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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

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

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

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

12 Nov 18

LIBERUM: AFH Financial Group* - FY update highlights a year of delivery

FY2018 beat expectations. The year saw success in six major areas: 16 acquisitions made; historic acquisitions integrated to plan; strong organic new business; margins raised; EPS up more than 30%; capital raised to continue to consolidate the industry.

Companies: AFH Financial Group

12 Nov 18

Carr's Group - Recovery in both divisions confirmed

The FY18 results for Carr’s Group show that it has delivered the promised recovery in both divisions. This is the result of (1) market conditions which have boosted demand for feed blocks in the US and a wide range of agricultural inputs in the UK; and (2) prior year investment, for example in feed block production capacity and in acquisitions. Noting that the FY18 performance was ahead of our estimates, we revise our FY19 and FY20 forecasts upwards and raise our indicative valuation by 4p/share to 182p/share.

Companies: Carr's Group

08 Nov 18

Building up steam

Prelims are in line with the positive August trading update, at which time we had upgraded FY19E and FY20E (revenue +10% per year, EBITDA +5% and +6% respectively). Group revenue growth of 16% included 14% organic growth: +19% Rail Technology & Services (RT&S) (16% organic) and +13% Traffic & Data Services (T&DS) (all organic). Investment in innovative partnerships such as Vivacity; acquisitions like TCS and DRS; and organic success in RT&S and T&DS, drive revenue growth and margin expansion – while increasing addressable markets and placing the business at the forefront of initiatives involving regulatory requirements, the advent of Smart Cities, and data collection and analysis. The potential scale of contract wins with TRACS Enterprise and other technology engagements offer excitement to forecasts, in addition to inevitable self-funded complementary acquisitions. Target 725p reiterated, with investment in future growth and development in place to offer unmodelled upside.

Companies: Tracsis

14 Nov 18

Sluggish Q3

Q3 results came in below our estimates as well as market consensus. Growth momentum in Europe was halted primarily by Germany’s underperformance (resulting from its turnaround efforts), France’s lower than expected growth (led by difficult comparables) and the UK’s continuing contraction (on the back of Brexit-led uncertainty). Offsetting this, the US remained upbeat, benefiting from strong underlying demand. We have lowered our estimates. No change in the stock recommendation.

Companies: Rexel

13 Nov 18

2019 will still be a year of transition…

Q3 18 key highlights: Q3 sales in line with consensus EBITDA declined to €33m (-49%), while EBIT at €-3.2m was still in negative territory Q3 18 was the fourth quarter in a row with around 1GW order intake Continuously good order momentum expected in Q4 18 2018 outlook narrowed to the lower end of the range 2019 will still be a transition year, recovery expected only in 2020

Companies: Nordex

13 Nov 18

Healthy 10 months organic growth confirmed; combination well on track

Informa reported a trading statement for the 10-months ending October 2018 The group’s underlying revenue grew 3.9% in the first ten months. The combination phase of “accelerated integration plan” for UBM is completed. Revenue growth is on track for the full-year target (+3.5%).

Companies: Informa Plc Ord

13 Nov 18

Positive figures in the UK's challenging market

Land Securities released relatively strong H1 18 results, despite a weak retail market. Revenue was up by +10.3% to £224m. Profit before tax for the period increased by +24% yoy to £42m. This is explained by net rental income rising (+1.65%) to £308m, driven mainly by the London Portfolio (+7.6% yoy to £155m) and less so by the Retail Portfolio (-3.7% yoy to £153m). This has led to an improvement in the adjusted EPS, which has risen by +17.9% to 30.3p (vs. 29.6p consensus), also pushed by a lower number of shares following the return of capital and share consolidation in September FY17. The valuation of the properties has been reduced by £188m (-1.4% yoy). Retail Parks (-4.5% yoy) and Shopping Centres (-3.2% yoy) have largely contributed to this, while the London offices assets have increased in value by +0.4% yoy. The EPRA net asset per share was down by -1.4% yoy to 1.384p. The H1 dividend has been raised again to 22.6p (+14.7% yoy). The financial position remains strong with unchanged net debt (£3.7bn) and a low LTV ratio (26.2%).

Companies: Land Securities Group

13 Nov 18

Q3: project delays push sales guidance to lower end of the range

A relatively dull release from Tecnicas Reunidas without the Bu Hasa award announced yesterday. Impacted by delays, the company has to guide sales to the lower end of the range.

Companies: Tecnicas Reunidas

13 Nov 18

9m18: good 9m EBITDA performance but postponement of dividend

Overall, there was a clear deterioration in traffic figures. Despite this, the company posted a 4% increase lfl in EBITDA in 9m 18 vs 3% lfl in H1 18. The Board of Directors has decided not to proceed with payment of the interim dividend for 2018, which is a negative.

Companies: Atlantia

13 Nov 18

Overall stable Q3 performance

There was no major surprise in Holmen’s Q3 results, wherein Paper and Wood Products’ pricing gains helped reduce the impact of cost headwinds and some divisional (volume) issues. While price tailwinds should moderate over time, healthy volumes across businesses, limited downside risk in case paper market headwinds are reinstated and apt input cushions from forests and energy – which also limit the group-wide emissions, should help Holmen maintain its valuation premium vis-à-vis peers.

Companies: Holmen

13 Nov 18

Avesoro Resources - Q3 Results

13 Nov 18

No further change yet related to MINT

Q3 revenue came in at €412m (+2.9% yoy, +5.0% at constant exchange rates), and recurring EBITDA was up 7.6% to €72m, both in line with consensus expectations. The expected weak performance in Spain has been fully offset by the strong growth in Benelux and Italy. Recurring net income was €28m, above consensus, mainly helped by the lower financial costs due to a reduction in debt. NH’s management has started to work with Minor (the new owner with 94.1% of the share capital) to define the new Strategic Plan. Outlook FY18 NH confirmed its FY 18 EBITDA expectation of €260m and upgraded its net financial debt ratio target to 0.8x-1.0x vs. 1.0x-1.2x previously.

Companies: NH Hotel Group

13 Nov 18

Positive one-off and portfolio effect cover weak organic performance

Bayer’s Q3 figures were positively impacted by Monsanto (contributing for a full quarter) and an enormous gain from the divestment of parts of the agro businesses. Stripping these effects out, the figures look a bit bare with just some top-line growth and some ailing profitability. The €3.2bn gain gave profitability a strong push far above our expectations but, on an adjusted basis, the group’s profitability came in below our expectations. Consensus top-line was not met, but the adjusted profitability was above.

Companies: Bayer

13 Nov 18

Zenith Energy - Operational update

13 Nov 18

Mosman Oil & Gas - Mosman Oil & Gas - Stanley-1 Well Test Results

13 Nov 18

PDL BioPharma - Q318 results

PDL reported Q318 revenues of $67.9m, up 8.2% compared to Q317 and up 45.8% sequentially, with that growth mainly due to an increase in the fair value of the Assertio (formerly Depomed) royalty rights. Noden Product revenue of $17.8m was up 17.9% compared to Q317 but was down 31.2% sequentially, mainly due to the bulk purchasing by distribution partner Orphan Pacific for the Japanese market launch in Q218. Importantly, PDL recently announced a $100m stock repurchase program which at current prices would buy back approximately 25% of the common shares outstanding.

Companies: PDL BIOPHARMA

13 Nov 18

Still solid organic growth

United Internet has released a correct Q3, although with growth numbers slightly lower than in H1. Q3 revenues have increased by 8.8% yoy in pro forma (vs 10.9% in H1) while EBITDA has grown by 6.6% yoy (vs 10.8% in H1). Remember that in reported terms both revenue and EBITDA growth during the first 9m were slightly above 25% due to the consolidation of Strato and Drillisch.

Companies: United Internet

13 Nov 18

TXT e-solutions - Putting cash to work

Strong organic revenue growth in Q318 combined with the recent Cheleo acquisition resulted in revenue growth of 18.6% y-o-y, a normalised EBITDA margin of 10.0% (+80bp y-o-y) and a normalised EBIT margin of 5.8% (down 240bp due to higher depreciation from the capitalisation of leases). The company has started deploying the proceeds of the TXT Retail disposal, with the first two deals adding software solutions to the services-led Banking and Finance business. We expect the company to make further accretive acquisitions across both businesses.

Companies: TXT e-solutions