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Cello Health (CLL.L): Recommended Cash offer
Cello Health
Cello Health has announced that it has received an all cash offer of £1.61 per share from Value Demonstration, a fund backed by US PE firm Arsenal. The board intends to unanimously recommend that deal which represents 12.3x trailing EV/EBITDA and a 44% premium to last night's close.
Cello's AGM statement should reassure that FY20 trading to date remains robust, underpinned by “solid” growth in net revenue in Q1/20. While Q2/20 saw certain early disruption, overall progress has been made to maintain revenues alongside effective cost controls, thus a creditable H1/20E result is expected. The 23% fall in the shares since February's highs, appears to overly discount for the actual reality of this disruption.
Cello’s AGM statement reiterates the group had a good first quarter, with solid overall growth in net revenue. Since lockdown, the Cello Health division has continued to make progress. Bookings visibility and the new project win rate have been maintained and the performance of the US business has been notably robust. The business is also supporting a number of clients with COVID-19 related UK and European public health campaigns as well as with US regulatory approvals and FDA filings. The Board is confident on Q2 performance for this division. Cello Signal, which only accounted for 5% of profits in 2019 is seeing COVID-19 related delays and cancellations, and costs are being reduced. The group remains in a solid net cash position after paying a £0.7m final earn out. Cash generation remains good (net cash was £5.5m at December 2019). There will be an H1 update mid-July and, assuming a similar message is provided, we would expect to reintroduce forecasts then. The shares are trading on an historic 2019 P/E of 12.2x and historic dividend yield of 3.6%. With our view that Cello will get back to normal trading quickly when markets allow and the financial strength of the group, these multiples look attractive: particularly so in a market where private equity has been very active and the obvious renewed focus on health services generally.
We believe management was very cautious yesterday when it released an unscheduled statement on the back of COVID-19 uncertainty in which it withdrew guidance and reduced the dividend. We have factored-in a c.60% hit to the cyclical, traditional media business division Signal (17% 2019 Group EBIT) and modestly lowered our 2020 growth rates for the Health division (83% 2019 Group EBIT).
Cello's trading momentum continued over Q1/20E with signs of further organic progress and maintenance of a strong balance sheet. The impact of measures to combat Covid-19 is creating some disruption for certain clients and their activities, but the majority of existing project work remains intact with new bookings continuing to come in. Contingencies are being exercised to limit any impact on profitability and cash flow. Given the degree of uncertainty over the level of disruption, we are withdrawing forecasts and putting our recommendation Under Review.
Cello traded well in Q1, with good revenue growth and solid operating cash generation resulting in £11.7m cash at the end of March. The Group has total facilities of £24.0m, of which £7.0m were drawn down at 31 March 2020. Cello is in a strong financial position. The entire employee base of the Group has been working remotely for over two weeks and delivering largely uninterrupted services to clients. Within the Cello Health division, there is some evidence of deferral of certain types of work where live meetings are essential. However, in the majority of cases, project work has continued and overall recent booking levels have remained encouraging. Some non-healthcare clients have needed to delay or cancel certain projects. Consequently, the cost base is being reviewed and the Board has agreed to take a 10% salary reduction for three months. The proposed final dividend of 2.95p will be replaced by an interim 1.0p, with the aim of declaring a special dividend subject to future trading performance. The Board is not currently able to provide clarity regarding the outlook for 2020 and we consequently place our forecasts and target price under review for the time being. Overall, Cello’s ability to deliver the majority of its services remotely, the defensive nature of its healthcare client base (82% of historic net sales), management action and the strong financial position means the group is very well placed to weather the storm and then resume its established growth path.
Cello has reported a strong set of FY 2019 results with sales, profits and dividends up 7% on an underlying basis. The group enters 2020 with a good order book supported by client’s continued strong R&D pipelines, and performance in the early months of the year has been good. Cello has successfully moved to a virtual model, with staff largely working from home, matching similar changes at the client. Ironically, this may increase the availability of resource on US projects (where staff are in short supply) as European staff can now more easily support. Travel costs will reduce significantly and the CEO has rightly suggested this new method of working may well become the new norm. While there is considerable uncertainty on the macro environment, healthcare services must be a good place to invest currently, both on an absolute and relative basis, and Cello is well placed to support the international client base. We have reduced our target price as the peer group has been de-rated, but there remains attractive upside and a 4% dividend yield supported by the £5m of net cash on the balance sheet.
Cello has delivered strong FY19A results as expected, with excellent underlying growth in Cello Health and a net cash beat as a highlight. Recent restructuring activities now mean healthcare activities generate over 80% of group net revenues, where growth rates and margins are stronger. The group has good momentum going into FY20E, but the recent COVID outbreak brings uncertainty and possible disruption.
Cello Health (CLL): Corp | dotDigital (DOTD): Corp | Iofina (IOF): Corp
CLL DOTD IOF
Cello Health has confirmed that it expects to report FY 2019 results in line with the consensus on an IFRS 16 basis. The Health division has seen strong like-for-like growth in net revenue, well ahead of plan, and an expanding operating profit margin, partly offset by a weaker performance by Signal. H2 cash flow was strong and the group was in a strong net cash position at the year end. We have updated our forecasts for IFRS 16 and the disposal of Pulsar, and reiterate our view that with PE actively acquiring in this sector and international peers on substantially higher ratings, Cello’s valuation multiples are underpinned with good upside.
Today's trading update confirms strong H2/19E trading, in-line with FY19E consensus expectations (£109m net revenue, £13.0m adj PBT). The core Cello Health division has continued to deliver growth ahead of plan following H1/19A's impressive growth. This has been offset somewhat by a weaker performance in Cello Signal given recent UK macro conditions. A reorganisation of Cello Signal to more closely support Cello Health thus appears sensible. The shares are starting to reflect the growing traction.
Cello has announced the divestment of Pulsar, its social media analysis software for £4.5m. Disposal of the technology leaves Cello as a pure-play professional services business, increasingly focused on a healthcare agenda. Given Pulsar's loss making and cash consumptive model, its removal should allow Cello Signal to generate EBIT margins of 10%+ and the wider group to achieve greater levels of FCF generation ahead.
Cello operates within a $30bn healthcare outsourced advisory market supported by 5% annual R&D growth. This market is defensive and growing. In many respects the challenge is less about finding work but securing the staff to complete it. Consequently, management has over the past few years focused on hiring, training and retaining talent and the benefits are now coming through. H1 net fees were up +6.8% and adjusted operating profit +12.3%. With PE actively acquiring in this sector and international peers on substantially higher ratings Cello’s reasonable valuation multiples are underpinned with good upside.
Cello has delivered excellent interim results with group Net Revenue (NR) of £55m (+7%) and adj EBIT of £5.7m (+13%). Underpinning this positive delivery is an acceleration in organic growth in Cello Health, particularly in the US. This should accelerate further in H2/19E given recent ISS's addition. Today's other significant update splits out Pulsar's results from Cello Signal, which has masked an improving margin in the latter.
Cello has acquired Innovative Science Solutions LLP (ISS) for an initial $6.4m in cash (maximum $10.5m). ISS is a scientific consulting firm specialising in strategic counsel and regulatory support for the healthcare industry in the US. It adds a new and key component to Cello’s offering of technical services along critical drug development pathways. The addition of ISS is in line with the group’s strategy of growing its technical services offering in the US healthcare market and we have upgraded our FY 2019E EPS by 2% and FY 2020E by 7%, after allowing for investment in headcount to support growth. We continue to expect the group to have net cash at December 2019E, meaning further enhancing additions could be financed from existing resources if opportunities can be found. We have raised our target price to 160p from 145p, valuing Cello at a 30% discount to peers on a P/E basis.
Cello Health (CLL): Corp Supporting clients through FDA approval | Hardide (HDD): Corp Update on investment programme | Robinson (RBN): Corp Solid set of interim results | Wameja (WJA): Corp HomeSend – home straight
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Cello has announced today the acquisition of Innovative Science Solutions LLP (ISS) for an initial sum of $6.4m. ISS is a highly technical, scientific consultancy which complements Cello's existing healthcare capabilities. It extends Cello's footprint in the key US healthcare market, while financially, it accelerates EPS growth to a more meaningful rate in FY20E.
Cello has issued a positive update on H1/19E trading, showing that Cello Health has continued its strong, organic momentum at higher margins. Meanwhile, Cello Signal's trading has been stable, as it increasingly takes on a healthcare focus. Today's update provides evidence that conditions in Cello's primary US healthcare market remain favourable. The company continues to identify accretive acquisitions in this space, which we believe could be a catalyst to the shares, currently trading on a modest valuation (12.2x ex-cash P/E) for what is a stable, highly recurring model.
Cello’s Health division has had an “excellent” first half with strong like-for-like, constant currency revenue growth. Operating margins are ahead of last year and the group has also benefited from stronger US$ exchange rates in H1. Coupled with a good current income pipeline, these points have enabled management to state it is confident of achieving a successful result in 2019, at least in line with current market expectations. We make no changes to our forecasts at this stage, although the potential for an upgrade is clearly growing. Encouraged by today’s statement, we reiterate our view that the market backdrop for Cello’s technically based, strategic advisory services is strong and defensive, supporting good growth prospects.
Cello has released a brief AGM statement today, providing a positive update on FY19E trading to date. Organic momentum from FY18E has continued through Q1/19E, with Cello Health continuing to deliver stronger and higher margin growth, while Cello Signal progresses more conservatively. We see today's update as consistent with our FY19E forecasts and note the Board's “in-line with expectations” comment.
In a positive AGM statement, Cello has highlighted good like-for-like net revenue and headline PBT growth and confidence in the outlook for Q2. The Cello Health division (77% of forecast operating profit) has had an “excellent” Q1 driven by the consulting businesses and the US overall. This trend is expected to continue in Q2. Signal has had a solid start to the year in line with expectations. The balance sheet remains strong (we forecast net cash of £8.3m at December 2019), supported by better than expected cash conversion. The group continues to assess suitable acquisitive growth opportunities in the US. Overall trading is in line with expectations and we make no changes to our forecasts. We reiterate our view that the market backdrop for Cello’s technically based, strategic advisory services is strong and defensive, supporting good growth prospects.
Cello reported a good set of FY 2018 results with net fees +2%, PBT +6%, EPS +14% (aided by lower tax), DPS +10% and net cash £6.3m up from £1.6m last year. 2017 acquisitions have continued to perform well and the Health division continues to broaden and deepen the client offering. Looking forward, the focus will remain on growing the group’s presence in the US and leveraging Signal’s digital capability into the healthcare sector. We reiterate our view that the market backdrop for Cello’s technically based, strategic advisory services is strong and defensive, supporting good growth prospects.
Today's largely in-line results were well flagged by January's trading update, but there are notable beats on EPS, DPS and Net cash. The group continues its organically focused delivery, leveraging Signal's digital capabilities into the healthcare space, alongside new office openings. This will continue Cello's migration over time into a more healthcare-focused, US-centric and higher margin business. We feel the defensive nature and FCF potential of Cello are not fairly valued in the current share price.
Cello Health (CLL): Corp Investing in new initiatives and enhancing services | Sopheon (SPE): Corp Consistency in strong prelims
Cello Health Sopheon plc
Today's trading update confirms an overall positive performance over FY18E, in-line with our forecasts which expect 10% growth in adj EPS. Underpinning this is a continuation of Cello Health's strong organic growth which has offset a flattish year for Cello Signal. Given strong cash generation, our forecast DPS growth of +3% looks readily achievable. Recent volatility in the share price, based no material changes in underlying trading, presents an attractive entry point at current pricing.
Cello has confirmed that the group traded well in 2018, with continued strong growth from Cello Health, offset to some degree by a slower performance from Cello Signal. Overall, results are expected to be in line with market expectations and we make no changes to our forecasts. We reiterate our view that the market backdrop for Cello’s technically based, strategic marketing services is strong and defensive, supporting good growth prospects
We have adjusted our forecasts to reflect strength in Health growth and medium term investment support for the unit. We have also taken down our Signal assumptions given the increasing likelihood of Brexit caution related impact. The net effect is that while 2018 EPS only falls 1.4%, 2019 and 2020 EPS fall 7.1% and 7.4% respectively. Earnings growth is now an uninspiring 2.3% for 2019. We cut out Target Price to 136p resulting in a Hold rating (cut from Buy). Long term investors interested in Health may well be prepared to look through to 2020, while others looking for near term performance and/or those concerned with a negative outcome scenario from Brexit negotiations will no doubt move their money on
Cello Health (CLL LN) Building in caution | Earthport (EPO LN) Board changes | Hargreaves Services (HSP LN) Completion of Brockwell Energy Disposal
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Cello Health has released positive interim results in-line with forecasts, indicating FY18E will be another year of steady growth. The Cello Health business continues to make mid-single digit underlying GP progress, driven by positive market dynamics and a high penetration of the global healthcare community. Cello Signal's digital expertise meanwhile are increasingly being leveraged into the healthcare space, giving rise to potential future margin appreciation. We expect the typical H2 weighting results to recur in FY18E in meeting our forecast +10% adj EPS growth.
Avesoro Resources (ASO): Corp New Liberty mineral resource upgrade | Cambridge Cognition (COG): Corp NeuroVocalix – first contract | Cello Health Group (CLL): Corp Trading well with good visibility | Hardide (HDD): Corp Upbeat trading update | InnovaDerma (IDP): Corp FY 2018 results – Boots to range Skinny Tan | Premaitha Health (NIPT): Corp Settlement with Illumina – freedom to operate globally | Quixant (QXT): Corp Weighting on a record H2 for gaming platforms | ThinkSmart (TSL): Corp Credible innovator, now developing new opportunities | Universe Group (UNG): Corp Interims
CLL IDP YGEN NXQ UNG TSL HDD ASO
Cello Health Group (CLL): Corp Robust H1 in Health | SRT Marine Systems (SRT): Corp Riding some stormy waters
Cello Health SRT Marine Systems plc
In a positive AGM statement, Cello has confirmed that the group has had a strong start to the year and this looks set to continue into Q2 based on current visibility. Cello Health had a robust Q1 with good sales growth and profit performance and Cello Signal has achieved a solid operating performance aided by last year’s restructuring in the US, and has a good pipeline of future opportunities in health. Cash conversion has been good and the balance sheet remains strong. Cello has developed a strong, core lead integrated global healthcare marketing services brand, creating a breadth and quality of service that others will struggle to provide under their disparate corporate structures. Cello has to prove the benefits of this move, but with net cash and the potential to also leverage its digital expertise into health, there is clear opportunity to create significant value.
Cello Health (CLL LN) AGM | Gresham Technologies (GHT LN) Clareti win with global tier 1 bank | IFG Group (IFP LN) Q1 update shows some progress, cost review in progress | Microsaic Systems (MSYS LN) 3rd small molecule agreement signed this year | Renishaw (RSW LN) Strong Q3 update with modest increase in guidance
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Drugs companies spend billions developing drugs, but in many cases do not have the in-house expertise to fully evaluate market opportunities, assess commercial risk and plan routes to market in all the scientific areas they are involved in, in every geography. The market backdrop for Cello’s technically based, strategic marketing services is strong and defensive. The evidence from competitors is that double-digit earnings growth is readily achievable and will be rewarded by a P/E of 20x+. Since 2012, Cello has worked on developing a strong, core lead integrated global brand, creating a breadth and quality of service that others will struggle to provide under their disparate corporate structures. Cello has to prove the benefits of this move, but with net cash and the potential to also leverage its digital expertise into health there is clear opportunity and, for now, we value Cello at a 20% discount to peers, setting a 145p target.
Today’s update contains few surprises, with Cello reporting gross profit (GP) of £102.5m (+11% YoY) and adj EBITDA of £13.5m (+11%). The biggest update lies in the decision to rename the company “Cello Health Group plc”, to better reflect the group’s strategic focus on healthcare advisory services, which are increasingly US focused (30% of FY17A GP).
Avesoro Resources (ASO): Corp High grade intersections from infill drilling at New Liberty | Cambridge Cognition (COG): Corp FY results – R&D will drive value | Cello (CLL): Corp Core global brand leveraging digital expertise into health | CityFibre (CITY): Corp Third FTTH City - Peterborough | Quixant (QXT): Corp Place your bet on this ecosystem | Sopheon (SPE): Corp Strong momentum continues | Utilitywise (UTW): Corp Focus on the cash flow
CLL CITY NXQ SPE UTW ASO
Cello has seen a strong performance from Health total growth over 25% and LFL of over 9%. This implies the unit has achieved £60m of revenues. The outlook is good with bookings running well and with the business having invested in capacity there appears no logical block to another strong year at the top-line (5% seems like a soft assumption). Profits have also done well despite the slightly softer margin due to the capacity investment. Signal (-6% on LFL revenue) has seen profits rebound with Pulsar (UK) contributing significantly to the improvement. Looking ahead the Company appears comfortable that it will see some positive growth in 2018 revenue. Assuming that the losses in Pulsar US are ignored (treated as a start-up) the Signal unit should see good growth in EBIT. For 2017 the Company appears to have traded in line with our £11.5m PBT expectation. We expect consensus 2018 PBT to stay around the £12.4m mark. At this stage the upside to the US tax changes could yield c£600k (6% to 7% of earnings), however the Company is working through the detail which is unclear. Until this is clarified we are not changing our tax assumption. We have rolled forward out Target price to 2018 and this comes out at 136p (was 131p). With a TSR of 12.7% this leaves us as a Buyer.
Cello has announced a FY17E trading update, confirming it has traded positively over the course of the year, in-line with our forecasts. Cello Health has continued its strong momentum (9%+ LFL CC) in FY17E, as the group becomes increasingly US focused, aided by successful addition of Defined Health (Feb’17) and Advantage Healthcare (July’17).
Cello Group (CLL LN) Health forging ahead | CVS Group (CVSG LN) Positive H1 update allays LFL uncertainty | Halfords Group (HFD LN) Stand-out growth in Cycling but dilutive margin effect due to mix | PROACTIS Holdings (PHD LN) Tender offer for remaining 21% of Hubwoo | Stadium Group (SDM LN) Trading in line with revised expectations | Vectura Group (VEC LN) Forecast changes post trading update: downgrade to Hold |
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Cello has delivered a positive interim performance with 12.9% growth in gross profit and 8.0% in adj PBT. Cello Health produced strong organic growth (focused in the US) alongside initial recognition of the Defined Health acquisition from February. Cello Signal delivered YoY declines versus a tough comparator, but is expected to rebound in H2/17E to meet expectations. We expect the traditional H2 weighting to results to deliver FY17E numbers in-line with our previous forecasts.
Cello has announced a pre-close trading statement for the interim period, confirming trading across the group has been positive in H1/17, particularly in Cello Health. Given a positive forward order book giving visibility into the traditionally stronger H2, the Board expect strong FY results in line with expectations. We upgrade our forecasts today for the recent acquisition of Advantage Healthcare Inc.
Cello Group has announced the acquisition of Advantage Healthcare for an initial cash consideration of $1.5m. Advantage Healthcare is a wellestablished healthcare consultancy providing critical analysis and insight to the biopharmaceutical industry. We see the acquisition adding depth to Cello’s US offering and demonstrating the company’s commitment to its core US market. We maintain our BUY recommendation.
Cello’s FY16 results reflect in-line trading in the year prior to the acquisition of Defined Health (DH) in February 2017. Performance was driven by Cello Health’s core services continuing their mid-digit growth (5.3% CC LFL), while Signal delivered growth (4.2% CC LFL) on a headline margin above 10%. We expect the company to further increase its US footprint beyond DH in the months ahead, utilising the remaining funds from the recent placing, leading to a more US-centric business.
Post the placing, Cello has net cash and, with an acquisition, has signalled its intent to invest for growth now that the VAT issue is firmly behind it. We continue to believe Pulsar, its social media tool, is in the share price for free, but also increasingly that Cello has developed a widening range of technologies that are performing well and support good profit growth potential. Cello is moving away from an ‘hours utilised and billed' type model towards a technology-backed model, a more valuable proposition.
Cello (CLL): Leveraging technology, investing for growth (BUY) | Water Intelligence* (WATR): Contract win evidences strategic progress (CORP) | Europa Oil & Gas* (EOG): Holmwood farmout (CORP) | Ithaca Energy (IAE): Takeover by Delek (BUY) | Frontier Developments* (FDEV): Initial details of third franchise (CORP) | BATM* (BVC): Diagnostic lab acquisition (CORP) | Orchard Funding* (ORCH): Strenghtening the model (CORP)
CLL WATR EOG FDEV BVC ORCH
Cello has acquired the assets of Defined Health, a New Jersey based scientific strategic consulting firm for a maximum consideration of $9.3m. Defined Health complements the existing Cello Health business, advising clients at the pre-approval stage in US drug development cycles whilst also accelerating Cello’s penetration of the East Coast biotech market. To finance this and a future M&A pipeline, Cello has raised £15.0m (gross) via a placing at 97p.
Akers Biosciences* (AKR): Trading update (CORP) | Cello (CLL): Accelerating the strategy (BUY)
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Cello has an overlooked and potentially significantly undervalued asset that is now out of development phase. Cello Pulsar is a social media analytics tool that has significant points of difference to the competition. In the right hands, social media data can inform, direct and optimise marketing campaigns but to date its usage has been constrained by early-stage science and customer unfamiliarity. Competitors in this area have individually raised nearly half of Cello's market cap, emphasising Pulsar’s potential to add very material value to the share price. We initiate at Buy.
Cello (CLL): #hiddengem (BUY) | redT Energy* (RED): Getting close to first customer sales (CORP) | Arcontech (ARC)*: Share consolidation (CORP) | Frenkel Topping* (FEN): Building value and scale (CORP)
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After taking advice Cello has issued a statement re the HMRC VAT issue. Sadly the matter remains unresolved and a frustration. However the stock has overreacted in our view and with the business performance strong (see recent results) we see this as an opportunity to Buy stock. The background is that Cello made an offer to HMRC in December to settle matters and provided additional information in January. HMRC only responded recently and Cello received this on afternoon of 21 March. The response rejects the offer, is unconstructive and fails to confirm how the VAT should be calculated and what the bill should be. We struggle to see how the bill could be stretched to double the provision (VAT element of £2.4m) and have already very conservatively assumed in our cash flow forecasts that the current £3.2m provision (including penalties and interest) is paid without recovery from clients (who are ultimately liable and who Cello is indemnified against). We still believe our approach to be conservative and think that even in the most extreme circumstances the underlying bill could not exceed £5m and this would be before recoveries from clients. HMRC appears guilty of creating uncertainty that is affecting operators in the charities sector (this issue relates to the ambiguity of which services carry a zero VAT rating for charities). The shares fell 8.5p implying an incremental loss of £7.2m of value. While the sentiment may not help the reaction is overcooked. Our 100p TP already reflects a sentiment discount for VAT. Buy.
Cello has met our profit expectations for the full year with revenues a slightly better and encouragingly Health being the driver with LFL of 4.7% (the smaller Signal unit managed a respectable 3.7%). Investors receive a better than expected dividend which has been increased 10%. Trading momentum has remained strong with good bookings continuing to build visibility. This reflects the strength of the Health offering and greater recognition by customers with average contract size rising. Health has secured new clients through its expansion and the Boston and Chicago expansions appear to be performing. The Signal brand/product offering consolidation has been completed and critically appears to be successful with larger clients. The margin improved 80bps to 9.5% and helped in part by Pulsar turning profitable. There is no update on the VAT issue save the Company as reiterated that it believes its total provision of £3.2m is appropriate (the payment of this is already included in FY116 forecasts). Health will make a payment of £0.9m to a former employer of several employees in Cello bio-consulting to free them off restrictions. The hires in this area are key to boosting momentum in US consulting and matching the strength of UK consulting. Cello had already confirmed trading results for FY15 and the key news today is that strong wins and visibility are being secured. With this in mind and even allowing for the VAT sentiment issue (that should fade) the shares are likely to be worth c100p even on a depressed 7x FY16 EV/EBITDA basis and a fuller valuation would suggest over 130p (10x EBITDA for Health and 8x for Signal). We upgrade to Buy with a 100p TP.
Cello Group (CLL LN) Prelims | Centaur Media (CAU LN) Prelims | Imagination Technologies Group (IMG LN) Significant further cost reductions | Marshall Motor Holdings (MMH LN) Quality franchise mix, B/S and growth outlook for just 9x | Safestyle UK (SFE LN) Capital returns and factory expansion for growth | Vernalis (VER LN) Interim results impacted by a mild US flu season
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Cello has confirmed that it has achieved results in line with market expectations for 2015. Full year LFL growth is expected to be c4%, with both units at a similar level. The Health business Is making good progress with its North American expansion. The majority of the Health business is growing well (c80%) with only the small Consumer business down on project deferrals. The balance of services in health makes the business robust. Signal business now operates under one incentive structure and is being marketed under the Cello Signal brand. Won RBS advertising creative off M&C Saatchi and there is scope to expand the relationship. This marks a radical improvement in Signals business position and highlights the improved state of the offering. The VAT situation is unchanged and there is no change to liability estimate. On outlook the Company indicates a good start to 2016 and we understand visibility is good in both businesses. Due to equity market weakness the shares have drifted into value territory and we will review our numbers and view in more detail.
We downgrade to Hold from Buy. While strategic progress and development appears broadly on track and in line with the medium term goal of building value in Health, the near term looks likely to be dominated by the VAT issue and to a lesser extent investment costs. The VAT issue is absorbing management time and we now assume there will be some drag from something we had expected to have been dealt with. Our TP moves to 90p (from 131p) and rating to Hold pending some positive news.
Applied Graphene Materials (AGM LN) Full year update highlights commercial progress | Cello Group (CLL LN) Medium term picture good but near term drags | Dechra Pharmaceuticals (DPH LN) Strategy playing out | Imagination Technologies Group (IMG LN) Short term issues mask medium term progress | Verona Pharma plc (VRP LN) Evaluating the potential
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The H1 revenue picture is good with gross income ahead of our expectations and new investments working well in both divisions. While the H1/H2 profit split does vary year to year the business looks to have higher costs than we expected and therefore expect to tweak down our PBT by circa a quarter of a million pounds. The contingent liability taken at the yearend for VAT has been turned into a provision and has edged up from c£0.8m to £1.1m. There is some mutterings about further VAT liabilities although this still seems to be outside the established issue area and there is no definitive HMRC position at this stage from what we understand. From a top down perspective Cello is delivering on its strategic development plans and this gives us greater confidence in our modest revenue growth assumption’s for 2016.
The Company has issued a trading update today covering H1. There is no new news with respect to the trading of the two units or the expected profile of profits and investment in the year. Net debt is also in line and the group goes on to reiterate its confidence in meeting market expectations for the full year. There is an update on the VAT issue that confirms no need to change the current provisions made. Cello has been building a good record of delivery and todays update continues this. We remain bulls of the stocks and reiterate our Buy rating.
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