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Beaufort Securities Breakfast Alert : Horizon, AFC Energy, Bushveld Minerals, Tissue Regenix and others

Published: 08:39 19 Jan 2016 GMT

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The Markets

Market opening: The FTSE-100 is expected to start this morning’s session around 80-points higher.

New York: Wall Street remained closed for the Martin Luther King Jr. Day holiday.

Asia: Equities are trading higher as economic data from China came mostly in line with the market expectations. The Nikkei 225 added 0.6%, led by gains from export-driven stocks. The Hang Seng was trading 1.3% up at 7:00 am.

Continental Europe: Markets ended in the red, led by a decline in bank shares. Moreover, oil prices continued their downslide after economic sanctions on Iran were lifted. France’s CAC 40 and Germany’s DAX shed 0.5% and 0.3%, respectively.

Crude Oil: Yesterday, Brent oil prices decreased 1.3%, while WTI did not trade. Based on the 15 January closing, the spread between the two varieties stood at US$0.5 per barrel.

UK small caps: The FTSE AIM All-Share index closed 1.46% lower yesterday at 688.12.

Today’s news

Chinese economy grows at slowest pace in 25 years

The Chinese economy grew at 6.9% in 2015, compared with 7.3% in 2014, the slowest in 25 years. Manufacturing growth decelerated to 6% in 2015 from 7.3% in 2014. However, the services sector expanded 8.3% in 2015 from 7.8% in 2014. In Q4 2015, economy rose at 6.8% y-o-y, down from 6.9% in Q3 2015, in line with market estimates.

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Horizon Discovery Group (LON:HZD, 131.0p) – Speculative Buy

The Company announced a positive trading update ahead of its full year results for the twelve months ended 31 December 2015. Revenue and EBITDA are expected to be ahead of consensus, driven by at least 120% growth in product sales. The Group reports a second consecutive year of on-target performance since its IPO, with full year 2015 revenues expected to be at least 2% ahead of the £19.8 million market consensus, representing growth of at least 69%. In addition, the Group is eligible to receive future R&D milestones of up to £208 million plus future product royalties, an increase of 32% over the prior year. Growth in the Products business has been particularly strong; with organic revenue growth of at least 120% expected to be reported (year ended 31 December 2014: £3.5 million), driven by strong demand for genetically-defined cell lines and derived molecular diagnostic reagents. Growth in the Services business of at least 65% (year ended 31 December 2014: £7.2 million) has been driven by a strong demand for custom gene-editing, genetic screening and drug combination screening projects. Revenue growth is reflective of strong product and service sales to large pharmaceutical and diagnostic development companies as well as an increasing number of academic customers purchasing from a product inventory that increased from 2,750 to 23,000 in the year. The Leveraged business continues to generate a portfolio of up-front, milestone and product royalty upside as exemplified by the deals announced with two new collaborations signed in 2015 with Redx and Servier. Further, commitments were made to invest up to £10 million across the following two years in two cutting-edge areas of cancer biology: synthetic lethality and immuno-oncology, which have the potential to deliver significant upside. Year-end cash is expected to be reported at £25.1 million (year ended 31 December 2014: £18.5 million).

Our view: 2015 has been another strong year for Horizon, with growth underpinned by organic and inorganic revenue, new product launches, and the establishment of new channels to market. Horizon’s reputation as a leader in gene-editing, translational genomics and personalised medicine is exemplified by the range of partnerships the company has announced in the areas of product development (e.g. Axol Bioscience, CareDx, Definigen), market access (e.g. ThermoFisher, Abcam), and leveraged research (e.g. Servier, Redx). Horizon continues to deliver on its strategy of: sustainable core revenue growth; increasing the value of what they provide customers; scientific leadership via academic partnerships and grant funded research; and accelerated growth through product in-licensing and M&A activities. The Company’s rAAV, ZFN and CRISPR gene editing platform continues to prove that it is fundamental to the elucidation of the genetic basis of disease and the evolving personalised and genomic-medicine value chain, and the Company is confident and excited about the prospects for the year ahead. We endorse their view and believe the shares represent excellent value at these depressed levels. Speculative Buy.

AFC Energy (LON:AFC, 25.50p) – Speculative Buy

Yesterday, AFC Energy (AFC) disclosed the results of the shareholder offer announced on 17th December 2015 for raising up to £1.13m. The company stated that it received valid applications from qualifying shareholders for 20,503,271 shares (representing £4.1m at the issue price) and was, therefore, the issue was 3.6 times oversubscribed. A total of 5,631,551 new ordinary shares would be issued to qualifying shareholders, through which AFC would raise £1.13m excluding expenses. Additionally, the company had raised £2.47m from the subscription, taking the total to £3.6m before expenses. AFC has presented an application for these shares to trade on AIM, which is expected to occur on 21st January 2016. The shares would rank pari passu in all respects with the company’s existing shares.

Our view: AFC receiving oversubscription of shares for its offer clearly reflects shareholder’s support and belief in the company. AFC plans to use the funds to complete pre-commissioning activities and meet working capital requirements for the KORE system facility at Stade. The company is working on the Milestone 11 (final) of its POWER-UP strategy. AFC successfully accomplished its previous milestones with minimal resources, ahead of stipulated time, reflecting operational efficiency and technological advancement. Once the fuel system is fully operational, it would be the world’s largest alkaline fuel cell system, functioning at an industrial facility selling power to national electricity grid. Furthermore, AFC recently signed a power purchase agreement (PPA) with Stadtwerke Stade, which would help it commercialise the energy generated from the system. The electricity sales from the system would be the first commercial revenue earned by AFC. We are encouraged by the company’s progress at the KORE system and await future updates on it. In light of the above argument, we maintain a Speculative Buy rating on the stock.

Bushveld Minerals (LON:BMN, 3.05p) – Speculative Buy

Yesterday, Bushveld Minerals (Bushveld) announced that it has established Bushveld Energy Limited (Bushveld Energy). Bushveld Energy is an 84%-owned subsidiary of Bushveld Minerals, which would focus on installing and promoting the use of vanadium redox flow batteries (VFRB) in South Africa. The business model is dependent on smart partnerships targeting scale opportunities for energy storage. The company plans to install several VFRB systems in 2016, create awareness, and build local assembly and manufacturing capacity. Bushveld has appointed Mikhail Nikomarov CEO of Bushveld Energy. Separately, the company released a corporate update highlighting its strategies for each of its platforms. Bushveld plans to continue with the development of the Bushveld Vanadium platform. The company would complete the integration of Lemur into the Bushveld Group. As part of the Vanadium strategy, the company remains focused on completing the pre-feasibility study (PFS) on the Mokopane vanadium project and developing the project in conjunction with a strategic partner. Bushveld would look for acquisition or partnership opportunities for the brownfield processing infrastructure to expedite production and significantly reduce capex requirements for the project. With respect to Lemur, the company plans to secure the independent power producer (IPP) license for the Imaloto Coal Project, resolving litigation surrounding license 4578 and securing a strategic partner for the development of an integrated mining and power project. The Zaaiplaats tailings project would be transferred to Bushveld’s Greenhill Resources division, while the Brits vanadium project would be transferred to Bushveld Resources. In relation to Greenhill Resources, Bushveld plans to commence production at its Mokopane Tin Project. The company would focus on the high-grade zones of the two deposits, which its studies have shown could be mined and processed with recoveries of more than 75% for a greater than 50% tin concentrate product. Meanwhile, Bushveld announced the re-appointment of Anthony Viljoen as Executive Director.

Our view: Bushveld’s launch of Bushveld Energy is an important milestone in the company’s growth story. The establishment of Bushveld Energy opens up a lot of opportunities in the energy storage market. The company anticipates a potential of more than US$20bn from this market over the next five years. Bushveld has developed plans to install and promote VFRBs during 2016, and expects it to take significant share in the utility scale energy storage market. Moreover, business diversification would open up new capital sources, which is a huge challenge for mineral extraction firms. Furthermore, Bushveld remains focused on the development of all its projects across platforms to enhance shareholder value. The company has reorganised its operational resources to ensure that each of its three platforms has sufficient support, focus and capacity to deliver value. We are buoyed by Bushveld’s progress and solid plans. Therefore, we maintain a Speculative Buy rating on the stock.

 

Tissue Regenix (LON:TRX, 13.25p) – Speculative Buy

Yesterday, Tissue Regenix stated that it has completed the enrolment process for its OrthoPure™ XM (porcine meniscus) clinical trial. The company has signed 20 patients for the trial, which is necessary to complete the submission of an application for a CE mark in Europe. The final operation took place on 12th January 2016 in Valencia, Spain, and the 20 patients would be monitored for six months post-operation for the clinical trial to be accepted. Tissue Regenix is undergoing a two-part CE mark submission that would reduce the time for processing the application. Data from this trial is the only remaining information needed to complete the second part of the CE submission.

Our view: The completion of the enrolment process for the OrthoPureTM XM trial is a positive development for Tissue Regenix. OrthoPure XM provides biological repair for damaged menisci, which can lead to early onset of osteoarthritis, an injury which has limited treatments currently. The company expects to secure approval for its first dCELL orthopaedic product by end-2016. Meanwhile, Tissue Regenix is undertaking clinical trials for a decellurised porcine tendon, OrthoPure™ XT, which is expected to be completed in the next few months. These trials would bring a new biological treatment alternative in anterior cruciate ligament (ACL) surgeries at affordable prices. Recently, Tissue Regenix reported strong revenue in the first half of 2015, following the successful launch of DermaPure in the US. The company enjoys a healthy balance sheet with enhanced cash position. We believe, given its infrastructure and capacity, Tissue Regenix is well placed to benefit from growth opportunities. Therefore, we maintain a Speculative Buy rating on the stock.

Condor Gold (LON:CNR, 19.0p) – Speculative Buy

Yesterday, Condor Gold (Condor) disclosed that it has ended its strategic review incorporating a formal sale process (FSP) as defined by The Takeover Code (Code). On 4th September 2015, Condor had started a formal strategic review of its business and assets to maximise value for shareholders. However, since the announcement, the company’s share price has fallen 65% due to the negative sentiment towards junior gold exploration firms, in particular, and the natural resource sector, in general. Condor believes that the fall in share price undervalues the company’s key asset, La India Project in Nicaragua. Therefore, the company has decided to terminate the FSP with immediate effect, as a result of which it is no longer in an offer period under the Code. Condor’s current market capitalisation is equivalent to about US$5 per resource ounce (oz) of gold in the ground as against an average sale price of US$56 per resource oz for similar gold mineral resources over the past 18 months.

Our view: Condor terminating FSP is a positive step taken by the company’s board. The fall in its share price does not reflect Condor’s real value and the stock remains undervalued. The low value of Condor’s market capitalisation does not do justice to the assets and resources held by the company. Condor’s wholly owned La India project has a resource estimate of around 18.1 million tonnes at 4.0g/t gold, comprising 2.32 million ounces of gold. Moreover, the pre-feasibility study and preliminary economic assessment undertaken by the company have increased contained gold within pit shells by 30% and raised the annual production by 25%. In addition, all-in sustaining costs are under US$700 per oz of gold. The company plans to continue with the development of La India and has applied for a permit to produce 100,000oz gold per annum from a single pit. We look forward to further progress at the project. Meanwhile, we maintain a Speculative Buy rating on the stock.

International Greetings (LON:IGR, 177.0p) – Speculative Buy

International Greetings, a designers, manufacturers, importers and distributors of gift packaging and greetings, stationary and play products, yesterday provided its trading update for the Q3 ended 31 December 2015. During the period, Group has seen strong trading with its all regions trading profitably. In Wales and Holland, Group’s new manufacturing facilities gave it additional firepower to efficiently meet demand. In USA, it recorded record sales while also expanding its export activity to Canada, Mexico and Brazil. The Group has successfully increased its market share in Australia by broadening its offerings and its operation in China also performed well. Group reported it is on target to deliver EPS growth for the FY2016, in line with expectations. Referring to the trading update, its CEO, Paul Fineman said in a statement “our results and on-going focus on converting profit into cash underpins our ability to provide increasing dividends to shareholders”.

Our view: International Greetings continued to grow well across all its regions during Q3 2015. The Group has benefitted by grabbing the opportunity to license a new product portfolio featuring the popular movie, ‘Star Wars’, ‘Minions’ and ‘Frozen’ franchise ranges. This broadened sales into new licensed territories, adding to new customers and marketing channels. It is encouraging that the Group witnessed profitability in all its regions’ trading with record sales achieved in USA and market share in Australia expanding. Going forward, we expect the Group to register further expansion in its new geographical, Canada, Mexico and Brazil. A widespread geographic reach provides varied revenue streams with diversification benefits. The recent years of investment in people and in fast pay-back capital equipment, appears to provide a strong foundation for continued progress across all fronts. Eyeing the Group’s overall performance together with management’s confidence in its ability to provide shareholders with a progressive dividend, Beaufort reiterates a Speculative Buy on the stock.

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