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Companies: ABC, AMS, AGY, ANCR, BOTB, BDRX, BVXP, 600258, C4XD, CTH, CSRT, DPH, DNL, DOTD, EKF, FARN, FISH, FUL, HZD, HCHOF, HCM, IMM, IDP, JOUL, LGT, MXCT, MEGP, CAKE, PLI, MLM, RBG, SCLP, SCS, SEE, SHOE, SYM, TSTL, VEC, VLG, VER, WJA
Shopping Trolley
by finnCap, 16 Oct
Gold Access
Best Of The Best | Fulham Shore | Hotel Chocolat Group | Innovaderma | Joules Group | Patisserie | Photo-Me International | Real Good Food | Revolution Bars Group | SCS Group | Shoe Zone
"We examine wet-led and food-led capacity across the regions and conclude that excess capacity remains in the food-led segment (although Central, Welsh and Yorkshire regions lag the national average).
Despite recent profit warnings, an increasing divergence in reported performance between pubs and restaurants, and a recent reduction in eating out frequency and spend, existing food-led operators remain too focused, in our view, on trimming estate tails and slowing rollout rather than substantial capacity reduction – and combined with smaller PE-backed concepts scaling up and landlord pragmatism, net new capacity continues to enter the market.
Given the severe cost and competitive pressures, as well as downside macro risks, we foresee more pain across the sector – in the near term expect aggressive menu price discounting to continue, leading subsequently to margin pressure and forecasting risk for listed operators and financing risk for smaller, highly leveraged private operators.
While rightsizing will happen (it did with pubs), the process may be protracted. We run the finnCap Slide Rule over the casual dining space, with our preferred pick Fulham Shore (BUY, 19p PT) scoring highest on QVGM metrics. While not immune to sector woes, Fulham Shore lacks an estate tail, should be a beneficiary of trading down and has a number of self-help levers, as well as a management team that has seen the movie (many times) before."
RhythmOne (RTHM)
H1 Trading update | N+1 Singer, 17 Oct
Gold Access
"The Company has provided an update for H1. Revenues ($112-114m guidance) are tracking slightly lower than we had been looking for with gross margin higher by 1% point (at 38%) and OPEX lower resulting in EBITDA being not far adrift from our expectation ($1.5m to $2.0m guidance).
The Company is guiding to meeting our full year $16m EBITDA expectation, in part because OPEX is expected to continue to be materially lower (US$87m for the full year). In order to meet our forecast, the Company will need to still achieve our revenue objective although we flag there is still some scope for OPEX to surprise given the continuing consolidation of the operations and acquisitions.
More cash has had to be invested in working capital (an issue in the industry at the moment) and there are some YUME acquisition-related expenses (we estimate c$3m) also impacting cash (guidance of $37m rising to $50m at year end). The Company expects some recovery in working capital in H2.
The shares have been drifting off during the YUME acquisition process. We expect the shares to recover as the process nears completion (due early 2018) and investors get confirmation the Company is tracking towards the delivery of the critical leap in profitability this year."
Bioventix (BVXP)
FY 2017 results – a year of transition ahead | finnCap, 16 Oct
Gold Access
"Full-year adjusted EPS was 7% above our expectations, driven by higher revenues, gross margins and a lower tax charge. FY 2018 is a year of transition; the need to replace revenues from the loss of its second-largest licence income stream (c.£1.0m) with existing product growth and the introduction of troponin by Siemens. We reintroduce a target price of 2,600p implying 2018 P/E of 30x falling to 26x for 2019. Despite an 11% decline in EPS in FY 2018 as it transitions the licence loss, the shares should be underpinned by free cash flow (+11%), which supports a 3.5% yield, 3.4% free cash flow yield, 46% free cash flow/capital employed and 56% ROCE. Bioventix remains a top quartile investment in the finnCap Slide Rule.
Revenues increased 31% (c.17% at constant exchange rates, CER) which resulted in 37% growth in adjusted pre-tax profits (£5.8m), given the operational gearing afforded a relatively fixed cost base. A 31p final dividend, as well as a 40p special dividend, implies a full-year dividend of 91p.
38% of revenues and growing at 31% (c.17% CER). Our forecasts factor in more modest growth in FY 2018 (8%), helped by new, albeit smaller, customer launches, underlying market growth and geographic expansion; we hope to be surprised again to the upside.
Despite a soft launch in non-US markets during May, Siemens generated no sales in FY 2017 and we adjust FY 2018 revenue forecasts to £0.3m (previous £0.4m). Other products, which accounted for 47% of revenues (+35% or 20% CER), are pencilled in for 7% CER growth in 2018.
Despite a soft launch in non-US markets during May, Siemens generated no sales in FY 2017 and we adjust FY 2018 revenue forecasts to £0.3m (previous £0.4m). Other products, which accounted for 47% of revenues (+35% or 20% CER), are pencilled in for 7% CER growth in 2018.
The shares are currently trading on an FY 2018 P/E of 32.2x, falling to 28.1x and are no longer considered cheap, having appreciated 146% over the past 12 months on the back of earnings upgrades. We forecast 2-year CAGR of c.7% However, other valuation metrics (cash flow yield, ROCE and FCF/ROCE) place the company in the top quartile of finnCap’s Slide Rule."
Tristel (TSTL)
FY 2017 results – RoW now dominates | finnCap, 19 Oct
Gold Access
"FY results were marginally ahead of July’s trading update, boosted by FX tailwinds and stronger-than-expected gross margins. Revenue growth of 19% was driven by overseas markets (+42%), despite intentional declines in non-ClO2 chemistry-based products. We make only minor changes to our FY 2018 forecasts, with EPS 2% higher than previously forecast and representing c.2% growth (+10% if adjusted for 2017 lower tax charge) during a period of higher investment ahead of the US launch expected in FY 2019. We re-introduce a target price of 275p, underpinned by a DCF analysis, which depends on the timing and success of the company’s entry into the US market.
FY 2017 results include revenues of £20.3m (+19% or 7%, ex-acquisition CER), adjusted EBITDA of £5.3m (+24%) and adjusted EPS of 8.1p (+27%). A final dividend of 2.63p (+20%) has been declared. The total dividend for the year was 4.03p, which represented a 21% increase over the 3.33p ordinary dividend but excludes the 3.0p special dividend declared in FY 2016.
International accounted for 51% of group revenues in H2 2017, growing at 42%. ClO2 chemistry is used in 82% of group product revenues (+24%), up from 78%.
The company is on track to launch its first products into the US market, pending EPA clearance which, albeit delayed by c.5 months, is expected in FY 2019. We include only nominal sales in our FY 2019 forecasts given the uncertainty over the actual launch timetable.
We have made only minor changes to our FY 2018 forecasts, increasing adjusted pre-tax profits and EPS by 1% and 2%, respectively. We introduce forecasts for FY 2019, in which we estimate 12% revenue growth (within stated 10-15% stated objective), which should drive a c.19% increase in adjusted EPS.
The stock trades at a 2018 P/E of 36.0x dropping to 31.7x for 2019. We introduce a target price of 275p which, in our opinion, better reflects the near-term outlook although we accept that forecasts could rise as a result of higher international performance and gross margins. At this level, the stock trades at a 2018 P/E of 32.2x, falling to 28.4x in FY 2019 but supported by rising ROCE and FCF/Capital Employed."
Seeing Machines (SEE)
Guidance for sales trebling despite cash constraints | finnCap, 17 Oct
Gold Access
"The trading update notes an A$200m pipeline of opportunities; however, prudent resource constraints have forced a slowdown in spending on the Fleet business roll-out with a knock-on impact on this year’s revenue and losses. Since the sale of the Off-Road business to Caterpillar, Fleet is the main revenue-driving division. On the back of this update, we are easing our Fleet - and therefore group - revenue and earnings forecasts for FY 2018 and FY 2019. Nevertheless, Seeing Machines is still demonstrating extremely strong sales growth, issuing guidance that it expects to more than treble revenue this year from A$13m to around A$40m, and then double this again in the year to June 2019 at c.A$80m. By then, OEM Automotive, Rail and Aerospace divisions should all be making strong sales contributions to augment the Fleet division growth.
The recurring telematics-type Fleet contracts, together with the advance multi-year contracts in Automotive, should give increasing revenue visibility as the roll-out progresses. On current spending, the company anticipates FY 2018 revenues trebling to between A$38m to A$43m and doubling that again for FY 2019 to A$78m to A$88m.
Near-term driven by Fleet with c.A$200m pipeline of opportunities, notably in large US fleets; new opportunities in EMEA; distribution partners in APAC; and global Telematics partners such Mix Telematics and GeoTab.
The first Cadillacs using FOVIO to enable the first handsfree semi-autonomous capability are on US roads. A growing ecosystem of Tier-1 automotive suppliers will take it worldwide; there is “a relentless drumbeat of interest and demand” accelerated by Euro NCAP rating requirements."
PG:GP – Issue 5
by Panmure Gordon & Co, 18 Oct
Gold Access
Abcam | Advanced Medical Solutions Group | Allergy Therapeutics | Animalcare Group | BTG | C4X Discovery | CareTech | Consort Medical | Dechra Pharmaceuticals | Diurnal Group | EKF Diagnostics Holding | Faron Pharmaceuticals Oy | Horizon Discovery Group | Hutchison China Meditech | ImmuPharma | MaxCyte | Midatech Pharma | ProMetic Life Sciences | Scancell | Vectura Group | Venture Life Group | Vernalis
"The next 9 months is due to be a strong period for UK life science company news in the biopharma space, with multiple significant trial readouts or regulatory decisions across 14 different companies (See page 9). Given the tendency for shares to rise on the anticipation of clinical results, we expect the strong performance seen in the biopharma subsector in the last month to continue. Many of the negative factors seen in recent quarters, including ACA repeal in the US and drug pricing, are easing or becoming of less concern, reducing the headwind to performance. In addition, an improving regulatory environment in both the US and China should aid drug progress. Hence, we upgrade our sector stance to POSITIVE.
Allergy Therapeutics (BUY, TP 53p) – strong continued trajectory in both commercial and pipeline development; CareTech (BUY, TP 470p) – anticipation of further earnings enhancing acquisitions; Faron (BUY, TP 717p) – Phase III trial readout expected at turn of the year; Hutchison China MediTech (BUY, 5200p) fruquintinib regulatory momentum and potential pathway towards breakthrough designation for its savolitinib combination therapies in lung cancer.
The UK healthcare market showed a strong end to the third quarter, rising 6.9% over the past 3 months compared to the All Share at 2.5%. The strong performance was primarily driven by biopharma stocks. In the US the NASDAQ Biotech Index has reached its highest point since July, increasing 6.5% over the past 3 months. The strong performance is giving an improved funding environment in both markets. Although the UK remains slow for IPOs, secondary activity is ahead of that seen in 2016 by a number of transactions, with median deal size comparable.
A new era of medicine is becoming reality with three events over the last quarter heralding major steps towards commercialisation of new areas of medicine. The approval of the first CAR-T immunotherapy product (Kymriah, Novartis), a positive FDA advisory committee for the first US gene therapy (Luxturna, Spark Therapeutics) and first positive Phase III data for a RNAi product (patrisiran, Alnylam). Each product is ground-breaking in its area. Each technology has application across a wide range of indications and as such we expect new momentum in drug development."
Uncovered Gems - Speed Dating Lunch - Four more gems revealed
by N+1 Singer, 18 Oct
Gold Access
Fishing Republic | Lighthouse Group | Symphony Environmental Technologies
"In our fifth lunch in this popular format, we were pleased to welcome last Friday the
management teams of Creightons, Fishing Republic, Lighthouse Group and
Symphony Environmental – four companies we deem to be less well-known than
they deserve. Each company gave a ten-minute overview of its business and the
investment case and we had quick-fire Q&A from a group of fund managers. Below
we summarise our thoughts on each company, with more details inside, plus we
include the slides presented by each management team. All four companies have
very interesting potential and we are happy to arrange further contact.
Creightons
The group has developed and produced a range of leading haircare, skincare, beauty
and fragrance products and has ambitious plans to double turnover to £60m by 2020.
Creightons has 3 business segments, 1) Brands (owned or licensed), 2) Private Label (full
service), and 3) Contract Manufacturing (for a range of aspirational and global brands).
Fishing Republic
A fast-growing play on the highly fragmented fishing tackle market and the largest
participation sport in the UK. Management is very experienced and the recent rollout in
both physical space (5 stores added in H1) and online is very impressive. Consolidation
potential in this market offers significant growth as well.
Lighthouse Group
Providing financial and wealth advice to “middle Britain” and with impressive affinity
partnerships (including the two largest unions), Lighthouse Group trades on a modest
multiple for a debt-free company with a solid track record of recent growth.
Symphony Environmental Technologies
Symphony develops and commercialises additives and masterbatches which are used
to transform the quality of manufactured plastic products. The most significant product
currently is d2w, which makes plastic biodegradable, and the group has other interesting technologies in development that in due course could all be huge markets."
Nudge, nudge, Nobel prize for a small cap fan!
by Stockdale, 17 Oct
Gold Access
APC Technology Group | Braemar Shipping Services | James Cropper | ECSC Group | EU Supply | FDM Group | GetBusy | Private & Commercial Finance Group | ProPhotonix | Synectics | Sprue Aegis | SQS Software Quality Systems | Tricorn Group | Warpaint London
"Further evidence that the shrewder investor prefers a smaller company, the Nobel Prize in Economics was awarded to Professor Thaler, an avowed fan of the smaller brethren. Back down to earth, all markets continue to make headway, with the smaller company indices continuing to lead the way. Despite the apparent deadlock in the Brexit process, life appears to carry on. The MPC meeting on 2 November and the Budget on 22 November may offer greater insight. In Share News & Views, we comment on recent updates from Cropper*, Halstead, Norcros, Tricorn* Walker Greenbank and Wincanton.
Last week, the Nobel Prize in Economic Sciences was awarded to Professor Richard Thaler best known for his teachings on behavioural economics and “nudge theory”, which bridges the gap between economics and psychology. Nudge theory helps to explain how small interventions can encourage individuals to make different decisions and/or less rational decisions. It is worth noting that Thaler is an adviser to two specialist US funds which seek to capitalise on value opportunities stemming from behavioural biases, seeking long-term capital appreciation in small-cap stocks. These funds look for companies with significant insider buying and share buybacks as indicators of future return potential, following an underperformance in the stock price. They also look to exploit an overreaction to bad news or underreaction to good news. Both funds have outperformed both their peer group and benchmark over the last five years by some margin. In a case of follow the money - Thaler said he would try and spend the $1m prize as irrationally as possible! In our view, he could do a lot worse than invest the money into similarly focused small-cap funds in the UK.
As all the major market indices continue to trade at near-term high, it is worth considering where the smaller companies indices stand. The majority of them continue to outperform. While the company reporting season peaked in the last two weeks of September updates will continue through the final quarter. The majority to date have been in line, although we have seen some companies disappoint recently. The key question is will markets continue to climb the “wall of worry” as the number of worries mount. "
Dotdigital Group (DOTD)
H2 growth acceleration; M&A in focus | N+1 Singer, 17 Oct
Gold Access
"With its exposure to a structural growth market, a highly recurring business model, consistent strong execution, healthy balance sheet and potential new avenues for growth, we believe Dotdigital remains a core holding in the sector. It offers investors an attractive compounding growth stock with the potential for accelerated growth as it expands internationally and increasing prospects for M&A. The FY results (19% sales growth, 27% EBITDA growth and 32% EPS growth) showed another year of strong execution, with the H2 growth acceleration particularly pleasing. We remain confident of the group’s prospects.
Total revenue came in at £32.0m up 19% yo-y and implying an acceleration of growth in H2 of 21% vs. 17% in H1. EBITDA grew by 27% to £10.1m, demonstrating the inherent operational gearing in the business. Cash balance (no debt) grew to £20.4m, up from £17.2m in FY’16, with operating cash conversion of EBITDA of 87%. The Board has proposed a DPS of 0.55 pence per share, up 28% y-o-y, underscoring its confidence.
Dotdigital trades on cal’18 EV/EBITDA of 13.9x, P/E of 23.6x and an ex-cash P/E of 20.4x. This is in the context of a forecast EPS CAGR of 23% (all organic) for the 3 years to June 2019. As such, we believe these multiples are attractive and that the shares will continue to grow into its rating. The added potential of accelerated growth through M&A is also highly appealing."
ESERVGLOBAL (ESV)
It’s now ‘when’ not ‘if’ for HomeSend | finnCap, 20 Oct
Gold Access
"HomeSend, eServGlobal’s JV with Mastercard and BICS of Belgium, has always represented a very exciting prospect. With the backing of the giant credit-card agency, it stood a good chance of securing a significant share of the US$600bn global remittance market. With a relatively minimal cost base, the transaction volumes from even a tiny share would have delivered US$100m in earnings for eServGlobal’s 35% stake – and Mastercard’s 26% of the global credit-card market suggested a far greater share was possible. Now, after recent announcements, we realise: firstly, that the applicable market size was woefully underestimated; secondly, that its share will not be tiny but significant; and thirdly, that success for HomeSend is becoming a certainty. On the contracts already signed, HomeSend will generate revenue and profits of hundreds of millions of dollars; it is now simply a matter of when its transaction corridors go live and the commission streams ramp up. We understand that that, too, will be faster than thought.
£24m fundraising at 9p: HomeSend needs cash to scale up to meet demand and it is vital that eServGlobal maintains its share rather than being diluted by Mastercard. It is, therefore, raising funds and there is thus an opportunity for investors to gain greater exposure to this remarkable scenario. Furthermore, eServGlobal will use the fundraising to pay down its punitive debt and strengthen its balance sheet. It will also provide working capital in restructuring PayMobile.
HomeSend forecasts are striking. Exactly how quickly the flows might scale up over the next two years is difficult to say, but by FY 2023 a conservative estimate is that HomeSend will be seeing growing annual revenues of almost US$200m on a fixed-cost base of under US$20m, with eServGlobal holding a 35% stake.
The core PayMobile business bears limited consideration in relation to the HomeSend investment; however, we are confident that despite its continued poor trading, its cash costs have been significantly reduced and it does not impugn the HomeSend opportunity and may have M&A value from FY 2018.
Valuation: We no longer see risk in the HomeSend model; the contracts are signed and Mastercard will ensure execution. Questions on how eServGlobal receives value and the relationship with Mastercard suggest that an offer from the latter might represent the true valuation; this prospect drives our 20p TP."
