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Companies: ACRL, RBG, SQS, SUR, TET, XPP

Revolution Bars Group (RBG)

Deltic proposal warrants consideration | finnCap, 6 Oct 

Gold Access


"In the absence of a cash element to the offer from Deltic, we think that investors will choose the (undervalued) certainty of 203p in cash from Stonegate under current market conditions.


Our initial analysis of Deltic’s merger proposal implies a valuation of 286p per share. In effect, RBG shareholders are being offered 65% of the combined entity for 53% of the combined EBITDA. Optically, this looks attractive relative to Stonegate’s 203p all-cash offer. We think that the proposed synergies relating to the merger (being verifiable) are by their nature conservative in quantum and timing, and more focus (e.g. around bar opening costs) could give further upside. Revenue synergies were not quantified, whereas, in reality, the ability to capture different demographics, trade them across a wider late-night piece with the addition of RBG’s food offering could add material traffic/revenue upside. Deltic clearly wants an (easy?) way of listing, potentially using an acquisition currency to mop up other bar operators in the current environment, and RBG shareholders could become part of this bigger journey. 


First, why was there no cash offer? This could still come, although the 10 October deadline may leave insufficient time to agree on financing and convince management, and Deltic is keen to have a listing – although we think a cash element (e.g. 50:50 merger with a special dividend) could focus the mind, given repeated commentary from management around the certainty that cash offers bring. Secondly, in the current environment, investors will need to take a view on what multiple an operator concentrated into a particular (late night) segment of the market should trade on versus a more diversified operator across a wide variety of formats from community and high-street pubs through branded bars to country inns and late-night venues. Intuition suggests that diversification prevails in weaker cycles. Wet-led venues are generally back in vogue but we have seen some slippage recently from GNK and MAB. Countering that, significant late-night capacity has come out of the market over the last decade and supply is more aligned to demand. Either way, with RBG’s share price having drifted back yesterday, and a cash underpin limiting the downside, we would expect to see renewed buying given that expectations may have shifted back to Stonegate raising its offer."


Accrol Group (ACRL)

Share suspension, forecasts and recommendation under review | Liberum, 5 Oct

Gold Access


"In a very disappointing and rather unforeseen set of circumstances, we are putting our forecasts and recommendation under review. The shares have been suspended pending funding discussions with the company's lenders. We will update our views and forecasts as and when there is greater clarity.


A number of factors have combined:


1. Input cost pressures higher than expected: In particular, there has been a continuous and material rise in parent reel prices. At this stage, this trend may continue for the foreseeable future.

2. Lack of pricing power: The group has been unable to increase prices to the extent we had hoped and this causes downward pressure on FY expectations.

3. Inefficiencies in labour and wastage: Accrol has incurred higher than anticipated costs in relation to the operational changes associated with preparing the business for growth. While these changes should deliver improved performance over the longer term with the addition of new lines, this is clearly a very disappointing outcome.

4. Potential fine re Health and Safety incident: An accident in May 2016 may now result in a significant fine being imposed by the Health and Safety Executive (HSE). This would have a further negative impact on the net debt position at the end of the year if it materialises.


Outlook is now unclear hence we place our forecasts under review: “Based on current market conditions, the Board now anticipates that earnings will be significantly below existing market forecasts for the current financial year, and as a consequence net debt will be correspondingly higher at year-end”.


It is now expected that net debt will be materially higher than expected and as such the shares have been suspended as the Group hold discussions with their lenders about funding requirements."



Treatt (TET)

A full year Treat(t) | Edison, 3 Oct 

Free Access


"Treatt has had yet another outstanding year, continuously exceeding expectations and meeting its 2020 strategic objectives three years early. The board has already approved a plan to drive the business through to 2022 that seeks to build on this success. We raise our EPS forecasts by 3% in FY17 to reflect the strong performance, though our FY18 and FY19 EPS estimates fall by 1-7% due to higher interest costs. Our DCF-derived fair value increases to 522p from 438p, which represents c 10% upside.

FY17 has been an impressive year for the company, with three separate upgrades to guidance. The growth rate achieved in FY17 (c 24% revenue growth, as per guidance) will be hard to replicate and should not be considered the new norm, but it does demonstrate the company is successfully embracing the sweet spot in flavour ingredients. Our net debt figures rise as working capital requirements are increasing (due to the impressive sales growth and also an increase in raw material prices). We now forecast £11m at end FY17, in line with guidance of £11-13m. We continue to base our assumptions on the expectation that both the UK relocation and the US expansion costs – which are progressing as planned – will be debt-funded, but acknowledge that management has not ruled out raising equity. 

Growth in the ingredients space remains higher than average for the consumer sector as consumers demand cleaner labels and healthier products but will not compromise on taste; this requires specialist ingredients. Margins are also typically high at the value-added end. Treatt’s ingredient solutions are used both by food ingredients companies in their formulations and by food and beverages companies directly. Treatt has placed particular emphasis on the beverages space and is becoming increasingly specialised in citrus, tea and sugar reduction. 

We value Treatt using a DCF model. We have rolled forward our model to commence in 2018, which, together with the increases to our operating forecasts, indicates a fair value of 522p (previously 438p), an attractive c 10% upside to the current share price. Treatt trades at 25x and 16.1x calendar P/E and EV/EBITDA multiples for 2018, representing discounts of c 9% and 22% to its ingredients peer group, respectively. Given the current growth trajectory of the business, and our forecast for low double-digit CAGR EPS for 2016-20, we believe this level of discount is unwarranted."


Lakehouse (LAKE)

Orchard sale sharpens focus and cuts debt | Stockdale, 2 Oct 

Gold Access


"Lakehouse has announced the disposal of its profitable, but non-core Orchard energy consultancy, which we believe has the benefits of further focusing the group and significantly cutting net debt. It has reiterated FY17 guidance. Our forecasts for FY18 and FY19, by implication, need to be cut to reflect the disposal of the Orchard, which contributed £2.5m to PBT in FY16. The trading statement also announces a number of encouraging contract awards. We retain our Buy recommendation and 75p target price.

Lakehouse is to sell Orchard to World Fuel Services (Europe), for £12.4m cash, representing an estimated gain on the book value of £5m. A further sum of £1.9m will be held in escrow against potential claims, to be released equally on the first and second anniversaries of completion. Orchard advises companies on managing their energy costs, particularly procurement and usage. The disposal will allow the Group to focus on its operatives-focused activities within its Compliance and Energy Services divisions and this, and better cash flow cuts our estimated YE18 net debt from £22m to £8m.

The statement confirms guidance for FY17: “As expected, we still have to manage the year-end legacy contract closure processes, but expect trading to remain in line with the Board’s expectations. Cash performance from trading in the second half was ahead of expectations, with a consequential benefit to net debt”. We have cut EBITA by £2.6m and £2.8m respectively, due to the disposal but have reduced interest by £0.5m for both years to reflect the proceeds. EBITDA goes down by the same amounts to £10.8m and £13.3m. 

Aberdeenshire Council has appointed the Energy Services division to a housing framework generating sales of up to £44m over four years. Services will include external upgrades, internal refurbishments, domestic heating programmes and renewable energy installations. The division has also won its first contract under the Excel energy efficiency framework, with a £4m award from Renfrewshire Council. The Compliance division has secured contract wins with Homes For Haringey, Yorkshire Housing Association and Sanctuary Housing. Construction has secured a number of important frameworks with Orbis. Property Services has closed or downsized non-profitable operations.

On our new forecasts, the group is trading at a 2018 P/E of 8.6x, a yield of 7.0% and, factoring in the reduced debt, EV/EBITDA of 6.0x. Although we have pared back our earnings estimates, the sharply lower debt in our view improves the risk profile. We retain our Buy recommendation and 75p target price."



XP Power (XPP)

Entering the RF power supply market | Edison, 2 Oct 

Free Access


"XP has acquired Comdel, a US-based RF power supply company, for $23m/£17m. This marks the entry into a new market for XP and gives it the potential to expand the amount it sells to a sub-sector of its customer base. We have revised our forecasts to reflect both the acquisition and the strengthening pound versus the dollar. We increase our normalised EPS forecast by 1.2% in FY17 and 1.7% in FY18

XP has acquired Comdel for $23m/£17m using a new $40m revolving credit facility. The deal is on a debt free/cash free basis with no deferred or contingent elements. The management team will remain with XP and the business will operate as part of XP’s newly created RF Power division. With revenues of $16.5m/£13.0m in FY16, this adds c 10% to XP’s revenues on a pro-forma basis. 

The deal marks XP’s entry into the radio frequency (RF) power supply market – this requires engineering expertise at a much higher power range than for XP’s existing products. The acquisition will increase XP’s exposure to the semiconductor manufacturing industry – XP and Comdel have several customers in common in this market. We expect XP to target selling more to its existing semiconductor customers; Comdel also brings new customers that XP could sell to. As Comdel’s product is more specialist, we expect XP to train its sales force to take a targeted approach to sales. XP also has the potential to improve manufacturing efficiencies, with the use of its Asian facilities a consideration for new product designs. 

We have revised our forecasts to incorporate Comdel from 1 October 2017. We have also reflected the weakening dollar versus the pound in FY18 – this reduces reported revenues although has a smaller impact on profitability due to natural hedging. Our revenue forecasts increase by 2.2% in FY17 and 5.8% in FY18, with normalised EPS increasing 1.2% in FY17 and 1.7% in FY18. We forecast a swing from a net cash position of £5.7m at the end of FY17 to net debt of £12.1m. On our revised forecasts, XP is trading on 20x FY18 EPS. This is in line with its UK electronics peer group and at a premium versus international power supply peers. Cross-selling and a reduction in manufacturing costs for Comdel have the potential to provide upside to our forecasts."



The Monthly October 2017

by Hardman & Co. Provider, 2 Oct 

Gold Access


1pm | Abzena | Advanced Oncotherapy Allergy Therapeutics | Alliance Pharma | Arbuthnot Banking Group | Avacta Group | Burford Capital | Chamberlin | City Of London Investment Group Collagen Solutions Diurnal Group | Evgen Pharma | Gateley | Morses Club | Murgitroyd Group | Non-Standard Finance | Obtala | Omega Diagnostics Group | Oxford Biomedica | Premaitha Health | Primary Health Properties | Purplebricks Group | R.E.A | Real Good Food | Scancell | Sinclair Pharma | Surface Transforms | Tissue Regenix Group | ValiRx


"In the October edition of the Hardman Monthly newsletter, Chief Executive, Keith Hiscock analyses the much misunderstood – but highly important – issue of stock liquidity. In particular, he focuses on the lower echelons of the Main Market and of AIM.

The conclusions are very revealing – and very relevant to Chief Executives and Finance Directors of such companies, who fret over the apparent low market rating accorded to their company’s stock.

The introduction of the apparently obscure MiFID II in January 2018 will have far-reaching market-related consequences; 

Hardman’s analysis indicated that the commission ‘pot’ is set to plunge by up to 75%;

As such, it will broadly only be commercially viable for house brokers – or a specialise research house, like Hardman – to analyse those Main Market company’s capitalised at less than £500m;

In terms of AIM-listed stocks, the threshold, calculated by Hardman, is slightly higher – at £700m;

Consequently, Executives of every quoted company with a capitalisation below £700m need to address – as a matter of urgency – how they will respond to the expected sea change in investment research availability."



Conviction List Q4 2017

by Panmure Gordon & Co, 5 Oct 

Gold Access


Capita | CareTech | Cineworld Group | Just Energy Group | Majestic Wine | Nostrum Oil & Gas | RPC Group | Virgin Money | Xaar


"Since its inception in 2010, the Panmure Gordon Conviction List has outperformed the market, returning 278% against a Small Companies index that would have returned 232% over the same period. Our Q4 portfolio reflects our view that the UK equity market stands to benefit from a coordinated upturn in global growth. Low nominal fixed income spreads continue to provide a valuation underpin for global equities. There are increasing signs that the world’s central bankers are making a concerted effort to wean markets off near zero interest rates. However, with global debt exceeding 200% of GDP and unfavourable demographic trends, we think their chances of rapid progress are slim.


Global economic growth is experiencing its most coordinated upswing since the aftermath of the financial crisis. Despite the recent UK-specific political turbulence, UK equity returns and earnings growth have converged with those of other developed markets. We believe that investors can profit from overly negative sentiment surrounding UK equities with corporate earnings set to be resilient to Brexit-related risks. This is not to dismiss the risks of headwinds gathering strength in domestic credit markets, the risks of material frictions to EU-UK trade and ongoing weakness in UK productivity – we simply believe the near-term impact of these events will be offset by convergent business cycles and the solid fundamentals supporting household and business spending."



Cutting oil price view; remain constructive

by Panmure Gordon & Co, 4 Oct 

Gold Access


Borders & Southern Petroleum | BP | Eland Oil & Gas Faroe Petroleum | Nostrum Oil & Gas Pantheon Resources | Parkmead | Rockhopper Exploration | Royal Dutch Shell Tullow Oil | Wentworth Resources


"We remain constructive on oil prices which have recovered strongly over the summer. However, we reduce our FY17 Brent forecast to US$54/bbl (from US$60/bbl) and our prospective forecasts to US$60/bbl (from US$70/bbl) making mainly concomitant changes to our other forecasts. That results in an average reduction in our target prices of 12%, although we make no changes to our recommendations. We continue to recommend an overweight stance, although there is less upside than there was. We highlight Eland (TP 125p) and Nostrum (TP 540p) as our top picks and between the majors, we continue to prefer Shell (TP 2,500p).

In our view, the key drivers of the recovery in the oil price originate in the supply side within the context of robust demand growth and the commencement of a reasonable draw in inventory. The market has become less confident in the ability of US shale production to thrive in a sub US$50/bbl world while non-OPEC/OPEC cut compliance has been high, although the recovery in production from Nigeria and Libya leaves markets looking modestly oversupplied for 2018. 

We reduce our Brent forecast for 2017 to US$54/bbl (from US$60/bbl), incorporating the average YTD, and our medium/long term forecast to US$60/bbl (from US$70/bbl) with larger reductions to our 2017 WTI forecast, given the impact of Hurricane Harvey on spreads. 

 Incorporating our revised macro suite, together with company specific adjustments results in an average reduction in our target prices of 12%. However, we increase our target price for Eland to 125p/per share, reflecting higher production and lower costs.  

We continue to recommend an overweight stance, although there is less upside than there was. We highlight Eland (TP 125p) and Nostrum (TP 540p) as our top picks and between the majors, we continue to prefer Shell (TP 2,500p)."



SQS Software Quality Systems (SQS)

Acquisition increases presence in growth markets, enhances earnings | N+1 Singer, 6 Oct 

Gold Access


"Last Friday’s announcement of the acquisition of Double Consulting, an Italian management consulting business, highlighted SQS’s commitment towards increasing its management consulting activities, expanding its presence in higher growth markets and accelerating progress towards the stated target of 9% operating margins by FY 2019. Our revised estimates translate into EPS enhancement of c1% in FY 2017 and c5% in both FY 2018 and FY 2019. We increase our target price from 725p to 741p.


We are updating our forecasts and target price following last Friday’s announcement of the acquisition of Double Consulting at a valuation of €10.5m. Double Consulting complements SQS's existing position in the growing management consulting market, strengthens SQS's offerings in the financial services and insurance sectors (BFSI) and expands SQS’ presence in the growing Italian market. The acquisition recorded revenues of €6.63m in the year to December 2016 and is reported to be profitable at a typical level for a niche management consultancy.


We have assumed the following in updating our forecasts:


1. Double Consulting delivers revenue growth of 10% in the current year then grows at an accelerated rate of 15% per annum in FY 2018 and FY 2019, in line with our expectations for the existing Management Consulting business.

2. Double Consulting generates a gross margin of 36% (again in line with our expectations for the existing Management Consulting business), an EBITDA margin of 17.5% and an EBIT margin of 15%.


This delivers the revised estimates below, which translate into diluted adjusted EPS enhancement of c1% in FY 2017 and c5% in both FY 2018 and FY 2019. We increase our target price from 725p to 741p."



Remember, remember the 30th of November

by Stockdale, 4 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


"Without wanting the year to pass any quicker than it is, November may well turn out to be a key month. The next Bank of England Monetary Policy Committee meets on 2 November when base rates may increase for the first time in a decade; three weeks later the Chancellor of the Exchequer gives his Autumn Budget. While both these events could represent key developments for markets, not to be overlooked, is our Growth Companies Seminar on 30 November. In Share News & Views, we comment on recent results/newsfrom APC*, Braemar*, ECSC*, Helios*, Sprue*, SQS*, Verditek* and Warpaint*.

The table above shows the continued outperformance of the various smaller company indices. The progress year to date is highly creditable. We are now in the final quarter of the year, the AIM results season marathon of the last two weeks has continued with the trend of the bulk of announcements being in line with expectations, with a few exceptions. Looking at the tone of most outlook comments, most companies are broadly optimistic about the shorter-term, although concerns over the economy and the consumer remain. 

The latest IHS Markit/CIPS Manufacturing PMI survey shows that the UK manufacturing sector continued to expand in September, although the index at 55.9 was a little lower than expectations. The survey also showed both production and new orders rising above the long-term average. However, there were also signs of input price inflation. The latest Construction PMI survey index showed a sharp decline to 48.1 in September from 51.1 in the previous month. This latest reading signalled the fastest decline since July 2016. It appears that there was a sharp decline in work in the period. There were lower volumes of construction work reflected in marked falls in both commercial and civil engineering activity during September. Housebuilding was the only area to show expansion. The Services sector PMI survey is due on Wednesday. These latest findings will no doubt feature as policymakers at the Bank of England consider whether to raise interest rates."

The information contained within this post is based on personal experience and opinion and should not be considered as a recommendation to trade nor financial advice.