FY results slightly ahead of forecast
Full-year results were slightly ahead of the group’s year-end update, which signalled a stronger than expected H2, with a recovery in N. America after weather affected H1. Three out of six regions saw growth. The new SkyScreed© met targets and further investment is being made to propel future growth. No change to current year forecasts, with no direct effect of the Coronavirus seen as yet. The shares offer compelling value, after the recent market sell-off, on a discount to its international construction peers as well as offering a very attractive total yield of 10.1%, while our 380p price target signals significant upside.
11 Mar 20
Morning Note – 22 January 2020
ANGLE (AGL): Corp De Novo submission to FDA expected by end Q1 2020 | Ideagen (IDEA): Corp Interims highlight ARR growth | Netcall (NET): Corp Trading update – strong cloud ACV growth | Pelatro (PTRO): Corp FY 2019 delivered and FY 2020 looks bright | Somero Enterprises (SOM): Corp Q4 ahead of expectations, boosting cash and dividend
SOM IDEA NET AGL PTRO
22 Jan 20
Q4 ahead of expectations, boosting cash and dividend
The FY update highlights a stronger Q4 than expected, with a rebound in US sales after a weak H1 and initial SkyScreed sales. This results in an uplift in revenue, profit, and cash guidance for the year, thereby also boosting the underlying and supplemental dividend. This results in an eye-catching current year yield of 7.3% and undemanding P/E of 9.4x. We maintain our 380p price target, which offers good upside potential.
22 Jan 20
Sector Note -
Election implications for the Industrial sector: The Conservative Party’s now stable working majority provides clarity, with the withdrawal agreement expected to be rapidly enacted. Status quo in most policy areas, except a stark change from a promised fiscal stimulus through higher spending on public services and investment programmes, which could kick-start activity. We see a recovery in consumer confidence boosting activity in the DIY and housing sectors, and greater infrastructure expenditure will also boost a number of construction-related industrials. While the sector participates in a Boris Bounce, we regard the recent strength of sterling cautiously, affecting international competitiveness and reducing the translation of overseas earnings, although it helps to reduce the price of imported raw materials. The renewed threat of a no deal Brexit has resulted in sterling giving up much of its gains.
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18 Dec 19
German Ifo meets expectations; Taiwan Oct industrial output misses; CRH saw better Q3 growth in Americas than in H1
CRH (CRH LN, £23.0bn) | Hill & Smith (HILS LN, £1.1bn) | Somero (SOM LN, £110m) | James Halstead* (JHD LN, £1.0bn) | Headlam (HEAD LN, £377m) | Coats Group (COA LN, £985m) | Victoria (VCP LN, £527m) | IG Design Group (IGR LN, £510m) | Severfield (SFR LN, £233m)
SOM CRH HILS JHD HEAD COA VCP IGR
26 Nov 19
Quarterly Research Outlook Autumn 2019
Following continued delays of a Brexit agreement, few sectors within the UK market have remained attractive to investors despite low valuations. One sector which has continued to outperform despite the political drama has been the UK video gaming sector (henceforth UK gaming), which we are fans of. We believe a combination of sector-leading growth, strong cash conversion and timely cyclical positioning support our positive view on the UK video gaming sector.
SOM ABBY AMS ANX ARS ATYM AVON BLVN PIER BUR CGS CAML CDM CSRT TIDE CYAN DTG DEMG ELM EMR FPO FDEV GTLY GENL GHH GRI GEEC GKP HMI HAYD HEAD HILS HTG HUR IBPO IOG INDI JHD JOG KAPE KEYS KWS KCT KGH LAM LIT LOK MACF MANO MOD OXIG PCA PANR APP SRE PHC PMO RBW RMM RBGP REDD RSW RNO ROR SUS SCPA SEN SHG SOLG SUMO TM17 INCE TWD TRAK TRI VNET VTC ZOO ZTF
21 Oct 19
Earnings risk remains but how much bad news is in the price?
Following the 1H 19 results, we trim our earnings by ~2%/3% for FY19/20e to account for a more synchronised global slowdown. At a PE of ~8x on our FY20e estimates, we believe current levels are now pricing in a ~35% peak-to-trough volume cut vs. the ~70% cut seen during 2007-10). While this may warrant investor interest, we retain our Neutral stance (but lower our PT from 275p to 200p) as we see heightened earnings risks, and importantly note an absence of positive catalysts. Recap on H1 interims. H1’s results came as a mild surprise with revenues outside North America falling ~19% y/y. We note that volumes across the product suite fell 16.5% y/y, mildly offset by a +3.8% y/y gain in average pricing.
15 Oct 19
Interim results – US recovers but EU and Middle East dip
Half-year results came in broadly in line with our expectations, which we had lowered on the signalled poor weather in the US and lower European and Middle Eastern sales prior to the period-end. While the US is improving, the Middle East is not expected to make up its shortfall by the year-end and European demand is being watched closely. Guidance is for revenues in the range of $83-87m, broadly in line with expectations, with some potential H2 risks emerging. We therefore take a more prudent view and reduce EPS by 5.5% in 2019 and by 7.7% in 2020. As a result, we also reduce our PT from 420p to 380p, based on a fair value P/E of 13x.
04 Sep 19
H1 19 interims – first take
H1 19 interims have come in ~3% below expectations at the EBITDA level, with revenues ~5% below forecasts. Although North American revenues were ~2% ahead, contract timings in international markets contributed to the top-line miss at the group level. The company has rebased its top-line guidance from $87m to $83-87m (APe: $87m), which we believe partially reflects the need for a strong H2. We estimate H2 vs. H1 growth of ~35% at the EBITDA level which is based on our FY19e EBITDA forecast of $26.3m (~6% below original guidance). We have not changed our forecasts today and retain our Neutral stance.
04 Sep 19
H1 19 interims preview – North America outlook will SOM.L Current Price: 283.0p be key focus
Somero will release their H1 19 results next Wednesday where we forecast group revenues to come in at $41.1m (down 8.7% y/y) – of which we estimate $26.6m will arise from North America (down 12.7% y/y) – and group EBITDA of $11.5m. We expect commentary around the health of US non-res construction markets to be a key area of focus given our stated concerns around downside risks. We retain our Neutral recommendation and 275p PT.
30 Aug 19
Sector Note - Machinations: finnCap Industrial Technology quarterly sector note - Q3 2019
No-deal Brexit now the default: The change in the UK political leadership clearly signals that the likelihood of a no-deal Brexit has moved from 100-1 and now appear to be odds-on. Michael Gove recently confirmed that this should be regarded as the default position that we should all prepare for. Already, the new Prime Minister Boris Johnson has highlighted a number of new policies and spending projects, with a focus on high-profile infrastructure projects. The chequebook is open, with an additional £2.1bn of funding just announced. Deficit control and reduction is no longer the prime objective and Treasury funding will be used to ease the process of Brexit. We hope this may be a good news for those at the sharp end of international trade.
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16 Aug 19
Quarterly Research Outlook - Summer 2019
In January, we provided a list of 11 stocks for 2019 that we believed would perform strongly with attractive catalysts that could lead to material outperformance. In this Quarterly Research Outlook, we revisit these views, analysing what has happened and how the remaining six months of the year could play out.
SOM AMS ANX ARS ATYM AVON BLVN PIER BUR CGS CAML CALL CSRT TIDE CYAN DTG DEMG ELM EMR FPO FST GTLY GENL GRI GEEC GKP HMI HAYD HEAD HILS HTG HUR HYR IBPO IOG INDI JHD JOG KAPE KEYS KCT KGH LAM LIT LOK MACF MANO PCA PANR PXC PHC PMO RBW RMM REDD RSW RNO RKH RBGP ROR SUS SCPA SHG SOLG TWD TRAK TSG TRI VNET VTC ZOO ZTF
23 Jul 19
FY19e trading in line with June guidance
Somero’s trading update confirms that performance is in line with June guidance ($87m revenues, $28m EBITDA and net cash of $18m). We leave our forecasts unchanged on the back of this, though we highlight that we remain 6% below guidance/consensus at the EBITDA level, reflecting our cautious view surrounding the extent to which further cost savings can be materialised, particularly following recent success in delivering a lean operating structure. We remain Neutral on a short-term horizon as we see limited negative earnings catalysts in coming months, though we maintain our fundamental view that ongoing signs of industry and economic headwinds facing the US non-residential construction industry could have a material impact on FY20e earnings.
11 Jul 19
Small Cap Feast
ReAssure Group plc - The Group is a leading closed book life insurance consolidator in the United Kingdom with 4.3m policies, £68.7 billion of assets under administration on a Post-L&G Illustrative Basis. It is considering a premium listing segment of the main market. Reinsurance giant Swiss Re has suspended plans for a £3.3bn London stock market flotation of its subsidiary ReAssure, blaming "heightened caution" among investors. Voyager AIR The Company will focus on the acquisition, leasing and management of primarily widebody aircraft, with asset management services to be provided by Amedeo Limited the IPO will comprise a Placing and Offer for Subscription of Shares to raise up to approximately US$200m. Uniphar, a diversified healthcare services business with a workforce of over 2,000, is looking to join AIM. Raise TBC, expected mid-July 2019.
SOM SOS IND TEK CPS BKS BMK TRMR HAYD AEG
11 Jul 19
Move to Neutral on short-term view; FY20e risk remains
We upgrade to Neutral following the recent trading update which saw the shares close 23% in the red. Despite references to adverse weather conditions in the US suggesting a temporary setback for the group, we maintain our fundamental view that ongoing signs of industry and economic headwinds facing the US non-residential construction industry could have a material impact on FY20e earnings. However, with expectations for FY19e now rebased and valuation better reflective of latecycle industry conditions, we see a short-term move to Neutral as being appropriate given little negative earnings catalysts over the next 3 months. We downgrade our earnings by 16% for FY19-20e, with FY20e earnings 15% below consensus, in line with our thesis. We lower our PT to 275p (from 300p) better reflecting fair value at this stage. Neutral (from Sell).
19 Jun 19
AGM statement – April showers
The company has released a disappointing trading update, pointing to trading affected by adverse weather in the US, which has delayed customer purchasing in Somero’s usually strong spring trading months. While trading is expected to improve in the remainder of the year, it is unlikely to make up the shortfall in 2019 and signals a 12% EPS downgrade. A lower cash level also results in a cut in dividend forecast. We shave back our price target from 465p to 420p. Weather patterns should be a temporary set-back and do not undermine our positive stance; Somero’s premium dividend yield is also still attractive in our view.
07 Jun 19
Sector Note -
Where are we in the cycle? There has been plenty of debate about what stage of the cycle we are in at present, and indeed the shape and duration of the current prolonged upcycle. We are, clearly in the more mature stages of the cycle and it is true to say that certain economic indicators have weakened. It currently appears that we are not heading into a downturn, or a recession, but rather a flattening-off in the global long up-cycle. The good news is that Chinese stimulus measures appear to be having some positive effects (recent Q1 data show GDP growth of 6.4% while industrial production rebounded 8.5% in March); equally, Sino/US trade disputes appear to be progressing towards being resolved, or at least ameliorated, which holds open the possibility of a relaxation of tariffs (or at least no additional ones). UK data continues to point to meagre growth, but this is being affected by Brexit. Growth remains lacklustre and the recent slight increase in PMI is related to additional Brexit buffer stock-building in March. The risk now is that the EU ‘flextension’ until the Autumn means that there is scope for some short-term destocking – which will cause a gap in some manufacturers’ orders. This lack of clarity and demand volatility causes production inefficiencies and makes business planning and forecasting more difficult, causing some to postpone investment decisions. The decline in business investment remains a serious issue for heavier, late-stage industrial equipment manufacturers and for longer-term UK competitiveness. This is especially the case given the revolution in manufacturing coming from IoT automation, robotics and other innovations such as electric vehicles/battery technology, 3D printing etc. If we fall behind in these areas, it will seriously damage longer-term productivity and international competitiveness
SOM AMPH ALU AVG CAR FLO GHH MPE RNO RBN SOLI SCE TRT TRI VEL ZAM HDD
18 Apr 19
Quarterly Research Outlook
We’re just over three months in to 2019 and we’ve seen a 10% UK market rally, retracing much of the Q4 decline, such is the nature of fickle market sentiment. That said, many of the issues we wrote about three months ago that were impacting markets remain: notably Brexit, trade wars, geopolitics and global monetary policy. The 2019 rally thus far feels somewhat fragile, with competing forces of optimism on a potential trade deal which could underpin the rally, against the deterioration in underlying economic data that could ultimately undermine the recent market gains. In this context, we look at what the lead indicators and the market are telling us about the industrial cycle and the stocks most exposed to various industrial trends. The Q4 derating in short cycle industrials and autos had been vicious and while these sectors have seen a more solid footing in 2019, with earnings downgrades being priced in, it will likely take a trough in lead indicators before short cycle stocks can start to perform again and re-rate relative to the market.
SOM ARS CYAN HYR LIT ABBY AMS AMER ANX ATYM AVON BLVN PIER BUR CGS CAML CALL CSRT TIDE DTG DEMG EMR FPO FST GTLY GENL INCE GRI GEEC HDY HMI HAYD HEAD HILS HTG HUR IBPO INDI JHD JOG KEYS KCT KGH LAM LOK MACF MNO MANO MOD MKLW OXIG PCA PANR APP PXC PHC PMO RBW RMM REDD RSW RNO RKH RBGP ROR SUS SCPA SHG SOLG TRAK TRI VNET VTC ZOO ZTF
11 Apr 19
Initiating with Sell – 23% downside
Somero Enterprises is a leading manufacturer of advanced concrete placing and levelling equipment that uses proprietary laser-guided technology to serve the global commercial construction industry. We consider the current mid-cycle multiple of c.12.7x FY19E P/E as inadequately pricing in the downside risk to earnings, arising from i) the cyclicality of the group’s exposure to the US construction industry, which is seeing signs of a slowdown and ii) the heightened probability (25%) of a US recession in 2020, impacting the risk-reward profile for equity investors. We forecast a significant deceleration in earnings (c.3-9% below consensus for FY19-20E) and initiate coverage with a Sell rating, setting a PT of 300p (c.10x P/E, 23% downside).
20 Mar 19
Full-year results – eye-catching dividend pay-out
Results were slightly above recently upgraded expectations, with a stronger than expected H2. Strong sales growth was gained in the US, with ongoing demand in its construction customer base. New products provided a boost to sales, while the recently launched SkyScreed®25 will accelerate sales prospects in the medium term. A strong cash performance supports the exceptionally strong underlying and supplemental dividend growth. No change to 2019 PBT forecasts, with the year having started well, a higher tax charge results in a 2.6% EPS reduction to 40.8ȼ giving YoY growth of 8.1%. We introduce conservative 2020 forecasts pointing to YoY EPS growth of 5.6%. Our 465p price target continues to offer good upside, with an eye-catching 6.6% forecast dividend yield.
13 Mar 19
Trading ahead of expectations, 5% EPS upgrade
The company has announced a positive trading update signalling a stronger than expected H2, with sales and EBITDA moderately ahead and cash more meaningfully ahead of expectations. We upgrade our 2018 EPS forecast by 4.9% and raise 2019 by 4.6%, confirming robust trading continues. The company has also announced a small bolt-on acquisition of Line Dragon for $2.0m, which looks an ideal close fit. The shares have significantly derated and the trading update confirms robust trading continues, thus providing a strong buying opportunity. The 7% dividend yield and single digit P/E in 2019 highlight strong value – this quality stock is one of our favourites.
16 Jan 19
Morning Note – 16 January 2019
Allergy Therapeutics (AGY): Corp Trading update – strong rebound | President Energy (PPC): Corp Building critical mass | SCISYS (SSY): Corp Another contract win in Space | Somero Enterprises (SOM): Corp Trading ahead of expectations, 5% EPS upgrade | Tracsis (TRCS): Corp Acquisition
SOM AGY PPC TRCS SSY
16 Jan 19
Sector Note -
It is always darkest just before dawn and we are starting to feel that – disaster aside (eg no deal Brexit followed by a Labour Government) – after a proper correction in Q4 2018, the market will soon start to find a level from which the best stocks will again emerge. We have no idea how the key geopolitical issues of 2019 will play out. What we do know is the following: the UK remains a treasure trove of good quality growth businesses, now at much cheaper valuations than 12 months ago. Despite some recent earnings downgrades, the small/mid-cap segment as a whole offers 6.0% sales growth, 13.4% EBIT growth and 5.4% dividend growth, consensus expectations that have remained remarkably robust over the past year. This is balanced by a market valuation of 11.8x EBIT and 13.5x earnings – substantially cheaper than the beginning of 2018. On this basis, we have chosen ten of our favourite ideas for 2019. As usual, there is no specific theme; we are simply trying to identify quality companies where there is overlooked value or self-help potential (for instance through M&A). Interestingly, four of our ideas have entirely US dollar earnings, thus insulated from the political issues in the UK. Happy New Year! Raymond Greaves – Head of Research – email@example.com – 020 7220 0533
SOM LOK MPE PDL QXT SHOE TAX TSTL TAM ECO
08 Jan 19
Sector Note -
finnCap’s Industrials Brexit Survey. As Brexit is now only around 100 days away, we decided that – despite continuing uncertainties – it would be interesting to conduct a 10-question survey to investigate how management expects the small and mid cap Industrial sector to be affected by Brexit. We focused on what sensitivities they have to potential supply chain delays, raw material import prices, reductions in regulatory red tape and whether they expected changes to their ability to export to the EU, and if there are opportunities to boost trade with the rest of the world. Overall, 82% of companies responded that Brexit would be negative for their company with only 18% expecting no effect. Not a single company thought it would be positive. We hope that the survey responses will not only be of valuable insight to investors but also give company directors a broader consensus of how their competitors, customers and suppliers are all likely to react.
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19 Dec 18
This edition we dedicate to the nascent electric vehicle market and associated supply chain. We have assessed the entire ecosystem in the UK and what technologies are currently available, and would highlight the following three conclusions: 1) The UK has developed a remarkably good ecosystem to enable the development and commercialisation of EV components and technology; 2) The dawn of the fully electric vehicle is going to bring about a radical simplification of the Automotive supply chain; and 3) EV isn’t the only way forward, and we see a clear role for Hydrogen, Biofuels and Synfuels.
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10 Oct 18
Interim results in line, with dividend doubled
Half-year results were in line with guidance with few surprises. Market conditions remain favourable – with solid growth seen in the US and substantial growth in Europe. The interim dividend saw a one-off doubling, as the dividend was rebalanced with greater weighting to the interim pay-out. We are comfortable with our existing forecasts and maintain our price target at 465p. We continue to see positive market momentum and strong cash generation, with the development of new products offering a significant opportunity to deliver share price upside over the medium term.
05 Sep 18
Small Cap Breakfast
CentralNic-Schedule 1 from the business operating in proprietary retail platforms selling domain names and associated web presence services including hosting and email on a subscription basis, has acquired KeyDrive S.A which constitutes a RTO. Raising £24m at 52p, combined market cap of £88.7m Trackwise—established business that manufactures specialist products using printed circuit technology. Offer TBA. Due Late July Ovoca Gold (to be renamed Ovoca Bio PLC) - RTO of IVIX, a Russian company developing a drug candidate for the treatment of female sexual dysfunctions. No monies to be raised, market cap of £8.5m, due 30 July Nucleus Financial—independent wrap platform provider . FYDec17 revs £40.36m and PBT of £5.1m. Offer TBA. Due late July. Kropz PLC-Intention to float by the emerging plant nutrient producer with an advanced stage phosphate mining project in South Africa and exploration assets in West Africa
SOM BVC NCC HNT AMO KMK FLX IOG EMIS
17 Jul 18
K3 Business Technology (KBT): Corp Contract momentum | Lok'nStore (LOK): Corp Growing pipeline of long-term assets | Redcentric (RCN): Corp The public sector giveth, the public sector taketh away | Somero Enterprises (SOM): Corp AGM statement | STM (STM): Corp Deloitte update
SOM KBT LOK RCN STM
11 Jun 18
Full-year results – dividend turbo boosted
Full-year results were slightly above expectations and point to being on track to exceed our previous FY 2018 forecasts slightly. Market conditions remain robust in its main US market, with significant growth seen in Europe. A revised dividend policy gives new clarity to cash returns, (backed by $19m of net cash), and triggers a strong uplift in ordinary dividend plus a supplementary dividend. The shares remain attractive on an earnings basis but also have premium yield attractions. Our raised 465p TP is based on a P/E of 17.0x in 2018 and 16.0x in 2019 and offers strong upside scope to the shares. Market conditions remain favourable and cash returns underwrite our positive stance.
14 Mar 18
Alumasc (ALU): Corp Q3 profit warning | Avesoro Resources (ASO): Corp Gold in West Africa | Flowtech Fluidpower (FLO): Corp Acquisition and placing | President Energy (PPC): Corp Beefing up the Board | Somero Enterprises (SOM): Corp Full-year results – dividend turbo boosted
SOM ALU ASO FLO PPC
14 Mar 18
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.
SOM SIXH DSCV AXS AMPH ALU AEP AVG CAPD CAR FENR FLO GINV GHH IOF MPE RE/ RNO RBN SOLI SCE TRI VANL VEL ZAM TRT HDD
27 Oct 17
Interims in line, US market seeing some improvement
Interims were satisfactory placing the group on track to achieve existing full-year forecasts. Some market weakness in US and China was experienced at the start of H1, but momentum has improved pointing to a solid H2. Cash generation remains strong supporting a better than expected dividend, while the 13.3c special dividend has now been paid. The shares have dipped over recent months and now trade on a P/E of 13.4x and EV/EBITDA of 7.3x, which appears good value versus our 350p target.
06 Sep 17
Somero Enterprises* (SOM): Interims in line, US market seeing some improvement (CORP) | Orchard Funding * (ORCH): Pre-close growth and stability (CORP) | PPHE Hotel Group* (PPH): New rooms, hotels, funds and opportunity (CORP) | Synairgen* (SNG): LOXL-2 ready for Phase I clinical trial (CORP) | Trakm8* (TRAK): AGM told that FY 2018 trading is in line (CORP)
SOM ORCH PPH SNG TRAK
06 Sep 17
CyanConnode* (CYAN): Leader of the narrowband (CORP) | Ideagen* (IDEA): Consistent strength in delivery (CORP) | K3 Capital* (K3C): Director changes (CORP) | Lighthouse Group* (LGT): Trading update (CORP) | Somero Enterprises* (SOM): Strong June trading shows a pick-up in US market activity and affirms FY forecasts (CORP) | Castleton Technology* (CTP): Solid prelims (CORP) | Cello (CLL): Strengthening the offer in Health (BUY) | dotDigital* (DOTD): Yet again – positive trading update (CORP) | Allergy Therapeutics* (AGY): FY trading update drives 7% upgrade (BUY)
SOM IDEA K3C LGT CTP CLL DOTD AGY CYAN
18 Jul 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
Full-year results – encouraging margin and cash performance
Full-year results were slightly better than expected and provide confirmation of encouraging market conditions and robust finances. We modestly increase our forecasts on the back of raised sales and gross margin assumptions. A strong cash performance reinforces the potential for a special dividend later this year. We raise our PT from 254p to 325p based on a P/E of 14.5x. The shares have seen a strong rerating but remain attractively valued and deserve to outperform on the back of earnings momentum and the potential special dividend.
15 Mar 17
Somero Enterprises* (SOM): Full-year results – encouraging margin and cash performance (CORP) |Chariot Oil & Gas* (CHAR): 2016 final results (CORP) |Orchard Funding Group* (ORCH): Growing the lowest risk book in the market (CORP) |Gem Diamonds (GEMD): Annual results (BUY)
SOM CHAR ORCH GEMD
15 Mar 17
Upgrade on positive year-end trading update
The group has announced a positive year end update, with a stronger finish to the year delivering sales slightly better than expectations. Operational gearing results in a 7.5% increase in EPS. Cash generation is significantly better than expected. As a result, we increase our price target from 205p to 254p, based on a fair value P/E of 12.0x for 2017. With healthy growth set to carry on, the shares should continue to show robust momentum, with the potential for a special dividend an additional positive.
10 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
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
Robust interim results performance
Half-year results illustrate a generally robust performance, with good revenue growth and creditable margin expansion. Results were in line with expectations, while the 32% dividend increase was much stronger than we anticipated. The results place the group comfortably on track to achieve current forecasts, recently upgraded in July, with strong US trading conditions providing good momentum for H2. The shares look good value on this basis, having also seen some recent profit taking. Our 205p price target offers good upside and we believe the shares are well placed to continue to outperform.
06 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
Avingtrans^: Cash proceeds offer huge opportunities (BUY) | Somero Enterprises*: Encouraging trading update (CORP) | Support Group: Analyst interview | Premaitha Health*: Analyst interview (CORP) | Amino Technologies*: Robust trading update (CORP) | Hardide*: Interim results (CORP)
SOM AVG YGEN AMO HDD
06 Jun 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.
SOM SIXH AMPH ALU AEP AVG CAPD CAR CKT FENR GINV GHH HAYT IOF KBC MPE BOU RE/ RED RNO RBN TRI VLX XAR ZAM TRT SVCA HDD
04 Apr 16
Constellation Healthcare*: Building out the platform (CORP) | Artilium*: Acquires customer contact specialist (CORP) | Somero Enterprise*: Analyst interview (CORP) | Frontier Developments*: Interims (CORP) | Renold: Disappointing trading update (U/R)
SOM CHT ARTA FDEV RNO WAND
10 Feb 16
The next level – but not a plateau
The recent positive trading statement has provided a short-term catalyst for the shares. In view of management’s target to double sales by 2018 and the strong operational drop-through expected, we still consider the shares to be significantly undervalued. A strong product range, a robust strategy to expand overseas sales and an experienced management team all provide confidence in Somero’s ability to deliver on its strategy. We initiate coverage with a target price of 185p, based on a 2016 P/E target of 12.5x versus an attractive current valuation of 9.7x. We believe the group to have strong prospects and the shares significant upside.
08 Feb 16