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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

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

14 Nov 18

Good Q3 results above our and consensus expectations

Pre-tax profit increased by 24% to €563m for Q3 18 compared to Q3 17. Net interest income rose by 5% to €856m in Q3 18 compared to Q3 17, while risk provisions were down by 69% to €28m. Commission income was up by 6% to €455m for Q3 18. The trading result was a profit of €4m for Q3 18 compared to a loss of €1m for Q3 17. Operating income increased by 5% to €1.33bn for Q3 18 compared to Q3 17. Administrative expenses rose by 3% to €734m in the same period. The tax ratio decreased slightly from 21.5% for Q3 17 to 19.7% for Q3 18. Profit after tax and minority interests rose by 30% to €417m for Q3 18 compared to Q3 17. RoE was 14.4% for 9M 18 compared to 13.3% for 9M 17. The RoE target of RBI is 11% for the coming years. The common equity ratio 1 (CET1) under Basel 3 fully-loaded was 12.8% at the end of September 2018.

Companies: Raiffeisen Bank International

14 Nov 18

Car deliveries +1.7% in October

Last month’s number almost reached 201k which brought the ytd number to 2.04m, an increase of 1.3%. To reach our full-year projection, deliveries have to increase by 1.0% to 459k in the months of November and December which seems realistic. Delivery growth accelerated somewhat in Europe (+2.6% to 88k in October and +0.2% to 904k ytd) but the number fell in the Americas (-1.6% to 35k and +2.5% to 370k ytd). They were also down in China when we exclude deliveries of the BBA joint-venture (-12% to 15.3k and -16% to 146k). The joint-venture increased its deliveries strongly (+24% to 41k and +18% to 370k). However, profits from these latter deliveries will only be reported on an at-equity basis, except for the components imported by BMW into China. The Mini brand increased deliveries by 2.1% to 29.4k in the last month and the BMW brand by 1.6% to 171k. The respective 9M numbers were -1.6% to 295k and +1.8% to 1.74m. Excluding the cars delivered by BBA, the BMW brand’s deliveries fell by 4% to 130k in October and by 1.8% to 1.37m ytd.

Companies: Bayerische Motoren Werke

14 Nov 18

JPJ Group plc - Strong figures despite headwinds

Despite the deluge of negative news across the UK gaming sector, JPJ Group plc (JPJ) has produced another strong quarter, with gaming revenue growth of 8% to £77.8m and an EBITDA margin of 37%. The strategy to expand beyond the UK is clearly paying off; Vera&John revenues increased 40% and international now represents 44% of total revenues. Net debt is reducing rapidly, helped by Q318 operating cash flow of £33m, as well as the £18m cash from the disposal of the social business, and we anticipate dividends from next year. JPJ shares have fallen by c 30% ytd June and now trade at only 5.2x P/E, 7.0x EV/EBITDA and 16.6% free cash flow yield for FY19e.

Companies: JPJ Group

14 Nov 18

Cenkos: Dods Group Plc - Restructuring nearing completion

Dods' interim results guide to its performance being in-line with our forecasts as the Group nears completion of a multi-year restructuring programme. In our view, the restructured group will position the company to achieve its ambitious growth strategy. We believe that the current stock price does not fully factor in the growth prospects and offers value on a FY19E EV/EBITDA of 6.7x. Buy

Companies: Dods Group

14 Nov 18

Reasonable 9M numbers, but some margins were down

Salzgitter’s 9M numbers were just ahead of our expectations. Revenue increased by 1.7% to €6.93bn, EBIT by 42% to €332m, and pre-tax earnings by 63% to €285m. Our respective numbers had been €6.89bn, €318m, and €265m.

Companies: Salzgitter

14 Nov 18

Morning Note – 14 November 2018

Companies: COG LGT MPM

14 Nov 18

Marshall Motor Holdings - Trading Update

14 Nov 18

LIBERUM: Workspace Group* - Strong first half growth

Workspace’s first half results confirm good LFL growth enhanced by strong demand at newly completed refurbishment and redevelopments. NAV +3.7% to 1075p was 1% ahead of our forecast, with earnings +13% and 9% ahead of our forecast.

Companies: Workspace Group

14 Nov 18

LIBERUM: Equiniti* - Trading update to confirm virtues of the model

We expect next week’s trading update to confirm virtues of Equiniti’s model. Its resilient Registration business combined with attractive high margin ancillary revenue streams should help the group deliver 5% organic revenue growth in FY18, despite the challenging environment.

Companies: Equiniti Group

14 Nov 18

LIBERUM: Speedy Hire* - Delivering on multiple fronts

A strong set of 1H19 results provide evidence that the group continues to deliver on its strategic aims. Improving asset utilisation and significant share gains with SME clients suggest an encouraging outlook.

Companies: Speedy Hire

14 Nov 18

Robust 9M trading, supported by organic growth in all divisions

EDF released a robust set of Q3 trading figures, fully in line with our forecasts. The group’s top line increased by 5.3% organically, driven by higher output in both the historical French division and in the renewables segment. The group confirmed all its 2018 financial objectives.

Companies: Electricite de France

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

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

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