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Companies: ACSO, AFRN, BAR, CCT, EPWN, FUL, IQE, KWS, NXT, SSY
Keywords Studios (KWS)
Ticking every box (except valuation) | finnCap, 19 Sept
Gold Access
"Interims are in line with July’s trading update, with sales up 17% LFL and adj PBT margins robust at 15.0%, +90bps vs. 1H16. Despite this strong performance and our long-term confidence in the business, we move from Buy to Hold in view of the stock’s exceptionally strong run.
Keywords already provides services to 23 of the top 25 leading game companies globally. As such, we believe the company's principal growth opportunity is to maximise 'revenue per title' by cross/up-selling add-on services or those in different geographies. To this end (and as validation of the company’s strategy) we note a 40% increase in clients taking three or more services to 84 (out of c.400). In revenue terms, we suspect these clients represent significantly more than this 21% (84/400) by number. Cross-selling could be a reason behind the group’s accelerating growth – as rather than the divisions 'moving' independently, there is now greater positive correlation.
Art: 22%; Localisation: 23%/36% (in/ex Synthesis); Functional Testing: 70%; Audio: -25%/-10% (in/ex Synthesis); Localisation Testing: 3%; Customer Support: 57%. Despite reservations that growth in Localisation should abate (due to maturity in the ‘trend to outsource'), the evidence is to the contrary, with exceptionally strong growth being maintained y-o-y. We also flag strong performances within FT and CS – both represent material step-ups relative to prior years. The only disappointment was Audio; however, we are expecting a busier H2 and furthermore are optimistic regarding the acquisitions of La Marque Rose, Asrec and the subsidiaries Dune Media post period-end – here Keywords plans to consolidate operations and now undertake production work (not sub-contract). This model potentially offers higher margins and better quality control.
Cash generation was not strong with 58% of EBITDA converted to adj. op c/f (including MMTCs). This isn’t unusual, however, and as per FY16, we expect stronger conversion in H2 and forecast 87% conversion for the full year.
Changes reflect the aforementioned M&A post period-end (+4% sales and +2% adj. PBT) but also expansion plans announced today, meaning in the near term, margins are unlikely to materially exceed FY16 levels. "
Gold Access
"Interims are in line with July’s trading update, with sales up 17% LFL and adj PBT margins robust at 15.0%, +90bps vs. 1H16. Despite this strong performance and our long-term confidence in the business, we move from Buy to Hold in view of the stock’s exceptionally strong run.
Keywords already provides services to 23 of the top 25 leading game companies globally. As such, we believe the company's principal growth opportunity is to maximise 'revenue per title' by cross/up-selling add-on services or those in different geographies. To this end (and as validation of the company’s strategy) we note a 40% increase in clients taking three or more services to 84 (out of c.400). In revenue terms, we suspect these clients represent significantly more than this 21% (84/400) by number. Cross-selling could be a reason behind the group’s accelerating growth – as rather than the divisions 'moving' independently, there is now greater positive correlation.
Art: 22%; Localisation: 23%/36% (in/ex Synthesis); Functional Testing: 70%; Audio: -25%/-10% (in/ex Synthesis); Localisation Testing: 3%; Customer Support: 57%. Despite reservations that growth in Localisation should abate (due to maturity in the ‘trend to outsource'), the evidence is to the contrary, with exceptionally strong growth being maintained y-o-y. We also flag strong performances within FT and CS – both represent material step-ups relative to prior years. The only disappointment was Audio; however, we are expecting a busier H2 and furthermore are optimistic regarding the acquisitions of La Marque Rose, Asrec and the subsidiaries Dune Media post period-end – here Keywords plans to consolidate operations and now undertake production work (not sub-contract). This model potentially offers higher margins and better quality control.
Cash generation was not strong with 58% of EBITDA converted to adj. op c/f (including MMTCs). This isn’t unusual, however, and as per FY16, we expect stronger conversion in H2 and forecast 87% conversion for the full year.
Changes reflect the aforementioned M&A post period-end (+4% sales and +2% adj. PBT) but also expansion plans announced today, meaning in the near term, margins are unlikely to materially exceed FY16 levels. "
Character Group (CCT)
FY17 pre-close reassures; Implications of Toys "R" Us bankruptcy | Panmure Gordon & Co, 20 Sept
Gold Access
"CCT published its FY17 pre-close trading update after the close last night stating that, on the back of a solid finish to FY17, “underlying pre-tax profits…are expected to meet current market expectations”. The reassuring statement on trading and CCT’s strong financial position served as a useful context to highlight CCT’s assessment of the implications of the rapidly unfolding situation of Toys “R” Us (accounting for c8% of CCT’s total sales) which filed for Chapter 11 bankruptcy protection late Monday evening. CCT reasonably concludes that it does “not currently have reliable visibility on the important 2017 Christmas trading period and its effect” on FY18. We believe that the $3bn debtor-in-possession financing afforded to Toys "R" Us on Monday should eliminate collections risk for its toy suppliers. However, we recognise that CCT’s exposure is mainly to Toys “R” Us UK (which is not included in the bankruptcy protection) such that if credit insurance was completely withdrawn, then CCT would likely redirect uninsured Toys “R” Us-bound orders to other toy market retail operators. Such a scenario could potentially have an impact on our unchanged FY18 £14.5m PBT estimate, although we note our FY19 £15.5m PBT forecast has been convincingly further underpinned recently by a significant strengthening of CCT’s toy portfolio (e.g. Teletubbies’ licence extension, new Pokemon distributorship)
Investors should recall that the global toy industry has been growing at a low-to-mid single-digit rate consistently over the past decade or so, and therefore remains in good health. Having said that, similar to other consumer product categories, the toy industry is rapidly evolving, with new small entrants, a strong resurgence in traditional games, digital game formats, and a pronounced distribution channel shift to online etc. We think therefore that Toys "R" Us is a "leveraged buyouts can kill companies" story rather than “another death of store-based retailing” story. Having said that, we would expect that toy suppliers, including CCT, will rationally cut back their exposure to Toys "R" Us in the coming months, not least as we can imagine that Toys "R" Us will likely go through some form of store rationalisation programme."
Free Access
"Towards the end of H1 17, one of the numerous development programmes for photonics applications that IQE has been working on moved to volume production. The programme, which we infer relates to 3D sensing in the iPhone X, potentially has a transformational impact on IQE’s performance. Until there is clarity on the rate of roll-out of the new phone, however, our estimates, which are unchanged from the trading update in July, model a cautious ramp-up in IQE’s epitaxy sales. The share price is looking for performance substantially ahead of this, which our scenario analysis suggests is achievable. Importantly, even if demand for the iPhone X is muted, IQE is engaged in multiple photonics development programmes with the potential to generate transformational levels of growth.
The strong photonics growth noted since FY14 continued into H117. A 48% leap in photonics revenues and a 10% currency tailwind delivered a 12% y-o-y increase in group revenues during H117 to £70.4m. Adjusted operating profit from the wafer manufacturing operations grew by 32% to £9.6m. However, this was offset by a reduction in licence fees, which benefited from one-off upfront payments in H116, resulting in small (2%) decrease in group adjusted operating profit to £10.6m.
Importantly, part of the H117 growth is attributable to the onset of volume deliveries of VCSEL epitaxy for the iPhone X. This is in addition to continued work on a range of programmes that also have potential to become volume contracts in future. This includes VCSELs for other consumer applications such as hand and body tracking, automotive applications, data comms and industrial applications such as heating; InP (indium phosphide) wafers for high-speed data networks and GaN (gallium nitride) wafers for radio frequency and power applications. This range of applications gives potential for growth without the reliance on the handset market that has bedevilled IQE in the past.
IQE shares are trading on an FY18e P/E multiple of 36.7x which, compared to the average for our broader sample of peers (16.8x), implies an EPS of 8.8p. Our analysis (see Exhibit 5 on page 12) of the impact of a potentially faster VCSEL volume roll-out than that modelled in our current estimates indicates that this earnings run rate is achievable."
Gold Access
"While new regional openings are trading well across both brands, July/August trading softened across suburban London, driven in management’s view by a vacation exodus, poor weather impacting The Real Greek (TRG) and lower inbound tourism from the US and the Middle East. September continued this trend and, while trade has picked up in recent days, it remains below expectations. Furthermore, capacity exiting the market is encouraging management to renegotiate rents, rent-free periods and reverse premiums, with a knock-on delay on the new opening schedule.
Summer months comprise approximately half of FY sales for TRG. While Franco Manca (FM) is less seasonal, the above factors generated a double-digit reversal in LFLs amongst several units in July/August. We reduce our FY18 headline EBITDA forecast by 15% to £8.9m, split equally between the delay in new openings and soft Summer trading. Our FY19 headline EBITDA forecast reduces by 18% to £10.9m, capturing the lower FY18 base, some continuation of softer trading conditions/discounting by peers and additional overheads at TRG. FY18 adj. diluted EPS moves from 0.8p to 0.6p with FY19 from 0.9p to 0.7p, and FY18 gross debt moves from £10.7m to £12.2m and FY19 from £12.9m to £14m to fund the ongoing roll-out. Forecast net debt/headline EBITDA is 1.3x and 1.2x respectively.
While heavy discounting amongst casual dining peers (e.g. Prezzo, Pizza Express) is discouraging management from raising menu prices for now, new dishes are being introduced to raise average spend. In terms of pipeline, our current annual forecast of 15 new openings (11 FM, 4 TRG) could be subject to downward revision should capacity continue to exit the market, although those deals that do complete could be more favourable than previously expected – management recently negotiated a £250k reverse premium on one site, which significantly improves cashflow/payback. Finally, our forecasts do not include the estimated £400k of Bukowski disposal costs (although these will likely be deemed exceptional).
Price target moves from 25p to 19p, reflecting our downgrade. In the current environment, however, we prefer models that offer consistent quality, speed, convenience and value for money and Fulham Shore delivers on all of these. "
NEXT (NXT)
Mediocre H1 top line but strong cash generation | AlphaValue, 18 Sept
Gold Access
"Next’s H1 17 earnings to end July combined continued top-line erosion (-2.3%), a promise of resilient cash flow generation by January 2018 at £875m leaving plenty of dividend room (£225m current +£257m special) but a sharp drop in H1 pre-tax earnings nevertheless at -9.5% (see table).
Next does not differ from brick-based apparel retailers in their race to shift business online. The H1 figures confirm that this is a demanding exercise as the 8.3% drop in “retail” sales (the word for high street stores) is not offset by the honest but unspectacular increase in online ones (+5.7%) and even less so in real money terms (£-91m vs. £+36m ex sourcing swings).
Next insists and probably rightly so that there is not a perfect divide between the two worlds as many an online buyer will push a Next store door anyway but, on its own top-line analytics, the race is a losing one.
The management posture is about cash flow extraction from a declining business. This helps sustain a rather unique Next trait in the apparel retail hell: superior dividends. That makes sense as long as running a cash-lean firm helps push it into the right direction. Management makes the right strategic noises. The issue is that the Zaras and Zalandos never put themselves in any UK-centric strategic corner to begin with.
The odd dimension of the Next earnings was the guidance for H2 with indeed a very UK-centric comment on its dependence on the vagaries of the pound. On the Thursday, 13 September, earnings release, the comment was that the firming up pound would be less of a pain for an importer of dollar-based goods. On Friday, 14 September, the British pound reached a post-Brexit vote high on tougher talk from the BoE which lent a helpful hand to Baron Simon Wolfson. The FY pre-tax guidance to January 2018 has been raised by £7m or about 1%. The direction of travel is right but the underlying mechanisms are not exactly company-driven.
Raising the guidance does not really make any difference to our current earnings assumptions which are unchanged. Tweaking the valuation on better macro news (firming up GBP) would be a hard sell. The real issue about Next is its valuation distance from Zara which trades at 2.5x higher P/Es and half the yield. We assume that the market will not want to pay similar multiples for a cash extraction business. But it may want to buy some of the following promise “_Going forward our focus remains the delivery of design-led, high-quality clothing and homeware that is widely affordable – delivering the new trends in a way that is both exciting and wearable_”. To give management the benefit of doubt, we contracted the discount to peers from 50% to 33% which gives the target price a small nudge up. For more on the peer valuation front, one would expect Next to invest more and cut its pay-out."
Swallowfield (SWL)
Strong progress in FY17 and positive outlook | N+1 Singer, 19 Sept
Gold Access
"Full year results confirm substantial progress being made in both Manufacturing and the enlarged Owned Brand business, where Brand Architekts is delivering strong growth and profitability. In line with forecast, ‘underlying’ PBT increased by 193% and FD EPS by 82%. A positive outlook statement and confidence in future growth underpins a final dividend increase of 52%. A slightly better margin performance in FY17, and evidence Swallowfield’s increasingly differentiated products and formulation capability are resonating with existing & new clients will provide reassurance. We make no changes to forecasts which point to 370p intrinsic value.
PBT increased by 193% YoY to £5.4m on an ‘underlying’ basis before accounting for share based payments where the charge was £1.8m but this should normalise going forward. Of note was a slightly better margin performance which, alongside positive comments in the outlook statement, should be well received. This message is underpinned by a 52% increase in the final dividend to 3.5p, in line with our forecasts.
Since launching its strategy in 2014, management has continued to execute well, particularly integrating and growing Brand Architekts successfully. The group is well placed to deliver further profitable growth. Of note today is the positive effect of enhanced capability and differentiation. This is helping it to win and retain customers, especially global brand owners. This and ongoing production efficiencies underpin margin assumptions despite the backdrop
A positive outlook statement and start to the year underpins forecast assumptions. We make no change to FY18/FY19 PBT forecasts of £5.1m/£5.8m respectively. Factoring in a small recent staff share option award, FD EPS is marginally (<1%) different at 23.8p/27.2p, equating to a 2- year CAGR of 25%. Net debt is still expected to be £4m this year reducing to £1m next year as the positive impact of Brand Architekts enhances cash flow."
Accesso Technology Group (ACSO)
Post analyst meeting feedback | Whitman Howard, 20 Sept
Gold Access
"Revenue $46.6m (+17.4%), Adj EBITDA $8.7 (+33.8%), adj EBITA $6.5m (+30%) PBT $1.6m (-30.4%), Adj EPS c22.25 (+40.8%), EPS c4.96 (-32.6%). Management is pleased with the current start to the year. Revenue was perhaps a touch light which has been caused by a slightly subdued attendance in the North American due to bad weather, however, management was keen to identify that this was not represented in the profitability numbers. Queuing revenue (20% margin v ticketing 80% )was slightly lighter in North America and this was disproportionately represented in the top line numbers as one major contract is recognised in gross revenue rather than net. The Board are confident are making FY estimates and we reiterate this confidence. H2 will have the full summer trading months and the added benefit of both recent acquisitions which are progressing to plan, and the recent Village Roadshow contract win in Australia.
40 new contract wins so far this week (on par), continued x-selling ability remains. Passport: continues to be the main driver (+18% YoY) - including the NFL Experience in Times Square (beating largest US ticket operator), The CNN Studio Tour in Atlanta and The Jameson Distillery in Ireland. Merlin rollout continues, LEGOLAND Japan open, more locations in China imminent. Mobile now 50% (5 years ago 3%). Siriusware: largest ever contract in H1, also notable contract win at Niagara Falls X-sell between Siriusware & Passport. ShoWare: continued new business momentum with new venues secured in the period located in US, Mexico, Columbia, Canada and Brazil. Integration and sale with Ingresso. LoQueue: as mentioned challenging in North America but new product Prism going v well. A major customer is commencing efforts to replace its entire Qbot estate with Accesso Prism. Integration of acquisitions performing well (integration and sales made) and benefit likely to be experienced in H2. Ingresso volumes up 48.2% year-on-year for the period since acquisition with ShoWare and Passport customers already migrating onto its platform. TE2 offers highly-personalised software solutions to improve guest experience before, during and after a site-visit and enables real end-to-end interaction. We retain our positive stance on both acquisitions. As ACSO continues to enter new markets revenues diversify which reduces reliance on the North American theme park sector (- European volumes now 14.6% and importantly Asia-Pacific 2.8% v 2016: 0.1% )."
Epwin Group (EPWN)
Dividend focus | Edison, 21 Sept
Free Access
"Respectable H1 trading has been partly overshadowed by ownership changes for two large customers triggering estimate reductions. Given the step down in expected earnings, investors may focus more on the 8.7% dividend yield and, based on the current financial position and our cash flow projections, we believe this level of payout to be sustainable.
First-half revenue was up 4.6% including an increased National Plastics contribution and broadly flat for the existing businesses, with ongoing variability in market conditions and business unit performance. Higher input costs – affecting both divisions – were only partially recovered in the period, resulting in an 80bp EBIT margin reduction (to 7.4%) and a 5.9% group EBIT decline. Epwin’s cash profile was consistent with historical seasonal patterns with period-end debt at £28.2m. This said, the flagged bad debt provision (£3.9m for Entu) and expected costs of site rationalisation actions (c £2.5m) will restrict the usual H2 flow back to below normal levels in our view. Management confidence in the longer-term business outlook was reflected in a 1.4% dividend increase on what is already an attractive payout level.
The 16 August trading update (see our August update note) highlighted potential issues with Epwin’s two largest customers (both now under a change of ownership since Entu’s trade and assets were bought out of administration). How the trading relationships settle down remains to be seen, but we now assume a large reduction in revenue and profitability from these sources. Separate actions being taken to reduce the cost base and increase efficiency will partly mitigate the impact; our FY17 EPS FD is now c 7% lower than previously published levels, with annualised effects more apparent in the c 18% reductions in FY18 and FY19. Existing dividend expectations are largely unchanged, although we have tweaked down FY19. Our end-FY17 net debt projection is now c £26m (or 0.85x EBITDA for the year) and interest cover is in the order of 19x. We see net debt and its EBITDA multiple declining in FY18 with a similar interest cover, despite lower earnings.
P/E and EBITDA multiples are firmly in single-digit territory. With profitability set to step down temporarily, the 8.7% prospective dividend yield will be a key attraction. Unsurprisingly, cover ratios are lower (between 1.5x and 1.8x on an earnings basis) but the group’s financial position and future cash profile suggest to us that this level of payout can be sustained while the company rebuilds its earnings profile. "
Amino Technologies (AMO)
German Contract Win | N+1 Singer, 18 Sept
Gold Access
"Amino has announced that it has been chosen by Deutsche Glasfaser, the largest provider of FTTH networks in Germany, to support the second phase rollout of its next-generation TV platform. This win comes hot on the heels of last week’s announcement that Amino is providing Finland-based operator DNA with mobile and set-top box service
delivery for its multiscreen TV. The wins give us confidence that the good momentum shown in H1’17 has continued into the traditionally stronger second half. Notwithstanding recent FX moves, we believe the group is well placed to meet our full-year expectations and, trading on an undemanding Nov’17 EV/EBITDA of 9.5x, believe the shares remain attractive.
Deutsche Glasfaser, which provides greenfield fibre-to-the-home (FTTH) services across Germany, is working with Amino to support the next stage of the deployment of its end-to-end TV platform, DGTV. Following an initial launch of the platform in 2014, Deutsche Glasfaser has selected Amino to complement its existing platform, which is deployed as part of its triple-play bundle offering, and also as a white-labelled offering to wholesale customers, including ISPs and cable operators.
The deployment is another example of Amino’s software-driven strategy aligning with market demands, with the new Amino ENABLE ‘transformation software layer’ being a key deciding factor in the contract award. We continue to believe that Amino’s end-to-end solutions mean that it is very well placed to take advantage of evolving consumer viewing habits.
We are not making any changes to our forecasts on the back of this announcement. After a strong first half Amino appears to be well placed to meet our full-year forecasts, with momentum continuing into the traditionally stronger second half. We note however that recent FX moves will likely result in a slight headwind for the remainder of the year. Trading on an undemanding Nov’17 EV/EBITDA of 9.5x, we believe the shares remain attractive."
Scisys (SSY)
ANNOVA’s success underpins a strong H1 | finnCap, 21 Sept
Gold Access
"A strong set of interims leaves the company comfortably positioned to deliver at the higher end of expectations for FY 2017. Assisted by six months of ANNOVA, acquired in December, H1 revenue grew 22% YoY (and 6% organic) to a record £27.2m. This delivered adj. PBT of £0.9m, down 12% on H1 2016 due to the increased interest from the acquisition loan. We are lifting our revenue expectation from £53.4m to £54.0m. SCISYS profits are traditionally H2-weighted, so we continue to expect it to deliver adj. PBT of £4.0m for 2017 thanks to the exceptional £64m order book and several large new contracts. We reiterate our 155p target price.
Rapid organic growth is hard for a technology services business, so the boost to group revenue from a strong six months of ANNOVA is notable. It has commenced the roll-out of its flagship OpenMedia solution across the BBC regions, as well as achieving similar success in Canada and Germany. The underlying 6% organic growth was predominantly powered by additional pass-through sales as well as the performance of the Space division, whilst some ESD and Media & Broadcast division contracts have slipped into H2, boosting the order book to £64m in June and underpinning management confidence in the second half and a very good FY 2017 overall. We lift our FY sales forecast slightly in response. H1 margins were a little weak on that slippage in ESD and in particular Media & Broadcast, but margins and earnings are usually H2-weighted and will be higher than usual this year due to ANNOVA’s own natural H2 bias.
The usual excellent working capital management and cash conversion delivered £1.5m FCF from £1.6m adj. EBITDA. This helped to reduce net debt from £10.2m post the acquisition to £9.1m in June. Management has sufficient confidence to raise the interim dividend by 11% to 0.59p, in line with our FY expectation of a 10% hike to 2.16p, or 2.2% yield.
Reiterating 155p target price, based on a multiple of 15x FY 2017 earnings. The finnCap Next50 index is trading on an FY 2017 P/E multiple of 20x but is projecting a stronger organic growth rate than services-based companies. "