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Beaufort Securities Breakfast Alert: Costain, IP Group Plc, IP2IPO, MySQUAR Limited

Published: 08:30 19 Dec 2016 GMT

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Today's edition features:

MySQUAR Limited (LON:YSQ)

Costain Group (LON:COST)

IP Group (LON:IPO)

"By the end of last week, global markets had started showing signs of fatigue. This follows a stream of new record highs on Wall Street, as the US$ and Treasury yields rose to multi-year peaks while the Fed adopted a more hawkish stance and lifted interest rates for only the second time in ten years. Their concerns are very real and have even led some to question whether the rest of the world should, in fact, be attending this particular party. As European and Asian market traders prepare for the Christmas/New Year break, political uncertainties that potentially threaten the very survival of the European Union will likely take centre stage early in 2017, as it heads to key elections in France, Germany, the Netherlands, Czech and Serbia, remain high; meanwhile escalating Sino-US trade and military tensions are set to heat up still further as Trump assumes office on January 20th. With such concerns overhanging, nearly all the overnight markets ended with fractional losses on relatively low volumes Friday evening and Monday morning. Having posted its sixth consecutive week of records, the Dow Jones took a breather, dragging down both the S&P 500 and NASDAQ with it. Asia ended similarly, with the Hang Seng hurting the most as focus returned to capital flight from the territory and pain from the continuing sell-off of Chinese bonds as traders speculated on the need for monetary tightening early in the New Year, while the Nikkei found itself not in the mood to celebrate the reported jump in November exports registered for November, led by ships and semiconductors, due to the news uncomfortably spiking the Yen against the US$; this left the commodity-heavy ASX as the region's only real winner with minerals stocks not surprisingly leading the way again. London is not scheduled to receive any significant macro data this morning, although the US is due to produce Services PMI numbers this afternoon, which will be followed by a speech from Fed-chair, Janet Yellen. There is little going on amongst UK corporates this morning, although earnings or trading updates are anticipated from a few second-liners, including Collagen Solutions (COS.L), Mytrah Energy (MYT.L) and Windar Photonics (WPHO.L). Traders will also be today anticipating tomorrow's CBI retail sales survey for any further signs of weakness in the UK economy following last week's higher than expected inflation figures and softening jobs market data, while looking out for further news regarding BP's (BP..L) US$2.2bn deal that was confirmed this morning detailing its acquisition of a 10% holding in Abu Dhabi's ADCO onshore concession. London is expected to open reasonably firm, rising some 30 points in early trade, although most of these gains are expected to be given back by mid-morning."

- Barry Gibb, Research Analyst

Markets
 

Europe

The FTSE-100 finished Friday's session 0.18% higher at 7,011.64, whilst the FTSE AIM All-Share index closed 0.22% better-off at 825.19. In continental Europe, the CAC-40 finished 0.29% higher at 4,833.27 whilst the DAX was 0.33% higher at 11,404.01.

Wall Street

In New York on Friday, the Dow Jones declined 0.04% to 19,843.41, the S&P-500 shed 0.18% to 2,258.07 and the Nasdaq was off 0.36% to 5,437.16.

Asia

In Asian markets this morning, the Nikkei 225 was down 0.07% to 19,387.25, while the Hang Seng lost 0.87% to stand at 21,829.26.

Oil

In early trade today, WTI crude was up 0.87% to $52.35/bbl and Brent was up 0.82% to $54.33/bbl.

Headlines

Thousands of workers set to strike in Christmas week

Thousands of workers will launch a wave of strikes this week, hitting postal services, rail companies and airlines in the run-up to Christmas. About 3,000 staff at hundreds of Crown post offices are expected to walk out on Monday, Tuesday and Saturday. The action marks an escalation of their dispute over pension changes, job security and closures. Meanwhile the rail strike at Southern continues with conductors beginning two-day action. Kevin Gilliland, Post Office group network and sales director, said fewer than 300 branches would be affected, with "business as usual in almost all of our network". On Wednesday and Thursday, workers who supply many sub-post offices with cash will join the action. There are fears the situation could escalate if unofficial action is taken by Royal Mail workers who refuse to cross picket lines. A Royal Mail spokesman said: "There will be little or no impact on Royal Mail as a result of the CWU strike at the Post Office. Deliveries will carry on as normal and the last posting dates for Christmas remain unchanged."
 

Company news

MySQUAR Limited (LON:MYSQ, 2.38p) – Speculative Buy

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 released its Annual Report for the year ended 30 June 2016. Financial highlights for the period included revenues of US$795,191 and total expenses of US$3,246,778, including US$501,214 of share-based payment expenses. Post the period, the Group completed an equity placing for £475k (August) and issued two Convertible Loan Notes (September and December), the gross proceeds of which were US$3m. Operationally, it diversified its business portfolio to include the chat and social networking application MyCHAT (with integrated monetisable features such as advertising, stickers, push notification, etc.), mobile gaming, mobile marketplace, VoIP, and the payment application (in cooperation with MyPAY Ltd). All products have already been released, except the VoIP and the payment application which are planned to release soon. In so doing, the Group's strategy has transitioned away from relying solely on applications developed in-house to partnering or licensing applications developed by third parties. Expansion of a modern 3G/4G-ready telecommunications network across Myanmar is key to MySQUAR's strategy. As of May 2016, proliferation of 43.72 million SIM cards had seen sales by local operators, equating to 89.38% national mobile penetration (Myanmar Times); the telecoms sector will be further boosted as a fourth operator license was awarded a few months ago to a joint venture between Viettel from Vietnam and its local partners.

Our view: MySQUAR's principal objectives for the current financial year are clear. Firstly to continue growing its user base and revenue numbers as quickly as possible through monetisation of games, VoIP, payment services, mobile marketplace, advertising and paid features in MyCHAT and, secondly to reach operating cash-flow break-even. In order to achieve these objectives, new funding arrangements have been put in place to accelerated the introduction of major applications while also ensuring management retains as lean a cost structure as possible. Momentum, for what is Myanmar's only such branded local language platform has clearly become quite enormous. By the end of this month the total number of registered user accounts, which has already exceeded 6m could have grown by a further 10% and continues apace. More to the point, Beaufort now sees it achieving monthly break even during the second half of the current financial year. This is important, because the terms of the large, recently issued CLN have effectively created a stock overhang and shareholders need reassurance that a similar event will not be required next year. That said, management had an immediate need for such a facility and the alternative, in terms of a deeply discounted equity placing, could well have caused irreparable damage to market confidence in the Group. On a much more positive note, however, MySQUAR is now positioned to over-deliver on operational promises. This is something that is unlikely to have been missed by the numerous and very cash-rich global hubs, who remain determined to ensnaring players in virgin territories that have successfully participated in an online user 'landgrab'. In this respect, MySQUAR now appears quite dramatically undervalued; Beaufort retains a price target of 21.0p/share and repeats its Speculative Buy recommendation.

Beaufort Securities acts as corporate broker to MySQUAR Limited

Costain Group (LON:COST, 351.50p) – Buy

Costain, an engineering solutions provider delivering integrated consulting, project delivery and operations and maintenance services, on Friday announced that Highways England has renewed its Area 14 Maintenance and Response contract. The contract is estimated to be worth up to £120m to the Joint Venture (50:50 Joint Venture with CH2M) over 15 years with work beginning in April 2017. The Joint Venture will provide routine and cyclical maintenance work, incident and severe weather response and will be responsible for the maintenance of depot facilities for Highways England. Costain's CEO, Andrew Wyllie CBE, commented "I am delighted that we are now able to continue working with Highways England as part of the new Area 14 contract. We will be delivering an innovative, technology-based approach to asset management that will lead to improved levels of efficiency, environmental sustainability and the highest safety standards."

Our view: The renewal of the contract is a positive news, demonstrating the constructive relationship Costain has built with Highways England and that its offering with JV partner CH2M meets customer's expectations. This follows two large contract wins announced last month with National Grid worth £113m and High Speed Two (HS2) worth £300m (50:50 Joint Venture with Skanska). Its H1 2016 results announced back in August, saw the Group reporting a strong earnings performance, with excellent forward visibility and record order book, with over 90% represented repeat business, reaffirming the quality of the Group's long-term relationships with blue-chip customers that can be expected to remain with it for the foreseeable future. Being significantly a UK-UK (labour and materials) operation, Costain is unlikely to incur a significant hit from BREXIT although, like others in the sector, must be considered vulnerable to a prospective wider economic slowdown. Such an outcome, however, still appears some way off, which explains the strong share price recovery post 24th June, supported further by the Chancellor's Autumn Statement (23rd November) reaffirming commitment towards infrastructural investment, particularly in sectors such as highways, digital and railways. Given the Group continues to win highly competitive contracts, together with excellent visibility for the next two years (management noted £1bn of revenue for 2017 and £2.2bn of revenue for 2018 was already secured at the time of its H1 result), Beaufort reiterates its Buy rating on the shares.

IP Group (LON:IPO, 158.00p) – Buy

IP Group, the developer of intellectual property-based businesses, on Friday announced that it has agreed to acquire Parkwalk Advisors Ltd ('Parkwalk'), the UK's largest EIS (Enterprise Investment Scheme) growth fund manager who focused on university spin-outs, for a maximum consideration of £20m payable in the form of cash and newly-issued IP Group ordinary shares, over a 3 year period. The initial consideration is £10m, with the remaining £10m is payable, subject to Parkwalk achieving certain business performance targets. Founded in 2009, Parkwalk has raised over £100m, majority from leading private wealth platforms and backed over 60 companies across its managed funds since inception. In 2016, Parkwalk committed over £40m to UK university spin-outs and has been a long-term co-investment partner of IP Group, having co-invested over £17m in 14 investment rounds during 2015/2016. IP Group said Parkwalk is a profitable business and will be "immediately accretive" to the Group's operating results. IP Group will retain Parkwalk's existing investment team and investment decision-making independence post-acquisition. IP Group's CEO, Alan Aubrey, commented "Parkwalk is a great strategic fit for IP Group being the market leader in the sector with fast growing assets under management run by an experienced team with an excellent track record. The acquisition reinforces IP Group's access to a diversified pool of capital for co-funding the earlier stages of the portfolio while providing a profitable and growing platform to develop closer links with institutional investment platforms. We consider EIS funds to be an increasingly important source of financing for early-stage technology companies and believe Parkwalk's strong links to leading institutional wealth managers and university partners will be beneficial to the Group."

Our view: The acquisition is another encouraging move for IP Group. Parkwalk has significant assets under management and is currently profitable, which is expected to be immediately accretive to the Group's operating results. The acquisition allows IP Group to access to a diversified pool of capital, build stronger relationships with many of IP Group's existing university partners and leading institutional wealth managers. Last week, two of the IP Group's portfolio company, Oxford Nanopore and Oxford Sciences Innovation, raised £100m and £230m respectively. Viewing long-term market potential, IP Group's continuing investment in its portfolio of companies to support their technological, product and commercial development ensures shareholders participate in future monetisation opportunities. While the Group saw a minor reduction in its NAV at the interim stage to around £685m, value continues to be added to the portfolio. Beyond the two already mentioned, both OSI and Ultrahapatics also provide significant medium-term upside. A substantial cash position (some £175m at the half year) suggests IP Group can fully commit to existing commitments and new deployments for more than 2 years before needing to realising any existing gains. The shares have tracked back from the highs achieved some 15 months ago, underperforming the FTSE250 by around 20%, to now stand at an estimated 1.38x NAV. This suggests the shares are trading some 10% below fair value (or 1.5x NAV) and Beaufort accordingly retains its Buy rating on the shares.

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