €2.33m (2013: €2.57m) due to costs incurred in bringing the quarries up to full production. The Group’s net cash position at end-December 2014 of €4.70m (2013: €5.26m). Since the year end Fox Marble sold 900 sqm of polished slabs of Argento Grigio marble to St Georges Plc the luxury homes division of Berkeley Homes Plc, while product continues to be sold via the company’s office in Carrara and its distributors in London (Pisani) and New York (Royalstone), with confirmed or completed orders under the Pisani offtake agreement currently total over €250k. Importantly, the construction of the factory building is almost complete and the company will shortly begin transportation and installation of the processing machinery. Order book as at 9th April 2015 stood at €2.8m out of which €2.0m is expected to be realized in 2015.


Our view: Quite shortly, Fox Marble will see key milestones fulfilled, including completion of the factory and increasing levels of production in Prilep and Malesheva. Significantly, this will lead to the company winning significant orders for its product as its branding, marketing and sales focus continues to develop. It is important to remember that buyers of wholesale marble survive only on their ability to deliver product in the volumes and quality promised; to date, despite having exceptional in-the-ground resource, their confidence in Fox Marble’s ability to extract and process has been lacking. With capacity now about to undergo a step improvement, this concern will quickly be repaired. Beaufort anticipates revenue climbing sharply during 2015 as more customers purchase its exceptional quality stone and compounding further into 2016 and beyond. Fox Marble effectively has an infinite on-surface resource across a wide range of rare and unblemished marbles. It is presently cash rich, while capital costs have already been committed with little further expenditure anticipated going forward. Labour and transportation costs are low, yet global demand continues to increase while pricing remains firm and rising. Against this, Group operations looks set to become exceptionally cash generative very quickly, with management committed to annually distribute any the surplus in the form of dividends. The first result of this could even be seen this financial year. The reality is that the value of Fox’s licences, which place an in-situ value of €16.5bn on just four (or an estimated 28% of its total resource) of its eight quarries, dramatically exceed the Group’s market value. When it has demonstrated its ability to routinely turn elementary extraction and processing into significant profit, the market should start to recognise this fact and power a re-rating of the shares.


AFC Energy (LON:AFC) 44.75p) – Speculative Buy


AFC Energy executed its first Heads of Agreement in Thailand to initiate a programme of commercial fuel cell deployment with Bangkok Industrial Gas (BIG). As per the agreement, the initial installed AFC fuel cell capacity of 10MW would be developed across three phases using the surplus hydrogen from hydrogen pipelines owned by BIG. The initial 2MW capacity would be installed by the end of 2016 following the requisite permissions. The remaining schedule of the fuel cell deployment indicates the 5MW and 10MW capacity to be operational by the end of 2017 and 2018, respectively. During 2015, the two companies would evaluate the prospect for a successful deployment of the AFC fuel cells into the Rayong Province (Thailand) using primary techno-economic feasibility studies.


Our view: Following the agreement with BIG, AFC Energy has moved a step closer towards the commercialization of its Beta-based fuel cell cartridge. Once the AFC fuel cells are successfully deployed in the Rayong Province (a high energy consumer), the company may explore further such opportunities across Thailand. AFC has adopted a unique process to accelerate the maximum operating performance from a fuel cell by applying external heat sources to ascertain and maintain the best possible fuel cell operating temperature. The process enhances overall system efficiency in addition to lowering cost of fuel for the cell system. Moreover the methodology of utilizing surplus hydrogen from BIG is consistent with the Thai government’s policy of incorporating innovative technologies for clean energy development. We know that AFC has already created a niche for itself through its low-cost alkaline fuel cell technology with success at generating energy from waste, natural and bio-gas, and coal gasification. Therefore, in view of the above, we reiterate a Speculative Buy rating on the stock.


Vmoto Limited (LON:VMT) 2.28p) – Speculative Buy


Vmoto released its revenue and profit forecasts for the 12 months ending 31st December 2015. The company expects the revenues to exceed A$69m for the year due to increased production and distribution comprising a growing proportion of higher margin vehicles produced for international sales. EBITDA is likely to be in the range of A$6m to A$8m, while net profit after tax is estimated to be anything between A$5m and A$7m. The projections remain in line with the company’s underlying EBITDA and NPAT results of A$4m and A$3.2m, respectively, in 2014. Moreover, the successful acquisition and integration of Nanjing Haiyong in 2014, is likely to result in higher earnings from this electric vehicle controller business in 2015.


Our view: The company’s efforts in the past three years to propel Vmoto’s transformation into a leading global electric two-wheel vehicle company is finally witnessing tangible results. The company has remained focussed on enhancing its production and distribution capabilities to support strong growth and earnings in the next few years while seeking potential new customers across the globe. The successful integration of the Haiyong Electric Technology comes at an important juncture as the facility has abundant underutilized production capacity, which may be used to scale up operations with minimal capital expenditure or investment. The company’s improving brand image in the Chinese and Asian markets is evident from its swelling profits. Thus in view of the above developments, we maintain our Speculative Buy rating on the stock.


Horizon Discovery (LON:HZD), 216.50p) – Speculative Buy


Yesterday, Horizon Discovery announced its unaudited preliminary results for the year ended 31st December 2014. Reported revenues increased 79% to £11.9m on near-doubling of revenues from products and services. Gross margin improved to 55% from 52% in 2013 while operating loss widened to £5.3m (2013: £2.9m) on huge investments to scale-up operations. Meanwhile, the research milestone portfolio enhanced 32% to nearly £158m, plus royalties. On the operational front, the company’s number of products grew by 186% to 2,750, which was further increased to 16,500 following the acquisition of Haplogen Genomics for a consideration £6m. Number of customers increased 171% to 955 and comprised of several prominent pharmaceutical companies. The headcount increased to 183 and new offices were opened in four new cities across the US and Austria. On the other hand, the company raised £68.6m net of expenses following its IPO on the LSE AIM. CombinatoRx service business and assets were acquired for £4.7m and Sage Labs Inc. was bought for £29m through a cash and share offer. The Board was strengthened with the appointment of Dr. Susan Galbraith, Susan Searle and Dr. David Smoller.


Our view: 2014 has been a noteworthy year for Horizon Discovery as it marks the company’s progress towards becoming a fully integrated life sciences company. The company has reported growth and improvement from all quarters of the business. Not only has the company expanded its offerings but also acquired prominent customers and partners while achieving several milestones all along. Its products already cater to wide segment of researchers from several sectors and help its customers in designing and producing innovative medicines and companion diagnostic tests. Going forward, we believe that personalised medicines are the future way of treatment for complex conditions. Thus eyeing the immense opportunity that lies ahead and the suitability of the company’s product for the same, we retain a Speculative Buy on the stock.


Poundland (LON:PLND) 335.0p) – Sell


Poundland Group plc, the UK single price retailer, yesterday announced its fourth quarter trading statement for the period to end-March 2015. Headlines for the 2015 financial year included total sales, excluding Spain, increasing by 11.8% (2014: 12.7%) on a constant currency basis, while like-for-like sales increased by 2.4% (2014: 1.9%). 60 net new stores were opened in the UK & Ireland, as planned, and the Spanish trial proceeded to plan. During the fourth quarter, total revenue, excluding Spain, increased by 7.1% on a constant currency basis (2014: 13.9%). On an actual currency basis, total revenue, excluding Spain, increased by 6.5% (2014: 14.4%) to £255.0m (2014: £239.5m). The Group ended the financial year with 547 stores in the UK, 41 stores in Ireland (2014: 497 and 31 respectively) and 5 in Spain along with a strong pipeline of stores for the current financial year. Further to the company’s announcement on 9th April 2015, Pound continues to carefully consider the UK Competition and Markets Authority’s announcement in relation to its Phase 1 review of the Group’s proposed acquisition of 99p Stores Ltd, together with the full detail behind it and will make a further announcement in due course.


Our view: Poundland has underperformed sharply over the past quarter, as the market recognises looming saturation in the UK fix-price discount retailer sector, surprising CMA complication with respect to the anticipated kick-off of sector consolidation and the fact that opportunity to expand into continental Europe appear largely restricted to remain within ex-pat communities (like in southern Spain). The contribution from new store trading weeks this year has been lower than last year and this continued to be the case in the fourth quarter. The recent € weakness is also providing a new headwind that could amount to a £3m plus impact during the current year. Overall, Beaufort now forecasts like-for-like growth in the range of just 1% to 2% during the twelve month period. Indeed, given the exceptionally low barriers to entry, like-for like growth is increasingly likely to find a high street flooded with such offer and head-on competition. The CMA’s decision to refer the proposed take-over of the 99p Stores came as something of a surprise as it is, perhaps, the natural reaction in a retail sector now entering the painful part of its business cycle. Indeed, perhaps the most telling point here is that the acquisition itself is based on a valuation of each 99p Store unit of just £291k, or less than a quarter of the value presently awarded to Poundland’s own near identical and often virtually adjacent units. Given that its business model can be so rapidly and effectively copied, Beaufort concludes that fixed-price discount retailers like Poundland and B&M European Value Retail SA should never have traded on multiples as much as twice that of their more established and unique, albeit somewhat beleaguered, high street peers like M&S, Debenhams, McColl’s, Card Factory etc. Despite recent sharp falls in the share price, Beaufort retains its Sell recommendation on Poundland.


Economic News


UK CPI


The UK consumer price index (CPI) rose 0.2% m-o-m in March, following a reading of 0.3% February, but matched the market expectations, the Office for National Statistics (ONS) said yesterday. On y-o-y basis, consumer inflation growth remained flat in March, in line with the projections. Core consumer price inflation – which excludes energy, food, and tobacco – was recorded at 1% y-o-y in March, after witnessing a 1.2% rise in the previous month. The markets expected a reading of 1.2%.


UK PPI output


The UK producer price index (PPI) output advanced 0.2% m-o-m in March, following a similar rise in July, the Office for National Statistics said yesterday. Economists had forecasted a PPI output growth of 0.1% for the month. On y-o-y basis, the PPI output declined 1.7% in March, maintaining the pace from the previous month. Markets had forecasted a decline of 1.8% for the month.


US advance retail sales


US advance retail sales grew 0.9% m-o-min March following a revised decline of 0.5% in February. The economists had expected a rise of 1.1%. Excluding auto sales, the retail sales improved 0.4% following a flat reading for the previous month, but came behind the expected rise of 0.7%.


US PPI final demand


The US producer price index (PPI) for final demand improved 0.2% m-o-m in March, after falling 0.5% in February, the Bureau of Labor Statistics stated yesterday. The reading matched the market expectations. Core producer prices, excluding food and energy, increased 0.2% in March. On a y-o-y basis, PPI demand declined 0.6% following a drop of 0.6% in February. The market expected a decline of 0.9%.



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