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Beaufort Securities Breakfast Alert: Collagen Solutions PLC, Servision Plc, SAN LEON ENERGY PLC

Published: 08:43 20 Dec 2016 GMT

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Today's edition features:

SerVision (LON:SEV)

Collagen Solutions (LON:COS)

San Leon Energy (LON:SLE)

"Speaking at a University of Baltimore commencement ceremony yesterday Fed Chair, Janet Yellen, said the US has the strongest jobs market in nearly a decade and that there are indications wage growth is also picking up. This 'music to the President-elect's ears' provided the impetus for US markets to claw back the previous day's losses, although bargain-hunters this time chose to back bond-proxies, such as real estate, energy and utility groups, that otherwise have been ignored by those betting on higher growth and reflation under the Trump administration. While the gains were modest with all major averages ending off session highs, the NASDAQ 100 still notched up a fresh all-time intraday peak while all three principal indices closed within 0.75% of their records. The baton was then picked up by the Bank of Japan, which raised its assessment of the economy for the first time in 18 months and, although monetary policy remained unchanged, the central bank's enthusiasm generated speculation regarding a prospective rate increases that would have seemed pure fantasy just a couple of months back. Japan accordingly led gains in Asia dragging the ASX behind it, while the main Chinese markets both continued to focus in on the continuing war of words with the United States as authorities returned the drone seized by its navy following 'friendly consultations' and traders picked up hints of a prospective tightening of liquidity in Q1'2017 from the PBOC. In the wake of yesterday's apparent terrorist attacks in both Berlin and Ankara, however, Europe is expected to open in a quiet, reflective mood. The UK will focus on this morning's CBI Retail Sales Survey, which investors will scrutinise carefully for any further signs of softening confidence following November's dull sales figures, stronger than expected inflation and higher fuel prices. Other than this and the release of Capital Issuance Data from London, the US is expected to release only its Redbook today ahead of a larger swath of pre-holiday economic data on Thursday and Friday. UK corporates expected to release earnings or trading updates this morning will be limited to second-liners, such as IXICO (IXI.L), Kefi Minerals (KEFI.L), Spitfire Oil (SRO.L) and Vislink (VLK.L). Traders will also be keen to hear more regarding the reported approval for NATO to commence talks with Russia on Baltic Air Security, questioning whether this is a further sign of thawing relationships with the West, following Trump's positive campaign overtures. The FTSE-100 is seen opening just 5 points either side of unchanged this morning during light early trading."

- Barry Gibb, Research Analyst

Markets
 

Europe

The FTSE-100 finished yesterday's session 0.08% higher at 7,017.16, whilst the FTSE AIM All-Share index closed 0.18% better-off at 826.71. In continental Europe, the CAC-40 finished 0.22% lower at 4,822.77 whilst the DAX was 0.20% higher at 11,426.70.

Wall Street

In New York overnight, the Dow Jones gained 0.20% to 19,883.06, the S&P-500 rose 0.11% to 2,260.45 and the Nasdaq added 0.37% to finish on 5,457.44.

Asia

In Asian markets this morning, the Nikkei 225 had risen 0.56% to 19,501.14, while the Hang Seng had fallen 0.54% to 21,713.77.

Oil

In early trade today, WTI crude was down 0.42% to $51.90/bbl and Brent was down 0.2% to $54.81/bbl.

Headlines

Lloyds Bank buys MBNA credit card firm for £1.9bn

Lloyds Banking Group (LLOY.L) is to buy credit card firm MBNA from Bank of America in a £1.9bn deal. Lloyds chief executive Antonio Horta-Osorio said MBNA would be a "good fit" with the bank's current credit card business. The bank, which is nearly 7% state-owned, said its share of the UK credit card market would increase from about 15% to 26% after the transaction.

 

Company news

SerVision (LON:SEV, 1.75p) – Speculative Buy

SerVision, the leader in mobile live video streaming over wireless and cellular networks, yesterday announced that its UK subsidiary, SerVision UK Limited, has been awarded two new customer orders for its IVG400-N system, the Group's cutting-edge High Definition mobile video gateway system, following its strategic decision to target the UK bus and coach sector. Following a six week trial period, the Group has received a purchase order for £120,000 to supply 59 units of the IVG400-N system to Skills Motor Coaches Ltd, a major East Midlands coach company based in Nottingham with a fleet of over 150 vehicles. The contract also includes three years of data plan and technical support. The Group also received a purchase order to supply an initial ten systems for £28,000 to be installed onto new buses being built for the City of Cardiff Council Transport Department, following successful outcome of the trials. The next purchase order for another ten system is expected to be received in early 2017.

Our view: Following SerVision's successful entry into the UK private sector in 2016, these orders signal a significant move into a new market segment for the Group, and one which could open further opportunities for it. There are over 100,000 buses in the UK that could benefit from the increased protection offered by live streaming provided by SerVision systems, which is currently in discussions with a number of other bus and coach companies, including those businesses who run bus fleets for local UK councils. The equipment permits viewing of 'live' camera feeds, whether travelling in the UK or in Europe, along with the ability to download quality footage directly via the mobile network. This can ensure insurers are provided with supporting CCTV evidence of any incidents within a matter of minutes of them occurring and potentially lower the cost of policies that otherwise are disadvantaged by lack of irrefutable evidence. In the light of these ongoing developments and the improved performance in H1 2016, in which a marginal rise in revenues and lower administrative costs was reported with management noting it was "cautiously optimistic" of delivering an improved year-on-year result for 2016 as a whole, Beaufort retains its Speculative Buy rating on the shares.

Beaufort Securities acts as corporate broker to SerVision plc

 

Collagen Solutions (LON:COS, 5.25p) – Hold

Collagen Solutions, the developer and manufacturer of medical grade collagen components for use in regenerative medicine, medical devices and in-vitro diagnostics, announced its interim results for the 6 months ended 30 September 2016 ('H1 FY2017'). During the period, revenue and other income advanced by +30% to £1.89m while administrative expenses increased to £1.34m (H1 FY2016: £898,284), against the comparable period (H1 FY2016). Adjusted LBITDA widened to £418,308 (H1 FY2016: £79,376) and pre-tax loss enlarged to £983,313 (H1 FY2016: £356,537) leading basic and diluted loss per share of 0.60p (H1 FY2016: 0.26p). Cash and cash equivalents at the period end stood at £1,657,193 (31 March 2016: £2,493,146). On the operational front, its lead 'finished device' (ChondroMimetic) progressed towards initiating 6-year retrospective study and re-establishing manufacturing and European approvals. The Group also initiated 2 additional 'finished device' projects for wound repair and bone healing. Opened new commercial offices in South Korea and USA, the Group also continued progress with its distribution channels in Asia and in China through Cre8ive Joint Venture. The Group was invited in September to participate in a second Horizon 2020 grant funded research programme, for which, Collagen Solutions will receive c.€500,000 over 5 years for the project expected to commence in early 2017. Collagen Solutions' CEO, Jamal Rushdy, commented "I am pleased to report on the continued momentum in our core biomaterials contract development, supply, and manufacturing business. Recent investment in sales and marketing, and in particular talent, systems and processes, has resulted in improved operational efficiency. We are on track to initiate a six-year retrospective study for ChondroMimetic with new data to demonstrate long-term tissue regeneration with 3D MRI analysis as well as sustainability of the early positive functional results, and in parallel obtain the CE mark in 2017. Together, we believe that the progress made during the period set the strategic foundations on which we will base our objective to grow our revenue by 5x within 5 years."

Our view: Collagen Solutions delivered strong revenue growth during the H1, supported by increased material supply and contract manufacturing activities from both new and existing customers. The Group loss widened, however, despite the encouraging revenue growth, due to the higher administrative expenses, reflecting the increased headcount in R&D, quality, operations and finance and administration, as well as higher costs of additional office and production space. The Group made good progress operationally with its 6-year retrospective study for ChondroMimetic which is remains on track to initiate. Additionally, new projects for wound repair and bone healing will shortly open up new commercial opportunities in the orthopaedic and wound care markets. Post the period, the Group signed distribution agreements for research markets in South Korea and Japan. It has also refined its target to grow revenue by 5 times within 5 years, against FY2016, indicating CAGR revenue growth of +38.0% ending FY2021. Having risen sharply back last summer following our Speculative Buy recommendation, in common with a large number of other cash-hungry AIM-quoted technology stocks, the shares succumbed to a more generalised sell off during Q4 2016. While we consider Collagen will make good development progress during the current year, the Group's cash burn has increased substantially to c.£140k/month during the period which, given its cash position, suggests the Board may well need to seek additional funding from shareholders within the next 6-9 months, Beaufort considers this may be the sensible point for interested investors to add to their positions. In anticipation of such an event, Beaufort has decided to downgrade Collagen Solutions from Speculative Buy to Hold.

 

San Leon Energy (LON:SLE, 52.00p) – Speculative Buy

The Board of San Leon yesterday responded to takeover speculation contained in the weekend press. The Board of San Leon went on to confirm that it has received an approach from a possible offeror, which may or may not lead to an offer being made for San Leon. It noted that this announcement does not constitute an announcement of a firm intention to make an offer under Rule 2.5 of the Takeover Rules and that there can be no certainty that an offer will be made or as to the terms on which any offer might be made. Management confirmed a further announcement will be made, as appropriate, in due course.

Our view: The market appears to believe that any such interest for San Leon assets is likely to have originated from Asian, specifically Chinese oil & gas, operator(s). Whilst, at this time, there is clearly no substance to such rumours, it does make some sense. The size of the opportunity San Leon presents is quite overwhelmingly large. Back in August, the Group conditionally raised approximately £170.3 million (US$221.4 million) through an issue of 378,400,000 new ordinary shares at a placing price of 45 pence per Ordinary Share with institutional and other investors. The net proceeds were used to complete the OML 18 Production Agreement, which resulted in the Company securing an initial 9.72% indirect economic interest in OML 18, the world-class Nigerian onshore oil and gas asset, and for general corporate purposes. Approved by shareholders on 20th September, this represents entry into the Nigerian onshore oil and gas production industry, one of the largest oil producing countries in the world. OML 18's estimated gross 2P reserves are approximately 576 MMbbl of oil and approximately 4.2 Tcf of gas and its gross 2C contingent resources are approximately 203 MMbbls of oil and approximately 1.6 Tcf of gas. As of June 2016, the asset was producing at approximately 50,000 bopd of oil and approximately 50 MMscfpd of gas. Eroton, the Operator of OML 18, has entered into an Offtake Agreement at a gross price of US$95/bbl (US$91.5 net) for approximately 35% of the expected 2P production to the end of 2017. San Leon also has the right to provide oilfield services to Eroton. Oisin Fanning, Executive Chairman of San Leon noted in a RNS announcement back in August that "This is a transformational transaction representing the progress that we have made in delivering against our strategy of securing production and near-term operational cash flow". The leap in yesterday's share price reflects recognition of the substantial long-term pay-back that may be derived for San Leon from OML 18, the additional doors such an arrangement could open in Nigeria/West Africa generally and, perhaps, anticipation of OPEC's recent international production cut resulting in firmer long-term oil prices. Having drifted off from the highs achieved immediately after gaining shareholder approval for the deal, the San Leon shares settled back close to the placing price before yesterday's leap. Further details of the party behind this approach for control of San Leon, and potentially even, expressions of interest from other players, will be needed to power a further significant uplift in the shares. Not that Oisin Fanning, of course, is unlikely to surrender without the considerable returns being placed on the table for shareholders. Beaufort retains its Speculative Buy recommendation on the shares.

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