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01 Nov 16
Since our last outlook note, Quadrise has begun to supply MSAR for extended LONO sea trials, paving the way for commercial adoption from calendar H217 onwards. In August it signed a memorandum of understanding with clients in the Kingdom of Saudi Arabia (KSA), which is a key enabler for progressing the production-to-combustion pilot there. In October it completed a placing and open offer raising a total of £5.25m (gross). This should enable it to transition comfortably to the commercial phase on successful completion of the LONO and KSA trials.
Exceptional trading continues
08 Nov 16
Keywords has announced that the strong trading in localisation and audio services has continued into H216. In particular, the Synthesis business acquired in April continues to benefit from exceptionally strong trading. Full-year results are now expected to be materially ahead of consensus and we upgrade our FY16e EPS by 13%. Erring on the side of caution, we have not changed our FY17 estimates significantly. Nevertheless, we believe the company does have a platform to sustain double-digit earnings growth, and hence medium-/long-term prospects for further share appreciation remain good.
04 Nov 16
Breaking with convention, this Quarter we take the temperature of the expanding non-listed casual dining and bar operator sector. Looking at the top 50 operators, it appears that the £80bn market for eating and drinking out in the UK is alive and well. The AlixPartners Growth Company Index (October 2016) shows that 2-year profit CAGR has improved over the last few years, and recent surveys from Greene King, Coffer Peach and Deloitte highlight elevated spend on out-of-home occasions.
Joy of Techs
21 Nov 16
ICT evolution is driven by technological development as advances are made which both meet and shape customer requirements. Our 2011 note No such thing as a telco described the modern reality in that former ‘telcos’ now deliver varying elements of a range of managed services. We built on this theme last year, exploring in further detail their evolutionary paths, operating fundamentals, and cashflow yield similarities. In the consumer environment, demand for bundles of technology is complemented by demand for content. Across the pond, the mooted combination of AT&T and Time Warner typifies the bundled need of ‘pipe’ and content, since unbundled alternatives such as FaceTime and WhatsApp can be easier and clearer to chat over, and Amazon and Netflix are easier to watch anywhere. In the UK, BT’s defensive actions cover delivery, content and capabilities, acquiring EE yet also buying football rights. While TV was long ago added to triple play to become quad play, voice is now merely an app, and fixed and mobile seen as just dumb pipes: it's the content that will influence consumer choices. Growth of TV and film as well as music and gaming over IP leads to UK small cap opportunities. In context of the drive to maximise value from pipes and access by offering content and data, we look at some amongst the potential tech small cap beneficiaries: Amino*, Keyword Studios, ZOO Digital*, 7digital*, KCOM* and CityFibre*.
Taking a prudent road
28 Nov 16
As flagged in September, H1 2017 profit is indeed below LY; adj. PBT of £0.5m compares with £1.5m in H1 2016 as Trakm8 invests heavily in new technology and acquisition integration. Management remains confident in another very strong H2 performance and in particular is focused on closing a couple of large high-margin software-related sales which would see the group meeting the original FY 2017 expectations of £5.9m adj. PBT. However, should these fall outside the March year-end, profits are only likely to be in line with last year’s £3.9m, albeit on a growing revenue base. Prudence dictates we assume a worst-case scenario in our forecasts so that surprise is only in the upside – if the deals close in the year, the company will meet those original revenue and profit expectations.
Innovate, specialise, integrate, globalise
01 Dec 16
Carclo has refocused investment in its established businesses (Technical Plastics and LED Technologies), where a differentiated offer and long-term relationships with customers provide good earnings visibility and more certainty of a return. This strategy delivered strong revenue and profits growth during H117. This growth appears set to continue, underpinned by long-term relationships with blue-chip customers. We leave our estimates and indicative valuation broadly unchanged and introduce our estimates for FY19.
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Acquisition of 3M's identity business, the long-awaited trigger?
09 Dec 16
Gemalto has announced the acquisition of the identity management business of 3M, for a total of $850m. The acquired business is composed of biometric solutions with a focus in civil identification, border control and law enforcement, as well as 3M’s Document Reader and Secure Materials Businesses. It generated revenues of about $215m (in June 2016 TTM), with an operating margin of c. 27%, and is expected to grow by 10% per year until 2020. 450 people will join Gemalto and reinforce the Government Programs business unit, which recorded revenues of €391m in 2015. The acquisition is EPS accretive, will be funded through existing credit lines and cash, but the net debt/EBITDA ratio is expected to remain below 1.5x. The closing of the deal is expected during H1 17, after regulatory approval.
Fraport’s new pricing structure
09 Dec 16
The airport operator has received approval to increase fees at Frankfurt Rhein-Main by 1.9% as of January 2017. At the same time, it is able to offer incentives to airlines that open flights to new destinations if they increase their passenger numbers by 3%. Under this condition, the fee for the new destination is reduced by 50% in the first year, by 33% in the second, and by 25% in the third. Management argues that the fee increase and the incentives are necessary to finance the company’s investments in the new runway and the construction of an entirely new terminal. Based on the airlines’ earlier indications, these investments were necessary to cope with rising passenger numbers. However, this number has grown by less than 1.5% p.a. during the last ten years when we assume that the 2016 number is unchanged from last year’s. Consequently, revenue growth would be insufficient without the fee increase. By offering the above incentives to existing and new clients (i.e. airlines), management sees the passenger growth rate accelerating in the years to come. Whether this will allow Fraport not to ask for further fee increases in the future remains to be seen.
On deck for multiple 2017 launches
09 Dec 16
NetScientific’s subsidiaries have made multiple advances on regulatory and commercial fronts. ProAxsis and Vortex will both be launching their first products in 2017, and to this end they have both received CE marks for sale in Europe, with Vortex receiving a Class 1 device designation for sale in the US. In addition, Wanda has signed two new contracts with care providers, bringing the total to four.
WCLC: Positive data highlights NSCLC pipeline
09 Dec 16
At the recent IASLC World Conference on Lung Cancer, HCM published positive proof of concept data in NSCLC on key assets fruquintinib and epitinib. Affirmative data not only translates to further pipeline progression but critically underpins the R&D effort at HCM, fuelling the prospects of a fruquintinib regulatory filing in China in 2018. In 2017 we anticipate the initiation of three more pivotal trials, further data from the mid- to late-stage pipeline, including savolitinib data (papillary renal cell carcinoma, PRCC, and non-small cell lung cancer, NSCLC), and importantly potential China/US NDA submissions. We value HCM at $2.4bn or £32.2 share.
November was a good month, in volume terms
09 Dec 16
Although Lufthansa suffered from strike action in the last month (as it did in November 2015), the number of passengers increased by 5.9% to 7.63m, which brought the ytd number to 101.9m, an increase of 1.6%. As demand increased by 10.1% while the offer was up by ‘only’ 9.3%, last month’s SLF improved by 0.5pp to 75.8%. The respective ytd numbers were +2.5%, +4.5%, and -1.6pp to 79.2%. However, management continues to complain about ‘significantly falling’ yields on a currency-adjusted basis. The development was similar in the Logistics division. Demand was up by 2.8% while the offer was increased by only 0.4%. As a result, the November FLF improved by 1.7pp to 71.0%. The ytd FLF was unchanged at 66.2% as both demand and offer were up by 0.8%. Lufthansa’s November SLFs improved to/from European and Middle Eastern/African destinations but fell to/from the Americas and APAC and for the first eleven months it was only up to/from the Middle East/Africa.
Sustained outperformance versus benchmark
09 Dec 16
Invesco Asia Trust (IAT) aims to generate long-term capital growth from investment in Asia ex-Japan equities across the capitalisation spectrum. The portfolio of c 60 stocks is diversified by sector and geography. IAT’s NAV total return has outperformed its MSCI AC Asia ex-Japan benchmark over one, three, five and 10 years. Near-term absolute returns have been particularly strong, having been enhanced by a fall in the value of sterling. IAT’s board actively manages the share price discount to ex-income NAV via tender offers and share repurchases. Annual dividends have been maintained or increased every year since 2001; the current yield is 1.6%.
DMGT reduces stake
09 Dec 16
DMGT has reduced its holding in Euromoney from 67% to 49%, meaning results will no longer be consolidated and removing a major barrier to investment in ERM for some potential shareholders. Of the 32.2m shares involved, 13.0m have been placed with investors and 19.2m bought back for cancellation, all at 975p, a discount of 13% to last night’s close. The reduced share capital mechanistically boosts the EPS and management has also indicated a review of the dividend payout ratio. We will formally adjust our forecasts when the buyback and cancellation are completed.
09 Dec 16
Circle’s existing operations continued to progress in H116, with revenues ahead 6% year-on-year in H116 and both business units again generating positive EBITDA. The group EBITDA loss after central costs declined further and we estimate positive EBITDA for 2018. Management is focused on further diversifying the group offering and building the scale required to generate attractive overall returns. Already preferred bidder for a new musculoskeletal (MSK) contract in Greenwich, Circle seeks additional MSK contracts, has agreed an innovative entry into the Chinese healthcare market, and plans a new independent hospital in Birmingham and the introduction of medical rehabilitation services.