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Beaufort Securities Breakfast Alert: Strat Aero, Advanced Oncotherapy, MySQUAR Limited, SerVision, Strat Aero, Sierra Rutile, Tullow Oil

Published: 08:37 03 Oct 2016 BST

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 Markets

Europe
The FTSE-100 finished Friday's session 0.29% lower at 6,899.33, whilst the FTSE AIM All-Share index closed 0.12% down at 819.10. In continental Europe, markets ended in the green, as concerns over Deutsche Bank reduced amid expectations of negotiations with the US regulators. Germany's DAX and France's CAC 40 advanced 1.0% and 0.1%, respectively.
Wall Street
Wall Street ended higher, driven by gains in Deutsche Bank amid news that the bank may be able to negotiate a settlement with the US Department of Justice. Investors digested positive economic data released in the US. The S&P 500 increased 0.8%, with the financial sector gaining the most. For the week, the markets rose 0.2%.
Asia
Equities are trading higher, taking positive cues from gains in the global markets and as investors focused on the settlement between Deutsche Bank and the US Department of Justice. The Nikkei 225 increased 0.9%, while the Hang Seng was trading 1.1% higher at 7:00 am.
Oil
On Friday, WTI prices rose 0.9% to US$48.24 per barrel, whereas Brent oil prices fell 0.4% to US$49.06 per barrel.

Headlines
UK's GDP growth revised to 0.7% in Q2 2016

As per an estimate by the Office for National Statistics (ONS), the UK's GDP growth was revised to 0.7% in Q2 2016, higher than the earlier estimate of 0.6%, marking the 14th consecutive quarter of expansion. The agency revised the annual growth for Q2 2016 to 2.1% from 2.2%. In addition, ONS stated services output grew 0.4% m-o-m in July. On a y-o-y basis, services output increased 2.9%.

Company news

Strat Aero (LON:AERO, 0.75p) - Hold
Strat Aero, the international aerospace company focused on the rapidly emerging Unmanned Aerial Vehicle ('UAV') sector, yesterday announced the settlement of all litigation and claims arising from its dispute with Mr W. Hulsey Smith, the Chief Executive Officer of Aero Kinetics Holdings LLC. Under the terms of the settlement, Strat Aero disclaims any allegations of fraud against Mr. Smith and will issue Mr. Smith 44,750,645 new Ordinary Shares ('Settlement Shares'), representing approximately 11.75% of the Group's enlarged issued share capital. Strat Aero has also made a cash payment to Mr. Smith of US$75,000. As a result of the settlement, both Strat Aero and Mr. Smith are released from all current and future claims relating to the Group's acquisition of Aero Kinetics and all debt and loan obligations relating to the Group's acquisition of Aero Kinetics are deemed to have either been satisfied or written off. Both parties have agreed to dismiss all pending litigation between them which is subject to certain procedural formalities. Application will be made for of the Settlement Shares, which will rank pari passu with the existing Ordinary Shares in the Group, to be admitted to trading on AIM ('Admission'). It is expected that Admission will become effective and dealings will commence at 7:00 a.m. on or around 5 October 2016. Following the issue of the Settlement Shares, the issued share capital of the Group will consist of 380,856,709 Ordinary Shares. No shares were held in treasury at the date of this announcement. The total current voting rights in the Group are therefore 380,856,709.

Our view: If there is one thing markets do not like it is uncertainty. So yesterday' resolution lifts one of the larger clouds that has overhung Strat shares for several months now and tells us that the Group's new management recognises such issues, however painful, must be dealt with. Coming closely behind the £2.5m contract won by Geocurve earlier this month, confidence does finally appear to be returning. In a sector that is otherwise becoming crowded-out with 'me too' player, the new contract in particular is a big 'tick in the box' for Strat Aero. It also tells us that if utility groups like the Environment Agency are prepared to engage with such 'newfangled' technologies, then UAVs are rapidly going mainstream with all the giant market opportunities that presents. The reality is that ATC regulators globally, including the likes of the US's Federal Aviation Administration and the UK's Civil Aviation Authority, have been running significantly behind with UAV/UAS curve for some years now and, given the relatively low cost of entry and the vehicle's potential to create safety hazard, criminal or terrorist opportunity in national airspace, this has to change. When they do catch up, new legal and operating constraints will likely squeeze out the bulk of the 'mom and pop' entities that have saturated this early stage opportunity, leaving larger, more credible players with comprehensive offerings, like Strat Aero, to seize the longer-term opportunity. That's the upside vision but, back on earth the Group's management still must contend with many challenges, including restructuring the numerous different operations that were thrown together over the past 18 months or so, into a series fully integrated and complementary operations while taking the knife to costs. Having recorded an operating loss of some US$5.9m during FY2015, and having managed to raise only around US$0.5m in August's equity placing, Strat's balance sheet is clearly under strain. Once such issues have been resolved, however, shareholders will be able to focus back on the scale of its global opportunity and the Group's early mover advantage. Until then, Beaufort retains its 'Hold' recommendation.

Beaufort Securities acts as corporate broker to Strat Aero plc

Advanced Oncotherapy (LON:AVO, 108.0p) - Speculative Buy
Advanced Oncotherapy, the developer of a next generation proton therapy system for cancer treatment, on Friday announced its unaudited results for the six months ended 30 June 2016, along with details of its successful raising of £10m (before expenses). This was completed through the issue of 10,000,000 new ordinary shares of 25 pence each at a price of 100p per New Share to new and existing shareholders. Application will be made for the New Shares to be admitted to trading on AIM on 7 October 2016. The funds will be used to continue the development of the Group's first LIGHT system which, once installed in Harley Street, will be the first Proton therapy centre in London. The funds will also support the Group's advancing collaboration with manufacturing partner Thales, which aims to provide volume manufacturing capabilities initially targeted at producing eight LIGHT systems a year. Mindful of the support of existing shareholders an Open Offer with the same pricing as the Subscription. Details of the Open Offer will be announced over the next few weeks. A further significant announcement was that AVO regards the agreement AVO signed back in May with a fund advised by Metric Capital Partners LLP, a Pan-European private capital fund manager, to invest £24 million in a financing facility to support the Group's provision of vendor financing for the installation of the first LIGHT machine in Harley Street. This facility was conditional upon a future £25 million cash or capital injection to fund the development of a manufacturing base for the LIGHT system. As announced on Friday, the Group has agreed with Metric to waive this condition and to make the full £24 million financing facility available for drawdown, subject to completion of the Subscription and the implementation of an additional financing plan supported by banks and strategic partners which will not be dilutive to equity investors. Further details of this financing plan are expected to be announced by the end of the year. In addition, the Group welcomed the participation of a new major shareholder in the Subscription. MK Trust, a Japanese financial institution focussing on Asian related investments, has subscribed for 5,000,000 New Shares in the Subscription, which will represent 7.3% of the Group's enlarged issued share capital on Admission. Miky Kambara, owner of MK Trust, will become a senior advisor to Advanced Oncotherapy. The Group's financial performance for the period was much as expected, detailing loss after taxation from continuing operations for the period to 30 June 2016 was £5.94m loss (H1 2015: £4.60m loss including discontinued operations), while total assets were £28.56m (H1 2015: £30.58m) with net assets of £22.63m (H1 2015: £27.48m). At the end of the period the Group held cash and cash equivalents of £0.67m (at 31 December 2015: £8.96m).

Our view: Technical development of the LIGHT system remains on track and the Group will continue to update shareholders on the progress made during the further integration and testing of the modules which is expected to continue up to the end of 2016. AVO clearly remains optimistic for the future and the commercial roll-out of its technology through existing partnerships while forging relationships to expand its reach. While some investors may feel a little disappointed that management was not able to provide a target date for the ground-breaking first 'switch on' of the LIGHT prototype, bringing forward the industrialisation plans with Thales to move towards commercialisation appears to have complicated the process. While this means the end-result could even be delayed by some months, management continues to confidently express its view that the product now presents little or no technical or commercial risk, while introducing a giant new market opportunity. Indeed, the Board is considering undertaking an 'investor education' exercise, designed to expand on these points, in the coming months. Having detailed the extent of ongoing monthly cash burn at the Group's June AGM, the market was already aware that the balance sheet required bolstering. Rapidly completed such an equity placing, however, demonstrates confidence amongst existing investors that management will deliver on its promises, with MK Trust's entrance into the capital bolstering this opinion still further. In this respect, the proposed Open Offer also provides comfort to existing shareholders who were not in a position to participate in the Placing. As has already been explained in numerous research documents, Beaufort's commercial scenario for LIGHT is that the cost, safety, operational and size advantages it brings to the world of proton therapy, will effectively render 'first generation' systems all but obsolete; its development will also has potential to expand the international market for such systems from some US$2.5bn annually right now, to a figure potentially ten-times as large as LIGHT becomes the obvious successor to the similarly-priced but now relatively antiquated X-ray radiation systems that have a global installed base in excess of 20,000 units. In this respect, LIGHT uniquely faces a giant and accelerating global opportunity. Beaufort remains an enthusiastic supporter of Advanced Oncotherapy and repeats its Speculative Buy recommendation on the shares.

Beaufort Securities acts as corporate broker to Advanced Oncotherapy plc

MySQUAR Limited (LON:MYSQ, 4.75p) - Speculative Buy
MySQUAR, the Myanmar-language social media, entertainment and payments platform whose principal activity is to design, develop and commercialise Myanmar-focused internet-based mobile applications, on Friday announced that it has entered into a cooperation agreement with a Vietnam-based company to publish and operate a mobile market-place application in Myanmar. In addition, the Group announced that Sandabel Capital LP has agreed to subscribe for a Convertible Loan Note ('CLN') with an aggregate principal amount of up to US$1.0 million. Developed by Fastsell Company Limited, the mobile market place application allows sellers to list their products while buyers can use the application to identify potential purchases and negotiate prices. The app also provides the geographic location of sellers to make purchases easier. Monetisation will come initially from advertising and subscription fees charged to premium accounts, and thereafter handling fees charged on every transaction. According to the perpetual agreement, MySQUAR's share of revenues will be 60%. The Myanmar-localised version of Fastsell for both Android and iOS devices is planned for release by the end of November 2016 (for the purpose of reference, the sister application, which was released for Vietnam market and is not in the scope of cooperation). The US$1.0 million Convertible Loan Note, (representing US$0.9 million net of fees) was issued to Sandabel, a private investment company that looks for early-stage investment opportunities. The proceeds will be used to fund working capital, for the development of new games and applications, and to repay part of the existing loan from Rising Dragon Singapore Pte Limited (the Credit Facility from Rising Dragon Singapore Pte Limited however remains available in full to the Group). The first drawdown in respected of the CLN of US$500,000 will happen on the date of the CLN agreement.

Our view: Fastsell is an exciting new mobile market place application that can connect buyers and sellers throughout Myanmar in live time, around the clock. The Fastsell app will leverage the synergies of MyCHAT's user acquisition and MyPAY's payment solutions as it commences monetisation via fees levied on transactions. On another note, cooperating with mobile application developers like Fastsell Company Limited will allow MySQUAR to benefit from financial risk-free enlargement of its product portfolio. The experience gained by management through the rapid monetisation of its first two mobile games, tells management that Fastsell is yet another product that local users will comfortably adopt and potentially turn a valuable contribution within a few months. This, along with further anticipated portfolio expansion in coming months, all suggests MySQUAR is positioned to more than deliver on its promises. Based on recent progress, the Group has the very real potential to be achieving monthly break-even or better before the end of the current financial year. This is something that is unlikely to have been missed by its numerous and very cash-rich global peer group, who remains determined to continue ensnaring players in virgin territories that have successfully participated in an online user 'landgrab'. In this respect, MySQUAR now appears quite dramatically undervalued; Beaufort has set a price target of 21.0p/share and repeats its Speculative Buy recommendation.

Beaufort Securities acts as corporate broker to MySQUAR Limited

SerVision (LON:SEV, 1.50p) - Speculative Buy
SerVision declared its unaudited results for the six months ended 30th June 2016 (H1 2016). Revenue increased to US$1.3m from US$1.2m in H1 2015. Operating loss reduced 31% to US$989,000, while net loss narrowed to US$1.0m from US$1.4m in H1 2015, leading to loss per share of 0.92 cents (H1 2015: loss per share of 1.75 cents). On the operational front, SerVision started commercial operations with a number of significant new customers including Manchester Airport, Maple Fleet Services, Stobart Rail and Up Front Car Holdings. In January 2016, the company signed a binding agreement with Convoy Technologies, an established US-based company that manufactures visual tools for heavy duty vehicles to improve fleet safety, security and productivity. On 8th July 2016, SerVision entered into a deed of amendment with YA II PN Ltd. As per this agreement, YA agreed to increase the maximum amount that can be advanced to SerVision from £1,000,000 to £3,000,000. After the deed of amendment agreement, SerVision requested a drawdown of a principal amount of US$786,500.

Our view: SerVision performed strongly in H1 2016, recording higher revenues and lower losses. The company's decision to open an office in the UK has turned fruitful—it contributed over 50% to SerVision's revenues. The company reported lower losses owing to a sharp fall in administrative costs. SerVision strengthened its relationship with DHL, with the UK office carrying out installations for more than 100 DHL vehicles in H1 2016. The company's R&D team took initiatives to improve the performance of its IVG and new SVCentral monitoring software by adding new features and functions to both platforms. Recently, SerVision supplied a first order of 28 IVGs for a new project in China and a new order for 70 IVGs that will be deployed on police vehicles in Tegucigalpa, Honduras. The company has also started IVG pilots with a number of bus companies, both in the UK and around the world. In the light of ongoing developments and SerVision's performance in H1 2016, we retain a Speculative Buy rating on the stock.

Beaufort Securities acts as corporate broker to SerVision plc

Strat Aero (LON:AERO, 0.58p) - Hold
Strat Aero, the international aerospace company focused on the rapidly emerging Unmanned Aerial Vehicle ('UAV') sector, on Friday announced its half-year results for the 6 months ended 30 June 2016 ('H1 FY2016'). During the period, revenues expanded to US$410,740 (H1 FY2015: US$57,441), and gross profit advanced to £293,941 (H1 FY2015: US$30,334), due largely to the series of acquisitions. Because of the surge in administrative expenses (from US$1,308,232 to US$2,387,675), owing to wages and salaries, consultancy and professional fees as well as the full impact of meeting working capital commitments for both Aero Kinetics and Geocurve in the period. This has resulted in widening loss for the period to US$2,121,986 (H1 FY2015: loss US$1,311,117) and loss per share to 1.20 US cents from loss of 1.61 US cents. Cash balances at the period-end stood at US$275,428 (H1 fy2015: US$238,324). On the operational front, the Group secured its first UAV Wind Turbine Inspection contract with contract value of US$26,000 with Westar Energy in the state of Kansas, USA in February. Followed by this, in March, it signed a five year Proprietary Software contract worth US$375,000 with Readyjet. The Group also executed Master Franchise Agreement with I-Coach for the UAV training programme in Hong Kong. The Group said revenues from inspection, survey and consultancy services fell below expectations due to slower adoption of UAV solutions by larger customers. Geocurve's pipeline revenue generation, on the other hand, was in line with expectations set at the time of acquisition. During the period the Group raised US$1,415,765 net of costs through the issue of new shares. Post the period, the Group completed the acquisition of Geocurve in July, secured second Wind Turbine Inspection contract in August and granted National Qualified Entity status by the UK's Civil Aviation Authority. Strat Aero executed another Master Franchise Agreement with the Limkokwing University of Creative Technology, and more recently, Geocurve awarded a multi-year contract worth £2.5m over the duration of 10 years to provide aerial inspection and survey services for the Environment Agency's Thames Estuary Asset Management 2100 programme. On Friday it also announced settlement of litigation with Aero Kinetics.

Our view: The half year performance saw a number of the revenues opportunities slip due to slower than expected adoption of UAV solutions by the larger customers. On the other hand, post the period, the Group settled all litigation and claims arising from Aero Kinetics by issuing its CEO, Mr. Smith, 44,750,645 new Ordinary Shares (representing c.11.75% of the Group's enlarged issued share capital) and a cash payment of US$75,000. Moreover, Geocurve's sizeable contract worth £2.5m showed confidence does finally appear to be returning. In a sector that is otherwise becoming crowded-out with 'me too' player, the new contract in particular is a big 'tick in the box' for Strat Aero. This also tells us that if utility groups like the Environment Agency are prepared to engage with such 'newfangled' technologies, then UAVs are rapidly going mainstream with all the giant market opportunities that presents. The reality is that ATC regulators globally, including the likes of the US's Federal Aviation Administration and the UK's Civil Aviation Authority, have been running significantly behind with UAV/UAS curve for some years now and, given the relatively low cost of entry and the vehicle's potential to create safety hazard, criminal or terrorist opportunity in national airspace, this has to change. When they do catch up, new legal and operating constraints will likely squeeze out the bulk of the 'mom and pop' entities that have saturated this early stage opportunity, leaving larger, more credible players with comprehensive offerings, like Strat Aero, to seize the longer-term opportunity. That's the upside vision but, back on earth the Group's management still must contend with many challenges, including restructuring the numerous different operations that were thrown together over the past 18 months or so, into a series fully integrated and complementary operations while taking the knife to costs. Having recorded an operating loss of some US$2.4m during H1 FY2016, and having managed to raise only around US$0.5m in August's equity placing, Strat's balance sheet is clearly under strain. With this in mind, the Board was clear in its H1 outlook statement that it "expect that the Company will require additional funding during the fourth quarter to provide working capital and support continued growth". Once such issues have been resolved, however, shareholders will be able to focus back on the scale of its global opportunity and the Group's early mover advantage. Until then, Beaufort retains its 'Hold' recommendation.

Beaufort Securities acts as corporate broker to Strat Aero plc

Sierra Rutile (LON:SRX, 26.50p) - Under Review
On Friday, Sierra Rutile published 1H16 results in line with our and consensus' expectations. Revenues were based on a strong (indeed record) first half production performance and improving but still weakish rutile prices, especially since the sales price on many 1H orders was agreed in 2015. There were two lumpy exceptional costs in the P&L but otherwise no surprises. The outlook statement is positive and full year production guidance increased to 135-145kt. We have updated our FY16 numbers although the changes are modest as we had already assumed 140kt of FY16 rutile production. Re: the transaction - assuming Iluka remains committed, the final decision of the German Antitrust Authority and actions of the Sierra Leone government will determine the outcome. Neither can be predicted with any certainty and so we keep our recommendation Under Review.

Our view: While uncertainty exits re: the transaction, we cannot justify recommending a Buy, Sell or Hold. If the transaction falls away we would expect the share price to fall, at which point we will re-evaluate our previous 40p target price in light of the 36p accepted by the board.

Tullow Oil (LON:TLW, 253.10p) - Speculative Buy
Tullow Oil received confirmation from its lead insurers that there is a recoverable claim with regard to the group's corporate policy for business interruption insurance following damage to the Jubilee turret bearing earlier this year. This follows Tullow's announcement on 23rd September 2016 that hull & machinery cover for Jubilee has also been confirmed.

Our view: Tullow Oil receiving confirmation of claim for the damage to the Jubilee turret bearing is a positive development. The cover comprises production losses at the Jubilee Field associated with the failure of the bearing and the downtime associated with the work programme to re-establish normal operations. Tullow would work closely with loss adjusters and insurers to establish an efficient payments schedule as remedial work continues. Recently, Tullow informed that first oil flowed from the Tweneboa, Enyenra, Ntomme (TEN) fields offshore Ghana. First oil was reached on time, on budget, three years after the plan of development was approved in May 2013. The TEN start-up process is now well advanced and Tullow expects oil production to ramp up gradually towards the FPSO capacity of 80,000 bopd through the remainder of 2016. Tullow estimates that TEN's average annualised production in 2016 will be approximately 23,000 bopd (net: 11,000 bopd). In the light of these developments, we maintain a Speculative Buy rating on the stock.

Economic news
UK Nationwide House prices

As per a report by the Nationwide Building Society, house prices in the UK increased 5.3% y-o-y in September, after rising 5.6% in August. On an m-o-m basis, house prices rose 0.3% vis-à-vis 0.6% growth in August.
US personal income and spending
US personal income advanced 0.2% m-o-m in August, after a 0.4% rise in July, the US Commerce Department said on Friday. Personal spending remained flat, after 0.4% increase in July.
US Chicago purchasing manager
The Chicago purchasing managers' index (PMI) improved to 54.2 in September from 51.5 in August, data from MNI Indicators suggested on Friday. The markets expected a reading of 52.0.
US University of Michigan sentiment
The US University of Michigan's consumer sentiment index for September increased to 91.2, from a preliminary reading of 89.8, final data indicated on Friday. The consumer expectations index, which closely forecasts the direction of consumer spending, rose to 82.7 in September from a preliminary reading of 81.1, while the current economic conditions improved to 104.2 from a preliminary reading of 103.5.

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