Accoya wood progress in FY20 to date continues to validate the business model and expansion undertaken last year. The new Tricoya project is also progressing albeit with commissioning slipping by some months into H2 calendar 2020. Our existing model accommodates these effects and we have made no changes save for adding FY22 estimates for the first time. For now, on our unchanged estimates, we continue to contend that the current valuation is underpinned by Accoya.
Companies: Accsys Technologies PLC
FY19 performance at the Arnhem Accoya facility has been robust with successful delivery of higher volumes from raised capacity. Construction delays at the new Hull Tricoya facility outside Accsys’s control are a near-term frustration and dampen EBITDA progression over our forecast horizon. That said, achieving a positive group EBITDA outturn in FY19 is a significant milestone. The current valuation is underpinned by Arnhem.
Accsys continues to make positive progress and is now generating revenue from its latest investment at Arnhem. We expect the new, under-construction Tricoya facility to follow suit within the next year, at which point annual group revenue potential will be around €150m according to management. In the near term, we expect to see an EBITDA positive outturn in FY19.
AGM comments point to operational progress at Arnhem and an on-track construction schedule for the new Tricoya facility at Hull. Accsys has set out a clear development plan for the group; while we are not placing undue weight on a short trading period, we are encouraged to see that growing revenues and production volumes have been achieved in the year to date.
Building on Accsys's established international presence the current significant investment phase (€80m+ capex) should be the catalyst for accelerated business growth. We expect Accsys to move into a group EBITDA positive position from FY19 with the significant profit potential to be progressively delivered thereafter. Our DCF analysis suggests that the share price is solidly underpinned at current levels with upside from enhanced commercial development of proprietary technology.
Successful expansion of its established Accoya facility at Arnhem should pave the way for Accsys to become EBITDA positive at the group level during FY19. A dedicated Tricoya facility (construction underway, first production expected from mid-2019) provides another clear platform for further profit growth. As this becomes more apparent, we believe it will be a catalyst for positive share price performance.
Accsys has reported H1 FY2018 interim results, delivering 13% revenue growth to a capacity-constrained €28.3m. Gross margin has been impacted by several, individually small, temporary pressures while the new Accoya reactor delivering a 50% capacity increase is a little late in delivery. These factors chip away at our forecasts a little but the longer-term picture and investment case remain unchanged. Retain Buy and 100p price target.
See what's trending this week...
Highlights this quarter:
Economics: Generally, the data points to modest growth continuing, with a more positive trend in PMI surveys suggesting decent m manufacturing momentum over the next six months. Currency weakness continues to be a double-edged sword for U K manufacturers, with exporters gaining competitiveness while input prices have risen. There has recently been a divergence of sterling’s performance against the euro and the USD. Those in commodity or competitive product areas may well have seen margin erosion, while many in intermediary goods have already passed on price increases to their customers. With low unemployment, the prospect of tighter labour markets post-Brexit and public sector pay caps starting to come off also signals the potential for some labour inflation, long absent from the UK industrial scene.
Topic of the quarter: We believe that powerful macro and sectoral pressures will drive further significant changes to the manufacturing supply chain over the next few years. We investigate some of these pressures, with the move to outsource suppliers to low- cost centres, like China, now seeing a slight reverse flow with some restoring to shorten complex and often inflexible supply chains. We see systems technology facilitating greater supply-chain control and efficiency. Brexit will present challenges to the UK supply chain with price and time to market barriers likely to rise, presenting challenges to the UK’s highly integrated and time-sensitive supply chain. Slick distribution infrastructure and greater information sharing with suppliers are likely to prove winning strategies in optimising logistics and gaining stock efficiencies.
Sector valuation: The industrials sector has continued to exhibit strength, with small-cap industrials outperforming by 2 % on last year and larger cap industrials by 17%. Currency and improving economic data have been a positive for the sector. While some other sectors have seen a pick-up in profit warnings over recent months, industrial technology companies have announced generally positive or in-line trading updates that have helped to drive the small-cap Industrials to an EV EBITDA of 8.4x and a P/E of 16.7x with the traditional small-cap discount narrowing.
Companies: DSCV AXS ALU AVG CAR FLO GHH IOF MPE RNO RBN SOLI SOM SCE TRI VANL ZAM TRT HDD
See what was trending this week...
We recently hosted our annual Industrial Technology dinner with 14 companies, many of which are active in the materials science arena; having focused previously on composite materials in the aerospace sector, in this edition of Machinations we focus on graphene, with its unique and potentially game-changing qualities and potential applications. Investments in this area remain fairly early stage, but could potentially reap huge rewards. Graphene is well represented in the UK small-cap market by several players.
Companies: DSCV AXS ALU AVG CAR FLO GHH IOF MPE RNO RBN SOM SCE TRI VANL ZAM TRT HDD
Surface Transforms* (SCE): Progress headwinds (CORP) | Aukett Swanke* (AUK): Interim results (CORP) | Horizonte Minerals* (HZM): Awards further contracts for the feasibility study (CORP) | 7digital* (7DIG): Acquisition confirmed and major new contract (COR) | Accsys (AXS): A year of strong progress (BUY) | Shanta Gold (SHG): Fund raise, debt restructure and acquisition (U/R)
Companies: SCE AUK AXS SHG
Accsys (AXS): Tricoya consortium structure completed (BUY) | HML Holdings* (HMLH): Acquisition and upgrade (CORP) | Cambridge Cognition* (COG): Old COG with some cool new tricks (CORP) | Transense Technologies* (TRT): Interim results, further payment from GE (CORP) | Hardide* (HDD): Hardide gains Airbus global supplier status approval (CORP) | Omega Diagnostics* (ODX): Regulatory clearance for Malaria test (CORP) | Allergy Therapeutics (AGY): Interims demonstrate strong momentum (BUY)
Companies: AXS HMLH COG ODX AGY TRT HDD
In a very significant development for Accsys, the company has announced it has reached financial closure to build a Tricoya plant in Hull. This represents an aggregate investment of €68.2m into a facility that should start to generate revenue during FY2020E. The funding is relatively complex: Accsys has raised €14m (gross) new equity for working capital purposes plus €18.9m of loans at the PLC level to enable an overall 74.6% participation in Tricoya Technologies (TTL). Separately, Medite, BP (Ventures & Chemicals), BGF and Hendersons are injecting an aggregate of €34.5m new equity into TTL and Tricoya Ventures (TVUK), while RBS is making available a €15m loan to TVUK. Overall, we are maintaining our 100p price target.
600 GROUP | ACCSYS TECHNOLOGIES | AGGREGATED MICRO POWER HLDGS PLC | ALUMASC GROUP | ANGLO-EASTERN PLANTATIONS | AVINGTRANS PLC | CAPITAL DRILLING LTD | CARCLO | FENNER PLC | FLOWTECH FLUIDPOWER PLC | GLOBAL INVACOM GROUP LTD | GOOCH & HOUSEGO PLC | HARDIDE PLC | HAYWARD TYLER GROUP PLC | IOFINA PLC | M.P.EVANS GROUP | R.E.A. HLDGS PLC | REDT ENERGY PLC | RENOLD | ROBINSON | SOMERO ENTERPRISE INC | SURFACE TRANSFORMS PLC | TRANSENSE TECHNOLOGIES PLC | TRIFAST | ZAMBEEF PRODUCTS
Companies: AXS ALU AVG CAR FLO GHH IOF MPE RNO RBN SOM SCE TRI ZAM TRT HDD
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Spectra Systems Corporation, a leader in machine-readable high speed banknote authentication, brand protection technologies, and gaming security software, has announced that it has executed a comprehensive services contract with a ‘long standing' central bank customer for the development, manufacture and servicing of a sensor system. The initial development phases underpin our FY2021E estimates (with risk likely to the upside), but moreover, the balance of development work, comprising supply of sensors (estimated value up to $34m in 2024-25), servicing revenues ($7.5m) and resultant high margin material sales through to at least 2035, provides significant underpinning of future prospects. Our updated Sum-of-the-Parts valuation (reflecting higher than anticipated development revenues and margins) indicates a risked fair value of 240p (from 200p).
Companies: Spectra Systems Corporation
Seeing Machines has announced that it has signed a non-binding Memorandum of Understanding with global aerospace and defence technology company L3Harris Technologies. The MOU frames the intent to enter into a global non-exclusive license agreement to enhance pilot training technology with Seeing Machines's dedicated precision eye-tracking system for flight crew training in the full flight simulator (FFS) environment. A license arrangement is currently in advanced discussions between the parties and subject to the negotiation and execution of definitive, binding licensing and other legal agreements. Further announcements regarding the progress of the negotiations in relation to such binding documentation will be made when appropriate.
Companies: Seeing Machines Limited
We have today released a new note on The Ince Group plc - this is the first of a series of "explainer notes" that take an in-depth look at the various aspects of the Ince investment case our investors have told us require more clarification. This edition examines the partner remuneration model - the headline for which is that this isn't discretionary bonus, it's more of a revenue share that partners are given in lieu of pay. Thus their remuneration is entirely variable, rather than representing a fixed cost.
Companies: Ince Group plc
Judges Scientific is focused on acquiring and developing companies in the scientific instrument sector. The acquisition of Korvus Technology, a UK-based but global supplier of vapour deposition systems, largely to academic institutions, marks Judges' third deal in less than 12 months. With Korvus generating revenues of £1.42m and adj. EBIT of £0.66m (46% margin), we choose to leave our FY2020E estimates unchanged but, after financing costs (all-cash initial consideration of £2.64m), we see a 3.5% uplift to FY2021E with our adjusted PBT increasing to £15.2m. Although a trading update is not provided this morning, we remain cautiously optimistic with respect to FY2020E. COVID-related business risks / restrictions remain; however the relative strength of H1:2020 (albeit at some expense to the order book) continues to provide some comfort, in our view.
Companies: Judges Scientific plc
TP Group (TPG) delivered robust organic growth of 13% during H1/20A. However, the impact of COVID-19, together with increased investment and a shift in business mix, meant that Adj EBITDA reduced by £0.9m YoY to £1.4m. TPG has today announced it is in advanced discussions to dispose of its non-core oil and gas focused engineering business. Despite the strong and expanding order book, COVID-19 continues to create uncertainty around the timing of contract deliveries. As such, our forecasts remain withdrawn and our rating Under Review.
Companies: TP Group Plc
An explicit and substantially positive update from Norcros points to a strong Q2 trading recovery after a COVID-19 affected Q1 and a significant reduction in net debt to modest levels. The company’s portfolio of businesses have demonstrated resilience and agility in being able to respond to these variable demand conditions and in doing so have probably enhanced the group’s competitive position. Our estimates remain suspended ahead of the H121 results announcement on 12 November.
Companies: Norcros plc
The Group has issued a trading update ahead of its interim results due on 12th November 2020. Overall, the first half has seen a strong recovery in activity and the Board now expects to report H1 revenues and operating profit of at least $200m and $20m respectively. This is materially ahead of market expectations and with a high degree of visibility through Q3 FY2021E we are upgrading our operating profit forecasts by 39% and 25% for FY2021E and FY2022E respectively. The Group is seeing strong growth in EV charging cables and bespoke high-performance cabling solutions, and consumer electronics demand has also remained robust. Together with investment in automation and cost efficiencies, the Group operating margin is now 10%, which is a testament to management’s operational and strategic focus. The shares trade on an FY2021E EV/sales multiple of 0.9x which compares to a sector based multiple of c.1.2x for companies with comparable operating margins and growth.
Companies: Volex plc
Checkit has deepened its relationship with John Lewis, by signing a three year framework agreement with this existing customer. This provides all John Lewis shops with the opportunity to benefit from Checkit’s three proprietary software products: Connected Workflow Management (CWM), Connected Automated Monitoring (CAM) and Connected Building Management (CBM). Out of these three, it is CWM which is a new service offering for John Lewis. We find this product particularly interesting given the broad number of (previously manual and paper-based) operational workflows the platform can automate - increasing efficiency. Additionally - through Checkit’s cloud-based dashboard – managers can track tasks in real-time and also respond to critical issues. Lastly, analytical tools can be used to spot operational weaknesses or non-compliance. This contract therefore provides further validation of these products and how they are resonating with large enterprises, as they look to drive greater efficiency within their organisations. This news follows-on from us recently reinstating forecasts. For FYJan21, we’re looking for £13.1m of sales i.e. modest LFL growth (PY pro-forma: £12.8m), within this though, expect to see strong ‘recurring‘ growth – driven by contracts such as this. Should also see decent progress on profitability (FY21E EBITDA: £-2.0m) indeed such progress was highlighted in H1, as cash-burn fell to £-1.4m
Companies: Checkit plc
The group’s AGM statement reads well, with record Q1 trading and strong cash flows. Net debt now stands below £1m, with significant headroom in facilities. Previous restructuring has delivered £2.4m of efficiency gains, which particularly benefit Levolux and Gatic. The UK market has seen a strong bounce accompanied by a strong export performance and a high level of export orders recently gained. No change to trading forecasts. The shares remain at a deep discount to our 130p price target and today’s update should be taken well.
Companies: Alumasc Group plc
OPG has produced a strong set of full year results. Revenue increased 9.5% YoY to £154.0m whilst strong free cash flow generation enabled material debt repayments. Post period end, the Group continued to make debt repayments and favourably refinanced a portion of its debt. Management swiftly implemented a COVID-19 cost reduction strategy and capitalised on financial stimulus provided by the Government and the Reserve Bank of India. Importantly, September 2020 showed signs of a recovery as Chennai plant load factors increased to 63% (H1/21A 46%). We believe the long-term structural growth dynamics in the Indian power production sector remain compelling.
Companies: OPG Power Ventures Plc
Following hot on the heels of last week’s significant project award for Siemens and London Underground, the group has announced a further significant project award for Alstom’s high-profile next generation of TGV trains for SNCF. While the value of the project has not been announced, it reinforces our optimism and view that momentum in the train market is improving and also further strengthens the group’s medium-term order book. We see the award as noteworthy also because it is in the group’s innovative electronics technology, validating the group’s product investment in this area.
Companies: LPA Group Plc
Symphony Environmental develops and sells innovative products and additives which make plastics and rubber smarter. The core d2w oxo-biodegradable product facilitates rapid and safe transformation of plastics into harmless biodegradable compounds. The newer d2p product is a protective technology which has many applications. The most commercially advanced prevents microbial growth on plastics, useful in food and non-food settings. This market is estimated to be worth $30bn globally and growing rapidly. Recent news has been positive. The Group has just announced that Turkey’s Uno Bakery will use oxo-biodegradeable d2w for its packaging. This follows a recent strengthening of the strategic partnership on d2w packaging with the world's largest bakery, Groupo Bimbo. In late September, in the UK, AGS Airports, which operates Aberdeen, Glasgow and Southampton airports has become the first UK company to trial a new d2w 100ml security bag. Further, Brazilian supermarket chain, Cotripal, has introduced an innovative combined d2w and d2p (antimicrobial) carrier bag. No financials for these announcements have been disclosed; we assume for the moment these are not material in the context of the Group. But the potential over the next few years is significant, in our view. Commercialisation is gathering momentum. Our valuation for SYM is 35p per share, indicating 30% potential upside.
Companies: Symphony Environmental Technologies plc
Renewi’s operations are at the heart of the circular economy that collects, processes and converts waste into usable secondary materials to reduce the use of primary resources and to lower carbon emissions. The company has recently entered a new strategic phase with a clear roadmap to deliver a substantial increase in group profitability. Consequently, Renewi offers investors an environmentally friendly above-average earnings growth opportunity.
Companies: Renewi Plc
We are pleased to see that in a period in which most companies faced colossal challenges, and CSSG saw at least some partial business interruptions, the company nonetheless succeeded in generating a result which is ahead of the expectation set in early August, with £1.75m EBITDA as against the anticipated £1.6m. With the interim dividend reinstated eight weeks ago, the final dividend is now announced at 1.2p, giving the FY2020A total of 1.95p, making CSSG a rare example of a company (well-supported by £4.1m of net cash) which has lifted its FY2020A DPS as against the prior year, and by no less than 8%. We assume that some of the net cash relates to HMRC and / or other support schemes; however net cash at more than double the FY2019A level (£4.1m plays £1.7m) still seems like a positive outcome.
Companies: Croma Security Solutions Group PLC
Historically exposed to coal, Drax had to adapt to ecological constraints. Which we believe it has failed to do. We have therefore decided to terminate our coverage in order to allocate our resources to companies that are in tune with tomorrow’s challenges.
Companies: Drax Group plc