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06 Nov 18

THE MONTHLY November 2018

In addition to Hardman’s monthly analysis of client stocks, the thorny issue of market disruption – a popular theme currently - is also addressed. In a wide-ranging article, Hardman’s utilities analyst, Nigel Hawkins, assesses the impact that market disruption has already made. In some sectors, notably telecoms and aviation, market disruption has been apparent for many years, as the rise of Vodafone, Ryanair and easyJet demonstrates. However, in some sectors, such as oil and housebuilding, structural changes have been modest – the dominance of the big players endures. For investors, there is real interest in those sectors where changes are underway. The UK groceries market, which may shortly become a duopoly, is a case in point. And, intriguingly, who knows if there is a company currently languishing in AIM, which will attain a £50bn market valuation within the next decade?

Companies: OPM AVO AGY APH ARBB AVCT DISH BNO BUR CMH CLIG CSH DNL DPP GTLY GDR HAYD KOOV MCL MUR NSF OXB PHP RE/ REDX SCE SIXH TON VAL VTA W7L

08 Nov 18

LIBERUM: GAME Digital* - Strong progress in a tough retail market

FY18 adjusted EBITDA of £10.1m (+26% y-on-y) is in line. Operational efficiencies have realised material costs savings as planned. These, together with an improvement in Events, Esports & Digital, have more than offset the challenges in a tough retail market.

Companies: Game Digital

08 Nov 18

Game Digital - Game on for BELONG

In a challenging market Game Digital (GMD) continues to make ground, meeting our 26% EBITDA growth forecast after achieving planned cost savings, despite the intensified swing to digital. In FY19 we expect the roll-out of BELONG to gather pace, as well as a continued fightback backed by the console industry. The value in our 67p valuation, other than cash of 33p, is in the BELONG roll-out, where continued momentum is crucial.

Companies: Game Digital

23 Oct 18

Quarterly Research Outlook

The June IPO of Knights Group Holdings, a Top-100 regional law firm, marked the fifth entrant to the burgeoning UK-listed legal sector. Following recent expansion of our coverage across all five listed legal firms, complemented by coverage of three broader support services peers with exposure to the sector, we revisit and build upon our views on this rapidly evolving sector.

Companies: ARS GTLY GENL KEYS KGH MNO RBGP TWD 7DIG ABBY AMS AMER ANX ARS ATYM AVON BLVN PIER CGS CAML CALL CSRT TIDE DTG DEMG ELM EMR FPM FPO FST GTLY GENL GRI GEEC HDY HMI HAYD HEAD HILS HTG HUR IBPO IOG INDI JHD JOG KEYS KGH LAM MACF MNO MKLW NAH OXIG PCA PKG CAKE PDG RBW RMM REDD RSW RNO RKH RBGP ROR SUS SCPA SHG SOLG TWD TRAK TRI VNET VTC ZTF

06 Nov 18

North Sea Rockstar

RockRose has quickly managed to establish itself as a significant North Sea player, with an acquired portfolio of assets which were non-core to the sellers but material for a company of RockRose’s size. We initiate coverage with a BUY recommendation and a TP of 1460p, representing significant potential upside of 156% from the current share price, a gap we believe will close quickly once investors realise RockRose is trading at a sharp discount to fundamental value.

Companies: Rockrose Energy

14 Nov 18

Strong FY 2018 performance

AB Dynamics has reported FY 2018 revenue and Adjusted PBT in line with our estimates, which were revised in October when the Group announced that it would significantly exceed market expectations. Both numbers are at record levels. The Group has delivered strong performances across a number of global geographies in the ADAS (Advanced Driver Assistance System) targets and steering robot businesses, and won its first simulator order (for delivery in FY19). As ADAS complexity is increasing, further customer demand is anticipated. The announcement also notes the tailwind of a ‘healthy’ order book at the start of FY2019. Given this strong outlook, and the prospect of another year of ‘solid progress’, AB Dynamics is to make further investment in supporting the significant growth opportunity, constraining near-term operating margin. We have upgraded our FY19 and FY20 estimates materially, while assuming an increased level of investment and upgrading EBITDA at a lower rate.

Companies: AB Dynamics

08 Nov 18

Weak total advertising revenue expected by the end of the year

In 9m 18, total advertising revenue increased by 2%, at the same pace as in H1 18. Once more, total advertising growth was boosted by fast-growing online advertising (+43%). Nevertheless, ITV disappointed the stock market with the expectation of a decrease in total advertising revenue of 3% in Q4 18, o/w -6%/-8% in December.

Companies: ITV

09 Nov 18

Cenkos: Empyrean Energy Plc - STOIIP Audit and PSC Execution

This morning, Empyrean Energy released the results of the third-party independent audit of oil initially in place (STOIIP) estimates and geological chance of Success (GCoS) by Gaffney, Cline & Associates (GCA) over the Jade, Topaz and Pearl prospects, located in Block 29/11 in the Pearl River Mouth Basin, China, in which the Company has a 100% working interest.

Companies: Empyrean Energy

07 Nov 18

International brands driving performance

Alliance Pharma (APH) is a profitable, cash-generative, specialty pharma business. The proportion of sales generated from higher margin international star brands is rising rapidly, and will be boosted by the recent acquisition of Nizoral in APAC, and UK approval and launch of Xonvea for nausea and vomiting in pregnancy, where conservative management has failed. Investment behind these brands together with compliance with new regulatory directives will limit short term growth but positions the company well for the medium term. APH is cash-generative allowing it to pay down debt at a fast rate. Meanwhile, it offers a dividend yield of 2.0%.

Companies: Alliance Pharma

06 Nov 18

6 month trading update

Double-digit growth of instructions has combined with increasing average revenue per instruction to deliver sustainable growth. Despite increased competition & total category media spend, Purplebricks has maintained its leading market position with 74% share of the UK online/hybrid market, and brand awareness (97% aided and 48% unaided).

Companies: Purplebricks Group

08 Nov 18

Getting its ‘Mojo’ back

As with any walk of life, the occasional setback is inevitable when tackling complex new challenges. The key is recognising when difficulties arise, responding quickly, learning from the experience and ultimately reaching one’s goals - perhaps via a different route. It’s no different in the corporate world.

Companies: Gattaca

14 Nov 18

Avon Rubber - Continuing to deliver

Avon Rubber’s FY18 report demonstrates the success of the new business strategy, delivering growth across both divisions. The product portfolio has been updated and the company is winning contracts in new geographies. The company has also taken action to address its business structure and production footprint. We see continued opportunity for organic growth supported by selective bolt-on acquisitions.

Companies: Avon Rubber

09 Nov 18

LIBERUM: Volex* - Strong H1 drives 7% earnings upgrade

We upgrade our FY19 underlying operating profit estimates by 7%, due to a strong first half and a step-up in the group’s margin mix. Power Cords delivered an impressive 7.7% margin, up 280bps y/y due to price increases, mix and automation-driven efficiency improvements.

Companies: Volex

14 Nov 18

Trading update & EPS upgrade

We note the unscheduled trading update released this morning by Marshall Motor Holdings (MMH), confirming better than expected trading in the used car market. Together with continued growth in the aftersales business and strong operational initiatives this is driving growth in underlying PBT vs 2017A. As a result, the company now expects adj. PBT in 2018E to be ahead of 2017 (continuing basis). We update our forecasts accordingly to reflect this, which triggers a 14% upgrade to our previously below consensus estimates. We leave forecasts for 2019E and 2020E unchanged reflecting the current uncertainty heading into next year and remain cautious at this juncture as we await further clarity over Brexit. The valuation on our cautious assumptions from 2019E continue to look compelling to us, particularly in the context of its balance sheet, dividend yield and strong anticipated FCF.

Companies: Marshall Motor

06 Nov 18

1H19 results

Strong 1H19 y/y revenue growth of 17% (to $14.9m) should not be overshadowed by restrained gross margins in the period (33%) caused by mix effects and increased investment costs. The Group notes that 2H19E trading has begun ‘extremely positively’. We anticipate that margins will expand, estimating a FY2019E gross margin of 35%, as subtitling volumes recover, ZOOdubs moves to a more mature state and ZOO’s investment in capacity and technological enhancements allow it to capitalise on buoyant market dynamics which should exhibit its scalability. Aside from tweaks to depreciation and cash, our FY2019E estimates are little changed.

Companies: Zoo Digital Group

14 Nov 18

Strong hydro conditions offset lower wind speeds in Q3 18

Erg released a robust set of Q3 results. Weaknesses in the group’s wind power activities – due to lower wind speeds and lower incentivised output – were more than offset by stronger results in the hydro business and the contribution of the new solar business. The group reiterated its FY18 objectives. We will slightly raise our forecasts while we stick to our Add recommendation.

Companies: ERG S.p.A

14 Nov 18

Unsurprisingly weak H1 results

SSE reported a weak set of H1 results, in line with the September profit warning. Adjusted operating profit was down 24%, to €448m on the back of lower renewables output and losses in the group’s EMP activities, due in part to a losing short position on gas prices. The group reiterated its five-year dividend plan.

Companies: SSE

14 Nov 18

Strong 9M results on higher renewables capacity, robust retail

E.ON released a good set of 9M results. EBIT was up 11%, supported by strong growth in the renewables business as well as positive trading developments in the customer solutions division in Q3, although this likely to reverse in Q4. The group confirmed its FY18 objectives. We stick with our current Add recommendation.

Companies: E.ON

14 Nov 18

Retail market still under pressure

British Land published uncomfortable H1 18 results, but its long-term strategy should push up its operating profitability and asset value in the future. Underlying profit decreased by 14.6% yoy to £169m. The diluted underlying EPS dropped by 10.4% yoy to 17.2p, lower than expected by analyst consensus. It was negatively impacted by one-off surrender premia received last year. The value of the portfolio was down by 1.9%, mainly due to the lower valuation of the Retail assets (-4.5%). Office valuation was up by +0.7%. As a consequence, the EPRA NAV decreased by 2.9% yoy to 939p. The LTV was lower than last year (-1.7bp) to 26.7% thanks to the significant amount of retail assets sold (£634m in the last 12 months).

Companies: British Land Company

14 Nov 18

Marshall Motor Holdings - Strong finish to 2018 expected

Marshall Motor Holdings (MMH) released a trading update, which indicates that the group’s Q4 performance is now expected to be ahead of management and market expectations. Driven by stronger than anticipated used car sales with healthy margins, PBT is now expected to exceed FY17’s record level for the continuing business. We are increasing our FY18e PBT and EPS by 6.4%. Brexit uncertainty remains at the forefront of FY19 prospects, and as some of the currently favourable market dynamics may wane, we leave our FY19 estimates unchanged. The P/E ratio for FY19 is an undemanding 5.8x.

Companies: Marshall Motor

14 Nov 18

A poor Q3 but the worst has been priced in

As expected Iliad has released poor Q3 revenues: Revenues in France were down by 2.1% yoy, when they were flat yoy and lfl in H1. They were indeed down by c.3.8% on the fixed side with again c.15k lost customers (however, less than the c.25k lost customers in Q2, but summer is usually less subject to unsubscriptions), while they were only flat on the mobile side (+0.2% yoy to be precise) with 110k lost customers during Q2 (vs 130k lost customers in Q2). In Italy, since launching its mobile business at the end of May, Iliad succeeded in winning 2.23m subscribers to generate eventually €46m in revenues in Q3 (c.€8 per subscriber per month).

Companies: Iliad

14 Nov 18

Higher bunker costs and pressure on margins

In Q3 18, the pressure on margins continued in container shipping due to higher bunker prices (+47%). Nevertheless, there was some improvement as the unit cost at fixed bunker prices, excluding Hamburg Süd, at constant currency, declined slightly (-0.6% yoy vs -1.4% yoy in Q2 18). The total synergies related to Hamburg Süd were upgraded to $500m at least (vs $350-400m previously). Import tariffs should start to weigh on world trade. Management is anticipating an impact of 0.5pt on average demand.

Companies: AP Moeller Maersk

14 Nov 18

Q3 Advertising revenues saved by the World Cup but for how long?

Mediaset has released a poor Q3 with revenues down by 6.6% yoy, while the EBITDA was down by 25.4% yoy. The Q3 net result was also negative at €-15.8m. Note Ei Towers is for the first time consolidated by the equity method. The reason for this separation is the exit of the transmission towers company from the group’s area of consolidation at the beginning of Q4 18 following the successful public offering made by Ei Towers. Note the sale by Mediaset of its controlling interest – the company now owns 40% of the share capital of 2ìTowers, which holds 100% of Ei towers – resulted in a net capital gain of around €500m.

Companies: Mediaset

14 Nov 18

9m 18: still burning too much cash, namely €263m over nine months

Overall, the company has burnt €263m since the beginning of the year, of which €85m from share buy-backs and €44m from dividends. We believe that financing shareholders’ remuneration through an increase in indebtedness is a very risky move. Following this earnings release, we will increase our forecasts but keep our Sell recommendation unchanged.

Companies: Bilfinger