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.
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27 Oct 17
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.
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27 Jun 17
Forecast upgrades follow strong interims
Interim results show a strong rebound in trading performance, with the outlook statement pointing to a better than expected full-year out turn. The group has shown a good increase in performance, with both divisions posting an increase in margins. Net debt has reduced, with stronger operational cash flows and balance sheet concerns are now fading. With upgraded forecasts our new 385p price target underwrites our maintained Buy rating.
25 Apr 17
Fenner (FENR): Forecast upgrades follow strong interims (BUY) | Omega Diagnostics* (ODX): In-line trading update and FY18 estimates (CORP) | Minds + Machines* (MMX): Prelims pressing ahead (CORP) | Imaginatik* (IMTK): Year-end trading update (CORP) | OptiBiotix* (OPTI): FY16 results in line with expectations (CORP) | Europa Oil & Gas*, (EOG): Irish seismic contractor (CORP) | Sound Energy (SOU): Schlumberger investment (HOLD) | CityFibre* (CITY): Strategy proof point (CORP) | Connect (CNCT): Investment being made to drive growth (BUY)
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25 Apr 17
Lombard Risk Management* (LRM): Beats demanding growth and profit forecasts (CORP) | Frontier Developments* (FDEV): Steaming ahead (CORP) | Tax Systems* (TAX): Right place, right time (CORP) | Acal (ACL): Stronger H2 and brighter outlook (BUY) | Fenner (FENR): Interim results signal upgrades (BUY) | Minds + Machines* (MMX): US and Europe domain sales (CORP)
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19 Apr 17
Fenner’s share price has gained 200% from its 2016 trough level
Fenner’s share price has gained 200% from its 2016 trough level. But it’s worth remembering that the trough-to-peak share price move from 2009-2012 was 1,280%. The company makes polymer conveyor belts for mining and heavy industries as well as specialised polymer components for a range of applications from specialised industrial to oil and gas to medical devices. Some of these markets have been depressed in recent years, particularly the mining and energy resources segments. However, we believe that a recovery is now beginning which, like the company’s conveyor belts, will keep going and going.
22 Feb 17
FY upgraded on positive trading update
The group has announced an encouraging Q1 trading update, with trading in the quarter being satisfactory, but with improving sentiment and order intake now being seen in its two main end markets (mining and oil & gas) added to previous restructuring and efficiency gains leading management to guide to the full-year out turn likely to be comfortably ahead of current expectations. We have upgraded our EPS forecasts by 12% for 2017, and we also increase our price target from 300p to 335p, reinforcing our Buy rating.
09 Jan 17
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
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19 Dec 16
Forecast upgrade prompts Buy rating
Recent FY results were in line with expectations, but with a much reduced cost base and several positive market indicators, management now expects 2017 to be mildly ahead of expectations. The shares have moved through the trough of its earnings and have recently outperformed on hopes of a minerals recovery, and now trade on a 2018 P/E of 18x. We some positive indicators now in evidence, and raise our rating from Hold to Buy, with a price target of 300p.
23 Nov 16
Fenner (FENR): Forecast upgrade prompts Buy rating (BUY) | Transense Technologies* (TRT): Upbeat AGM statement (CORP) | Avacta* (AVCT): To affinity and beyond… (CORP) | ScS Group (SCS): AGM statement (BUY) | BATM Advanced Communications* (BVC): Animal vaccine maker orders second sterilizer (CORP) | Redcentric* (RCN): CFO appointment and Financial Adviser resignation (CORP)
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23 Nov 16
After the severe short-term reaction to the Brexit vote, the UK manufacturing PMI now signals a return to more normal patterns and the stock market has recovered. Nevertheless, confidence remains weak. In the short term, it has largely been a phoney war. Sterling weakness has provided an opportunity for exporters. However, imported raw materials have also increased in price, as seen in the September inflation report with the input price index up 7.6%. Factory gate prices are lagging behind so beware of factory margins being squeezed. The reporting season has largely been devoid of serious shocks, with some order placement delays. However, due to the post Brexit fall in bond yields Carclo signalled a significant rise in its pension deficit, which wiped out its distributable reserves and caused it to cancel the previously declared dividend. We see potential for further bad news on pension deficits, with a number of larger industrials having significant pension liabilities that can only have grown since the referendum.
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28 Sep 16
Could Brexit be a positive for the UK Industrials sector? While the EU and UK are important to each other in terms of trade, the level of that importance is asymmetric: 44% of UK exports go to the EU and a further 10% go to countries with free trade agreements with the EU; only 15% of EU exports go to the UK. As a result, we feel that UK bargaining power is relatively weak and we need to accept the possibility that the UK drops out of the single market and trades under WTO terms with Europe. The extent to which this is a positive or negative for UK Industrials depends entirely on the value of Sterling versus the Euro or US Dollar. We analyse this and conclude that with a 7% (or greater) depreciation of Sterling (versus pre-Brexit levels), all the costs associated with WTO trade are more than compensated for. Big exporters become strategic winners and big foreign FX earners become financial winners. Largely domestic players are at risk. Export or die!
Economic DataIndices and Markets
18 Jul 16
In Issue 2, we concluded that the VW emissions scandal was likely to result in faster development and adoption of hybrid and electric vehicles. In this issue, we discuss what we think will be a key megatrend of the 21st century: the strong push to decarbonise vehicles AND power generation. The implications for the Industrials sector are substantial and we attempt to identify some of the key winners and losers of what we think is now an unstoppable force. The full list starts on page 8 but key winners we identify are: Lithium, Copper, Hydrogen, Composites, batteries and fuel cells, electric motors, wind turbine components, solar cells, ac/dc convertors and all forms of power storage.
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04 Apr 16
Restructuring and trading update
The group has announced the restructuring of its ECS business in the US reflecting poor conditions in the US coal market. It has also announced a trading update coinciding with today’s AGM. The two main areas of concern are the on-going weakness in mining (especially in the US) and further reduction in oil & gas, taking trading below previous expectations.
14 Jan 16
Synairgen*: AstraZeneca commences AZD9412 Phase II trial in severe asthma (CORP) | The Mission Marketing Group*: Trading update (CORP) | Ideagen*: Prelims (CORP) | Amino Technologies*: Interims, placing and acquisition (CORP) | Staffline: EPS up 45% – strong momentum continues (BUY) | Gemfields*: Initial ruby resource – Montepuez mine (CORP) | Weatherly International*: Q4 operating results (CORP) | Fenner: Trading update (HOLD) | Sound Oil: Initiation of coverage – analyst interview (BUY)
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22 Jul 15
With continuing weakness in its two largest end markets, we have reviewed our forecasts for the remainder of the current year, as well as next year. The two main negative pressures on forecasts continue: weakness in the minerals markets and the decline in oil service demand. We have downgraded our EPS forecast by 11.5% in 2015 and 7.9% in 2016. The shares remain unattractive, with no turnaround in underlying markets during the forecast period. We reduce our price target from 185p to 175p, based on a fair value rating of 12x. While the shares have taken a further step down recently and the yield has some attraction, we consider forecast risk remains on the downside and thus the shares remain a rather lacklustre Hold.
13 Jul 15