Brazil’s stock market plunges after corruption claims

"Big sigh of relief, even if traders know very major uncertainties remain! Turning higher early in the session, US stocks managed a somewhat half-hearted rebound Thursday evening, with the NASDAQ leading the way, having notched up their worst losses for several months across all three principal indices. Bargain hunters were in evidence amongst those who still believe President Trump can and will deliver on his ambitious, reflationary, tax cutting and deregulatory agenda, taking confidence from the appointment of former FBI Director Robert Mueller to serve as Special Counsel to oversee an investigation into Russian meddling in last year’s presidential election. Hard hit semiconductor and trucking stocks reversed part of yesterday’s losses, with the S&P500’s technology sector rising 0.6% despite Cisco tumbling over 7% on disappointing quarterly revenues, while the recently surging NYSE Arca Gold BUGS index gave back 2.4% as prices for June delivery for the precious metal slipped US$4.80 by mid-session. The overall rebound was supported by releases of upbeat economic data, however, with the Labor Department reporting another unexpected drop in initial jobless claims in the week ended May 13th and the Philadelphia Federal Reserve’s regional manufacturing activity index unexpectedly expanding at a faster pace during the month of May, while the Conference Board’s index of leading economic indicators rose by 0.3% in April as expected. In commodities trading, however, crude oil futures weakened during the US session to slip US$0.61 to US$48.46 a barrel after climbing USD0.41 to USD49.07 a barrel on Wednesday, before rebounding this morning, while base metal prices like copper did similarly. Asia ended mixed, however with the ASX again underperforming the region as stocks continue to be pressured by the PM’s proposed bank tax on the nation’s biggest banks and nervous commodities, pushing the headline index down about 2% on the week, its worst loss since October. The Nikkei tracked the US$ rebound, while the two main Chinese equities traded modestly in opposite directions. Yesterday’s European session, saw the major markets retraced their early weakness following the US open. The FTSE100 closed down just 0.89%, well off its intraday low, having gleaned confidence from the reported recovery in UK retail sales which expended at a faster than expected pace in April; both Burberry Group (BRBY.L) and Royal Mail (RMG.L) found good support following positive news releases, while retrenching oils, minerals and property stocks are expected to recover modestly on today’s opening. The pan-European STOXX 600 trimmed 0.5% on Thursday, with the CAC 40 losing 0.53% as the Xetra DAX dipped a more modest 0.33%. Amongst macro releases for today, the UK is expected to produce its CBI Industrial Trends Survey for May, while the EU offers its March Current Account data followed later by its May Consumer Confidence Preliminaries. The US is only scheduled to contribute its Baker Hughes US Oil Rig Count, although speeches are anticipated from the Fed’s James Bullard and John Williams. UK corporates expected to publish earnings or trading updates include Hikma Pharmaceuticals (HIK.L), Future (FUTR.L), Close Brothers Group (CBG.L) and Moss Bros (MOSB.L). Equities in London appear willing to participate in the rebound this morning, with the FTSE-100 expected to rise around 25 points in early trading, although investors will clearly remain touch-sensitive on any new headlines from Capitol Hill. Evidence is being demanded following Trump’s denial that he asked Comey to end the probe into Flynn’s Russian connections, while the significance of his administration’s overnight announcement regarding intent to renegotiate US’s participation in NAFTA needs to be closely examined."– Barry Gibb, Research Analyst

Markets

Europe
The FTSE-100 finished yesterday’s session 0.89% lower at 7,436.42 whilst the FTSE AIM All-Share index was down 0.54% at 971.66. In continental Europe, the CAC-40 finished down 0.53% at 5,289.73 whilst the DAX was 0.33% lower at 12,590.06.

Wall Street
In New York last night, the Dow Jones rose 0.27% to 20,663.02, the S&P-500 firmed 0.37% to 2,365.72 and the Nasdaq gained 0.73% to finish at 6,055.13.

Asia
In Asian markets this morning, the Nikkei 225 had risen 0.12% to 19,577.73, while the Hang Seng firmed 0.31% to 25,215.45.

Oil
In early trade today, WTI crude was up 0.81% to $49.75/bbl and Brent was up 0.72% to $52.89/bbl.

Headlines

Brazil’s stock market plunges after corruption claims
Brazil’s Bovespa stock market was briefly halted as investors reacted to corruption allegations against Brazilian President Michel Temer. Stocks plunged more than 10% at the start of trading, prompting circuit breakers to kick in and halt dealings. President Temer was forced to deny a newspaper report that he had given consent to paying off a witness in a huge corruption scandal. The Supreme Court has authorised an investigation into the allegations. On Thursday Mr Temer said in a TV statement: “I never authorised any payments for someone to be silent. I did not buy anyone’s silence. I fear no accusations.” “I have nothing to hide. I never authorised anyone to use my name” “We cannot throw so much hard work [on reforms] done for our country in the rubbish bin.” “I will not resign. I will not resign. I know what I have done.” Investors are concerned that Mr Temer’s reform plans could be derailed. The Ibovespa index closed more than 8.8% down at 61,575 points. Mr Temer is trying to get pension reforms through Congress that would mean men would have a minimum retirement age of 65, and women 62, and most people would contribute more. There is currently no minimum retirement age. There are also labour reforms on the cards to weaken trade union bargaining powers and make hiring and firing workers easier.

Burberry Group (BRBY.L, 1,718.00p) – Buy
Burberry, a UK based international luxury fashion and beauty brand, yesterday announced its preliminary results for the 12 months ended 31 March 2017 (‘FY2017’). During the period, on an underlying basis, revenue fell by -2% (or up +10% at reported currency basis, (‘RC’)) to £2,766m, against the comparative period (FY2016). Retail revenue advanced by +3% to £2,127.2m at underlying basis (RC: +16%), with like-for-like (‘LFL’) sales increased by +1%. Wholesale revenue fell by -14% to £613.9m (RC: -3%), due to rationalisation of distribution in key markets and distributor de-stocking. Licensing revenue declined by -48% to £24.9m (RC: -41%), as a result of the planned expiry of the Japanese licences. Underlying adjusted operating profit and adjusted pre-tax profit both dropped by -21% to £458.7m, and £462.4m, respectively, while on a reported basis, both advanced by +10%, leading to adjusted earnings per share of 77.4p, up +11%. On a statutory basis, pre-tax profit fell by -5% to £394.8m due to £67.6m of adjusting items (FY2016: £5m), leading to -6% dip in earnings per share to 64.9p. Free cash flow increased to £465m (FY2016: £274m), while net cash at the period-end stood at £809m (FY2016: £660m). On the operational front, the Group announced strategic partnership in Beauty with Coty, which has now received regulatory approvals. The Group has also completed £100m of announced £150m share buyback programme, while delivered planned cost savings of £20m in FY2017. Burberry’s CEO (and Chief Creative Officer), Christopher Bailey, commented “2017 was a year of transition for Burberry in a fast changing luxury market. The actions we have taken to lay the foundations for future growth are yielding early benefits and I remain confident that these will build over time. Marco Gobbetti assumes the role of CEO from July. With his extensive experience in the sector, we will build on these foundations to elevate and strengthen the brand further and take Burberry to the next level as a global luxury retail and digital business. I am excited to work closely with him in this next chapter”. The Group declared a final dividend of 28.4p, bringing full year dividend to 38.9p per share, up +5% to be paid on 4 August 2017.

Our view: Burberry delivered good result for the FY2017. Both revenue and LFL sales growth was in line with the consensus Analysts’ estimates, while adjusted pre-tax profit came slightly ahead, due to cost savings and ongoing cost management. The Asia Pacific region was led by accelerated sales growth in mainland China to “double-digit” in the Q4, while Honk Kong, though improving, remained negative during the period. EMEIA region was led by an exceptional performance in the UK, which continue to benefit from strong demand from both domestics and tourists. Europe also improved, particularly the France, while the Middle East remained challenging. In Americas, difficult condition continued with muted demand from both domestics and tourists. Looking ahead, the Group reiterated its FY2018 adjusted pre-tax profit guidance at constant currency basis while adjusted earnings per share is expected to improve “ahead” of this. This includes adverse movement in reported adjusted pre-tax profit of around £30m (previously £10m adverse) at 28 April exchange rates. The Group expect to deliver £50m of cumulative cost savings in FY2018 and remain confident to achieve targeted cost savings of at least £100m annualised by FY2019 (minimum cumulative cost savings of £30m in FY2019). In addition, Burberry is set to deliver strategic savings of c.£40m one-off restructuring costs in FY2018. Wholesale is expected to fall by “mid single-digit” in H1 FY2018 due to potential business disruption from Beauty, while underlying Licensing revenue for FY2018 is expected to increase by c.+20%, which includes contribution from new Beauty licence from H2. The Group’s confidence in future is reflected in +5% increase in dividend, representing 50% payout ratio, as well as additional £300m share buyback in FY2018, totalling £350m. The shares are valued at FY2018E and FY2019E P/E multiple of 20.8x and 18.7x along with dividend yield of 2.4% and 2.6% respectively. Given unchanged outlook, strong cash generation and free cash flow paving the way for progressive dividend policy, Beaufort repeats its Buy rating on the shares with a price target of 1,920p. We look forward to the further transition by the new CEO.

Marston’s (MARS.L, 137.00p) – Buy
Marston’s, one of the UK’s leading pub operator and independent brewer, yesterday announced its interim results for the 6 months ended 1 April 2017 (‘H1 FY2017’). During the period, on an underlying basis, revenue advanced by +2.8% to £440.8m, pre-tax profit rose +2.7% to £33.7m, leading to basic earnings per share of 4.8p, up +4.3%, against the comparative period (H1 FY2016). On a statutory basis, revenue advanced by +1.6% to £451.5m, pre-tax profit jumped +61.0% to £36.7m resulting earnings per share improved by +23.8% to 5.2p, due primarily to the mark-to-market movement in the fair value of certain interest rate swaps. Net debt at the period end was £1,322m (end H1 FY2016: £1,272.5m), representing net debt to underlying EBITDA ratio of 5.0x (H1 FY2016: 5.0x), excluding property leases with freehold reversion entitlement. On the operational front, the Group opened 4 new pubs and bars and 3 lodges, taking estate to over 1,000 rooms. On a separate announcement, the Group confirmed acquisition of Charles Wells brewing business (‘Charles Wells’) from the Charles Wells Group for a cash consideration of £55m. The Group also announced that it will acquire 7 pubs in “strong” locations to enhance its Destination and Premium estate for a consideration of £13m with a refurbishment investment of £3m. To fund these acquisition, the Group yesterday completed a placing to raise £78.9m before expenses (9.9% of the Group’s issued share capital) at a price of 137.0p per share. Marston’s CEO, Ralph Findlay commented “Our market position will be enhanced by the acquisition of Charles Wells Brewing and Beer Business and we remain confident our strategy will continue to create value for shareholders”. The Group declared an interim dividend of 2.7p per share, up +3.8%, to be paid on 4 July 2017.

Our view: Marston’s reported a good performance in the H1 FY2017, despite Easter falling into the H2 which impacted some £1.5m of its pre-tax profit. Underlying revenue growth of +2.8% was supported by both like-for-like sales growth in all businesses, new openings and growth in its beer brands. The Group’s operating margin declined by -0.3% to 16.1% due to slight dip in both Destination and Premium and Taverns, despite Leased and Brewing improved. It’s Brewing business also expanded its market share to 26% of premium bottled ale and 19% of the premium cask ale markets. The acquisition of Charles Wells is encouraging move. Charles Wells has a portfolio of over 30 beers including leading brands such as Bombardier, Young’s and McEwan’s, as well as holding UK distribution rights for the Estrella Damm lager brand and other beers under license including Kirin and Erdinger. Purchase price of £55m equates to 9.0x current EBITDA, which will be reduced to c.5.5x after £4m of synergies expected to achieve by FY2019 (majority realised in FY2018). Return on Invested Capital (ROIC) is expected to exceed 18% in third full year. Charles Wells has generated revenues of £92m, EBITDA of £6m, operating EBIT of £5m and net tangible assets of £36m for the year ended 30 September 2016. On top of the cost synergies, expanded brand portfolio will increase its ale market share from 11% to 16% and further strengthen its presence, with opportunity to step into Scotland market. Post the period, for the 30 weeks, operating marging has been flat year-on-year with like-for-like remain positive across all divisions with Destination and Premium +1.6%, Taverns +1.7% and Leased +2.0%. Volume for own-brewed beer increased by +2%. Looking ahead, the Group said it remain confident to deliver its full year target and is on track to open 20 pub-restaurants, 3 premium bars and 8 lodges in FY2017. Although further cost pressure is anticipated (such as energy inflation, National Minimum and Living Wage and Business Rates), the Group said it will actively managing the risk to its margins. We believe Maston’s has sufficient momentum to achieve further growth and given its shares currently valued at FY2017E and FY2018E P/E of 9.6x and 9.2x, along with dividend yield of 5.5% and 5.7%, respectively, its progressive dividend policy aiming at a cover of around 2.0x over the medium-term should ensure attractive shareholder return. Beaufort therefore reiterates its Buy rating on the Shares.

Click here to see all next week’s planned corporate and economic announcements.

Recommendations
During the three months to end-April 2017, the number of stocks on which Beaufort Securities published recommendations was 216, and the recommendations were as follows: Buy – 73; Speculative Buy – 118; Hold – 22; Sell – 3.

Full definitions of the recommendations used by Beaufort Securities in its publications and their respective meanings can be found on our website here.

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