See what was trending this week...
Companies: AVG, D4T4, DOTD, ERGO, FEN, HUR, IDE, LOOP, CAKE, PHTM, RFX, SOG, SUN, TEF, TRAK, TET, WAND, YU/
by N+1 Singer, 30 Nov
"Since April, our growth style screen has performed very strongly, outperforming the main small-cap index by 20pp and 24pp on an unweighted and weighted basis respectively, also comfortably outpacing microcap. In this note, we provide more detail on the constituent and basket performance in the period and present the new screen constituents. As usual, we focus on 10 of the current constituents, providing brief summaries and financials for clients to consider. We will refresh again in 5-6 months time and report back on performance.
First refresh since we changed emphasis to forecast growth
We have refreshed our growth style screen for the first time since we changed the selection criteria on 4 April 2017. At that point, we moved to focus much more on forecast growth rates compared to the previous greater emphasis on historic growth. The screening criteria were applied as at the close of business on 28 November 2017 in order to select 25 stocks from our universe of some 500 stocks. In this way, we seek to screen in the 5% of our universe with the highest forecast growth rates.
Very strong performance in the period since last selection
On a weighted basis, the screen outperformed the main small-cap index and the microcap index by over 24pp and 17pp respectively. On an unweighted basis, the screen outperformed small-cap by 20pp and microcap by almost 13pp. Our focus stocks outperformed small-cap by a modest 320bps and underperformed microcap. Notable performances from our focus stocks came from LoopUp (Not Rated, up 80%),
dotDigital (Corporate, up 40%) and Eckoh (Corporate, up 24%). We discuss the performance in more detail on pages 2-3.
Screening criteria enhanced
We select growth style screen constituents according to a combination of consensus forecast growth rates in a number of data points. We are happy to share the detail of these selection criteria with our clients on request. We had to lift the required growth rates compared to last April in order to select only 25 stocks, as there appears to be “more growth around” currently.
New growth style screen + 10 fast-growing focus stocks to consider
We set out the new list of constituents on page 4 and list the 16 leavers and joiners resulting from the refresh. We highlight where new constituents also appear in our other style screens. As usual, we have focussed on 10 stocks of which 6 are new, namely Avingtrans, CORETX, StatPro, Surgical Innovations, Telford Homes and Yü Group. Brief investment summaries and financials on our 10 focus stocks are set out on pages 6-10."
Phasing set to stun | finnCap, 28 Nov
"The H1 results will come as a shock to investors; however, unusual contract phasing is causing extreme H2 weighting (20:80) in FY 2018 and – consistent with company guidance – we are maintaining our forecasts. A large number of major contracts are expected to be both signed and delivered during H2, giving D4t4 remarkable confidence in what would be a stunning second-half performance (in excess of FY 2017) to deliver expectations. The surprisingly weak H1 leaves £18.5m revenue and £5.1m adj. PBT required in H2, compared with £7.6m and £2.1m respectively LY. We believe significant sales have already been signed, and D4t4 has 14 major contracts in the final stages of agreement, the majority with existing customers. Booking c.80% of them over the next four months will see it deliver on expectations, and confidence is underlined by a 13% rise in the interim dividend to 0.625p.
Revenue fell 53% YoY to £4.7m due to a lack of Project work (down 76% to £1.5m) and Licence sales (down 40% to £0.9m) in H1, while Recurring Revenue was flat at £2.4m. The reduced licences saw a weak 44% GM (52% LY) and a 61% fall in GP to £2.1m. Overhead costs were cut 21% to £2.5m and that delivered a £0.4m adj. LBT compared with PBT of £2.1m LY. Cash flow was good; just £0.3m outflow from ops and £0.2m capex adding to a £0.6m final dividend payment to reduce net cash from £5.1m to £3.9m. D4t4 remains well funded and asset backed (£2.2m property on the balance sheet).
Whilst this weighting is beyond most businesses, D4t4 has a swift delivery process; licences are booked on signing and it takes 6-8 weeks from a project signing to delivery. It has an impressive pipeline (est. at 3x or 4x the 14 deals in closure) and strong drivers in data collection and management (2 large deals are compliance-driven) as well as a blue-chip customer base; most of the 14 contracts follow on from existing business. We understand c.£3.5m will be closed by the end of this month, with £15m visible.
Given the nature of the business and its market, the spectacular H2 implied by guidance is achievable; however, it clearly introduces significant and unexpected risk to hitherto comfortable growth forecasts. This will affect valuation views in the short term; however, it is hoped that a steady flow of deal news over H2 will mitigate this risk and we reiterate our 200p TP."
A longer road but to a greater goal | finnCap, 27 Nov
"A good set of interim results has left Trakm8 well positioned to deliver on FY 2018 expectations of strong top-line growth and a return to attractive margins and cash generation. It continues to focus on the provision of pure telematics data solutions, winding down its third-party manufacturing (there should still be some seen in H2) but Solutions growth is now outstripping the waning Products sales, building an impressive base of recurring revenue and generating cash flow. That cash continues to be ploughed back into developing an integrated array of leading-edge data-driven solutions for Fleet and Insurance customers. This is a long-term strategy for growth that we feel will secure major contracts for Trakm8, preserve them against competitors, increase its monthly subscriptions and generate valuable data streams for resale. We reiterate our current earnings forecasts and highlight a 31% upside in our 180p TP.
Revenue grew 12% YoY to £14.8m, aided slightly by an additional 4 months of Roadsense. Solutions drove this growth with an impressive increase of 29% YoY to £12.5m while Products sales fell 35% to £2.3m. £5.5m of the Solutions revenue is recurring monthly subscriptions (up 17% YoY), while the remaining £7.0m is generated by the hardware installation and engineering fees, with that growth coming from major contract wins. GM held steady despite Brexit-related currency impact and the cost base was also controlled; increased investment in engineering sales & marketing being offset by ongoing cost reduction. This is gradually returning operating margins towards their previous levels >15%. Cash generation was strong but offset by the increased capitalised R&D. Encouragingly, net debt was reduced by £1.6m of tax credits, falling to £2.3m at the September period end.
The growth in connected devices was strongest in Insurance (rising a net 19% in H1) while Fleet unit connections grew just 6%. We do, however, expect a strong H2 for Fleet as it rolls out on major contracts won.
Management remains confident on FY forecasts; however, it caveats that on uncertainty in the expected demand from those existing client contracts. The target price is 18x FY 2019 earning, consistent with the technology sector as a whole."
EPS lifted by 6% in FY18, 2% in FY19 | Liberum, 27 Nov
"As flagged in the Sept’17 trading statement, maiden interim results would be strong. Revenue was +18%, gross profit +22%, EBITDA +42% and Adj. PBT and EPS +65%. An interim DPS of 2.2p has been declared. Net cash at the period end was £13.4m. Retail jewellery and foreign currency activities were particularly buoyant, reporting 30% and 35% growth in gross profit, respectively. We expect to see an EBITDA CAGR of 14% (2017-2019F).
We have upgraded our expectations for Retail jewellery sales and Foreign currency activities, resulting in a 6% upgrade to EPS in FY18 and a 2% uplift in FY19.
The company actually reported a reduction of one store in the 6 month period, finishing at 123. However, we believe the objective of growing at c.12 p.a. on average, remains.
Our only note of caution at this stage is in relation to the Purchase of precious metals. We have reduced our assumption for the gold price in FY19 by 6%.
Our TP is driven by a mix of PE and EV/EBITDA comparisons with H&T Group, RFX’s nearest quoted peer. This blended methodology results in a CY18 TP of 204p, 11% upside."
A fair wind | Arden Partners, 29 Nov
"Hurricane has made a series of large discoveries West of Shetland in fractured basement reservoir. The company is currently implementing the Lancaster EPS development, which is to produce at 17mbbl/d for up to 10 years. This will provide cash flow, and important production data to help demonstrate the commerciality of the up to 1bn boe of resources the company has discovered. Over the next 12 months we expect development updates and a new CPR, culminating in first oil in H1 2019. We initiate with a Buy recommendation, 60p target.
Hurricane’s West of Shetland discoveries contain resource potential approaching 1bn boe. A maximum of 62mmbbl is being developed in the upcoming EPS, leaving significant further potential.
Our base case NAV is c.2.5x the current share price, and our upside scenario (using high case resources) implies the shares could be worth up to 299p.
The EPS development has been sanctioned, and first oil is expected in H1 2019 – an important catalyst for the stock.
The production data from the EPS development will be important in providing evidence of the producibility of Hurricane’s discoveries, helping prove up the almost 1bn boe resource number.
The US$530m equity and converts raise earlier this year funds Hurricane until revenues from the EPS development, which could generate around US$220m/year of OCF."
Snowball ready to roll | Edison, 29 Nov
"WANdisco’s commercial platform for growth in the cloud storage market has strengthened further with Fusion’s integration into Amazon Web Services’ (AWS) Snowball solution.
AWS’s Snowball solution enables enterprises to migrate very large amounts of data (terabytes/petabytes) into the cloud. The service is essentially a ruggedized, portable S3 storage appliance rented to companies who connect the appliance locally to their network and download data which is then transported and uploaded to AWS’s cloud infrastructure. With the integration of Fusion, customers can migrate live and static data without interruption, ensuring data consistency (ie changes can be made to data during the migration process). The integration is not completely new news, having been announced earlier in the year, but the service is now being tested by Amazon and its customers, bringing forward another important tier one channel for growth.
We believe that the immediate revenue potential for this integration is likely to be more significant than for WANdisco’s other Amazon integrations (e.g hybrid data lake), which are available on the AWS marketplace, as it is likely to get proactive support from AWS’s sales team as a tool to facilitate Amazon’s land-grab for enterprise data. This news follows last week’s release of Fusion 2.11 which offers significant performance improvements (both to throughput and memory requirements), seen as key to fully exploiting the very significant cloud storage opportunity where very large amounts of data need to be replicated in real time. We believe that these enhancements could be the catalyst for closing some good-sized cloud deals. FY17 financial performance depends on the timing of large deals, but beyond this, we maintain our view that WANdisco’s platform for delivering significant, operationally geared upside to our estimates is strong."
Reassuringly good | finnCap, 27 Nov
"Record sales and profit in an extremely challenging environment highlights disciplined expansion, rigorous cost control and the right pricing and format strategy. An unwarranted pullback from the 365p peak in September creates a good entry point, in our view. We retain our 360p PT and BUY.
While revenue growth (9.7%) was marginally shy of expectations (10.5%), good cost control and operating leverage drove GP margin (78.2%) +20bps ahead and EBITDA margin (22.4%) +60bps ahead of our forecasts. Pre-tax profit (+17%), dil. EPS (+19%) and DPS (+20%) were all in line, and continued strong cash flow meant net cash increased +60% to £21.5m despite £11.9m allocated to capex and dividend.
20 new stores (15 net) were opened in the period including 7 Debenhams concessions, 4 rebranded Maison Blancs and 1 new Philpotts, with good performance of the latter underpinning further future rollout. All stores traded profitably from day one (despite 12 new geographic locations including the Irish Republic) testament to the wide appeal of the brand, and all were internally funded. Better rental deals outside of London are lowering average payback (now 23 months), and a planned new Manchester prod
The balance sheet remains ungeared and cash-rich, allowing site package opportunities and/or acquisitions to be exploited as they arise. The supply agreement trial with Sainsbury’s was extended from 12 to 18 stores during H2. While this is wholesale margin business, the volume opportunity through Click and Collect is potentially significant, and a decision regarding next steps will be made post festive trading. Online sales grew 26% (off a small base) helped by a 12% growth in Cake Club membership.
While geographic expansion into smaller regional stores lowers overall revenue forecasts, similar or better contribution relative to the legacy estate is achievable given lower rental costs. Consequently, we leave our earnings forecasts largely unchanged (3-year EBITDA and EPS CAGR of +10% and +12% respectively), although we do expect management to raise dividend progression to match 2017 growth. We retain our 360p price target (19.2x FY18 earnings) and BUY recommendation."
A top quality stock I should never have sold | Equity Developments, 28 Nov
"The markets have an uncanny knack of making fools out of us all. Back in 2012, I stupidly sold shares in Telford Homes - a specialist builder of affordable homes in ‘nonprime’ London boroughs. Happy enough at the time to pocket a >100% gain, only then to watch the price triple over the next 3 years!
My schoolboy error was being swayed by numerous scare-stories in the press - wrongly prophesying a property crash, rather than concentrating on the Capital’s excellent fundamentals. Namely, a chronic lack of affordable housing, augmented by robust demand from UK/overseas buy-to-let (BTL) investors, and more recently ‘Build to Rent’ (B2R) institutions – all desperately seeking income as bond/gilts yields remain locked at near record lows (see below).
In our view, looking ahead this favourable backdrop will not materially change either, regardless of Brexit. Sure, property valuations may appear stretched vs historical standards, with Londoners paying on average 10.1x salary for say a 2-bed flat, compared to 7.2x a decade ago and 4.8x for the rest of the UK (source: Nationwide). And yes, demand in well-heeled neighbourhoods like Knightsbridge, Chelsea and Kensington will probably stay subdued for at least another 12 months.
However, in Telford’s sweet-spot of ‘non-prime’ locations, prospects are much brighter, with prices likely (at worst) to flat-line over the next year or so. What’s more, there seems to us little risk of an aggressive shift in monetary policy in the absence of persistently high inflation. And besides, even if this did occur, there would probably be huge political pressure on the Bank of England to keep rates ‘low for longer’ in order to support the nation’s tepid GDP growth."
Growth continues apace | Edison, 30 Nov
"Treatt has posted yet another year of excellent growth, with revenues up 25% and adjusted PBT up c 45%. The company has reached its FY20 financial objectives three years early, and the management has therefore updated its strategy to take the company through to the next phase. A new facility is being built in the UK, and the US site is being expanded. Both projects are on track and Treatt has now announced a share placing to fund these projects. This was always flagged as a possibility. We update our forecasts to reflect the FY17 results and the share placement. Our fair value is 515p (from 522p previously).
FY17 was a record year for the company, with revenues topping £100m for the first time (£109.6m), adjusted PBT of £12.9m and EPS of 18.3p on a company adjusted basis. The growth rate achieved in FY17 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. We note management’s comments that FY18 has started well, and the growth in FY17 was broad-based – both in terms of geography and product mix – which sets a good base for the future.
Treatt’s new strategy is an evolution of the previous one. The focus remains on the company’s core areas of citrus, tea and sugar reduction. The theme of deep customer relationships continues: this has served the company well and should further help to speed up the innovation and success rate with its customers. The management is also focused on enhancing the company’s technical abilities to drive the business forward through product innovation and operational efficiencies, which in turn should drive margin expansion. The UK relocation and US expansion will help achieve these objectives.
We value Treatt using a DCF model, which now indicates a fair value of 515p (previously 522p), an attractive c 7% upside to the current share price. We have incorporated the share placement into our forecasts, hence reducing our net debt and increasing the number of shares. We have assumed net proceeds of c £22m. Treatt trades at 24.6x and 14.8x calendar P/E and EV/EBITDA multiples for 2018, representing discounts of c 15% and 20% 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."
Snap it up | N+1 Singer, 28 Nov
"PHTM is at an inflexion point. We see new technology and rapid expansion in a complementary segment as key factors behind an imminent step-up in profit growth. The stock also provides a substantial level of exposure to recovering European economies, especially France (c45% of PBT). In our view, consensus significantly underestimates these improving profit dynamics and emerging growth in Photo/ID, Laundry & Kiosks. Our base case assumes a 3-yr EPS CAGR of 10% (vs cons c5%) and our analysis suggests scope for this to be 18-23%. We initiate with a 225p target price
and highlight a 2-3 year bull case of 350p (10x cal20 EBITDA). Interims are on 11 Dec.
Photo-Me is the leading global operator in automated instant-service equipment with almost 50,000 vending units worldwide. It is the leader in its target markets, with high service standards. Innovation and R&D are also a key differentiator and technology upgrades in digital printing and especially cutting-edge photobooth ID security are central to the profit growth strategy. Our
analysis indicates scope to add up to £25m incremental profit over 3 years.
Including some additional FX tailwinds in H1 this year, consensus assumes c5% 3-year EPS
CAGR. However, our analysis indicates 18% is likely (growth scenario) or even 23% (bull case). Exposure to recovery in Europe (70% of PBT), especially France (c45%), adds to the attraction. With a drop-through of c60%, a 1% sales beat adds 2-3% to EPS. The next scheduled newsflow will be interims on 11 December.
Photo-Me is also rapidly expanding in the highly fragmented Laundry market, using its internally developed Revolution equipment and serviced by its existing engineer network. This is proving highly successful across territories, generates above-average margins, and is being rapidly scaled up, funded internally by the group’s strong underlying cash flow. Our analysis indicates scope to add up to £18m incremental profit over 3 years and make £50m EBIT in time.
The shares have been range bound between c140-180p for 4 years and the rating is only in line with its 5-year avg. Our 12m target price of 225p (33% TSR) is based on a 10x EV/EBITDA Apr19 multiple and 4.1% yield. However, if performance mirrors our growth scenario, the price would be 278p in 12 months (still using a 10x multiple). Yield is an additional attraction. We will publish in
more detail in due course."