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Beaufort Securities Breakfast Alert: Boohoo.com, Cyan Holdings PLC, Pennon Group plc

Published: 08:08 10 Feb 2017 GMT

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Today's edition features:

• CyanConnode (LON:CYAN)

Boohoo.com (LON:BOO)

• Pennon Group (LON:PNN.L)

 

Markets

Europe

The FTSE-100 finished yesterday's session 0.57% higher at 7,229.50, whilst the FTSE AIM All-Share index improved 0.17% to stand at 899.38. In continental Europe, the CAC-40 finished up 1.25% at 4,826.24 whilst the DAX was 0.86% higher at 11,624.86.

Wall Street

In New York last night, the Dow Jones rose 0.59% to stand at 20,172.40, the S&P-500 added 0.58% to finish on 2,307.87 and the Nasdaq improved 0.58% to 5,715.18.

Asia

In Asian markets this morning, the Nikkei 225 had added 2.49% to 19,378.93, while the Hang Seng gained 0.63% to stand at 23,672.88.

Oil

In early trade today, WTI crude was up 0.28% to $53.15/bbl and Brent was up 0.29% to $55.79/bbl.

 

Headlines

Germany warns the City over Brexit risk

One of Germany's most senior banking regulators has warned London that it is likely to lose its role as "the gateway to Europe" for vital financial services. Dr Andreas Dombret, executive board member for the German central bank, the Bundesbank, said that even if banking rules were "equivalent" between the UK and the rest of the European Union, that was "miles away from access to the single market". Mr Dombret's comments were made at a private meeting of German businesses and banks organised by Boston Consulting Group in Frankfurt earlier this week. They give a clear - and rare - insight into Germany's approach as Britain starts the process of leaving the European Union. And that approach is hawkish. "The current model of using London as a gateway to Europe is likely to end," Mr Dombret said at the closed-door event. Mr Dombret made it clear that he did not support a "confrontational approach" to future relations between the UK's substantial financial services sector and the EU. But he argued there was "intense uncertainty" about how the Brexit negotiations would progress and significant hurdles to overcome. The Bundesbank executive, who is responsible for banking and financial supervision, said he was concerned that the trend towards internationally agreed standards was under pressure. And that Britain might try to become the "Singapore of Europe" following Brexit, by cutting taxes and relaxing financial regulations to encourage banks and businesses to invest in the UK.

Source: BBC News

 

Company news

CyanConnode (LON:CYAN, 0.21p) – Speculative Buy

The world leader in narrowband radio mesh networks, yesterday announced receipt of a purchase order from a specialist in energy management systems for a smart metering contract in Bangladesh, South Asia. This is the Group's first order for a utility customer in Bangladesh and is a further demonstration of its growing geographical sales footprint. Furthermore, the order size and revenue visibility provided by the long-term nature of this order reflects its leading position within the smart metering industry in both emerging markets and also in Europe, where the importance of being able to accurately and remotely record data around energy consumption with appropriate billing is demanded. The US$5.4 million purchase order is for the supply of CyanConnode's Advanced Metering Infrastructure solution for a 150,000-unit smart metering deployment. The energy management system company, based in Eastern Europe, will integrate CyanConnode's hardware with its smart meters and shipment to their production facility will take place over the next 12-18 months. CyanConnode will also provide its Head End Server Software, which will be hosted by the energy management systems customer, with annual software licence income being recognised over a ten-year contractual period following successful smart meter implementation. The recurring revenue software licences and annual maintenance contract, which represent 50% of the total purchase order value, will be paid annually in advance and charged on a per meter per year basis.

Our view: A significant order from a new partner in a new geographic region! This Eastern European company is a leading smart grid solution provider with ten years' experience in varied countries including Russia, Eastern Europe and South Asia. It has formed a local entity, a new utility that has entered a long-term agreement with the Bangladeshi Government to provide electricity to consumers. It brings a consumer base of four million customers, which provides the potential for substantive follow-on orders, given the overall number of electricity consumers in Bangladesh is some 58 million and the fact that the World bank estimates between 2% and 3% of domestic GDP disappears through non-technical losses and power outages. Given their adoption of CyanConnode’s award-winning technology with its market leading smart meter solution, this is potentially the first of a series of such major contacts. Having established the scale of the opportunity (see Beaufort’s publication ‘The Future is Smart!’ that was released on 21 September 2016), the coming 24 months will see CyanConnode’s branded offering occupy the position of ‘industry standard’ for the sector. Indeed, Smart grid investment is projected to total US$8.1 billion over the period 2016-2026, with large-scale funding from the Asian Development Bank, the World Bank as well as bilateral aid organisations. This will enable it to add significantly to the already impressive backlog from India, Iran and the UK both with repeat orders and new large, long-term and exceptionally sticky customers. Despite using a chunk of the £10.1m (gross) raised through last summer’s Placing and Subscription to build up working capital, it still holds a significant cash reserve as it progresses into 2017. CyanConnode’s business model is maturing while its business opportunity remains in its infancy. Recognising the Group’s lead in this giant developing opportunity, Beaufort reiterates its Speculative Buy recommendation and price target of 0.6p/share.

Beaufort Securities acts as corporate broker to CyanConnode plc

 

boohoo.com (LON:BOO, 139.86p) – Buy

boohoo.com (‘boohoo’), one of the UK’s largest online own-brand fashion retailers, yesterday announced that it has obtained US Bankruptcy Court approval to acquire certain intellectual property assets (Nasty Gal brand and its customer databases) from US fashion retailer Nasty Gal Inc. for US$20m. This follows the announcement on 6 February 2017 where the Group said Nasty Gal had not received acceptable, qualifying bids for the intellectual property assets and customer databases and, therefore no auction will take place. The transaction, subject to the satisfaction of customary closing conditions waivable at the Group's discretion, is expected to complete on 28 February 2017. boohoo will finance US$20m through a combination of cash and a new bank debt facility of up to US$20m. boohoo’s joint CEOs, Mahmud Kamani and Carol Kane commented “We are delighted to have been successful in our bid to acquire Nasty Gal. It represents an exciting opportunity to accelerate our international offering and inspire an ever-growing range of young customers in the US and around the world.”

Our view: Founded in 2006, Nasty Gal is based in Los Angeles sells women’s clothing, shoes, and accessories in 180 countries targeting fashion for ‘young women’. Nasty Gal has generated net revenue of US$77.1m and a net loss after tax of US$21m (includes operating costs) in the year ended 1 February 2016. With over 3.5 million social media followers it represents an attractive resource for fast fashion online retailers like boohoo. The addition of the ‘Nasty Gal’ brand and its customer databases will accelerate boohoo’s international presence, particularly in the US, while also enabling it to expand customer reach. Given the strong result for the first 10 months to 31 December 2016 (announced on 10 January 2017), the Board confirmed a further upgrade to its full year revenue growth guidance (excluding recently acquired PrettyLittleThing) to 43%-45% from previous 38%-42%, having already revised this figure upward four times during the year. As noted in its previous trading update on 14 December 2016, PrettyLittleThing is expected to deliver revenue growth of over +150% in the financial year ending 28 February 2017 (FY2016: revenue £17m), while it anticipates being broadly breakeven at EBITDA level. The Group revenue growth including PrettyLittleThing, therefore, is expected to be between 46%-48%, while its EBITDA margin remains in line with previous guidance of between 11%-12%, having been lifted from 9.6% at the interim. The number of active customers (who shopped during the last year) has now grown to 5.1 million, up +13% since H1, with international sales (including rapidly growing US and Rest of World) increased to 39.3% of total revenue (H1 FY2017: 36%). Beaufort believes that the worldwide market for internet fashion sales will continue to expand as shopping preferences shift towards the convenience and competitive pricing affordable by online retailers, such as boohoo. The acquisition of the Nasty Gal’s intellectual property is highly valuable and become accelerator for boohoo once the Group integrates it with its popular products and highly engaging marketing strategy. We view the recent acquisition of PrettyLittleThing and Nasty Gal Inc. both as excellent strategic fits, which can be expected to accelerate the enlarged Group’s growth momentum while maintaining ability to meet rapidly changing customer demand patterns. The shares have performed extraordinarily well over the past year, yet we believe there remains further upside for the share price. Beaufort reiterates its Buy rating on the shares.

 

Pennon Group (LON:PNN, 844.76p) – Buy

Pennon Group, one of the largest environmental infrastructure groups in the UK for water and wasterwater services, yesterday provided a trading statement where the Board confirmed that it is on track to meet FY2017 performance in line with its expectations and prior guidance. South West Water (provides water and wastewater services) is on course to remain at a sector-leading 11.7% RORE and Viridor (Group’s recycling, Energy Recovery and waste management company) is on track to generate EBITDA target of c.£100m from its portfolio of 12 Energy Recovery Facilities (‘ERFs’) across the UK. As noted in the interim report, the Group said Glasgow's Recycling and Renewable Energy Centre (‘GREEC’) is being completed by an experienced team assembled by Viridor, which will work with a new Engineering, Procurement and Construction (‘EPC’) contractor, Doosan Babcock, who are currently finalising an assessment and project plan at the site. Doosan Babcock replaces the previous EPC contractor, Interserve, due to repeated delays in the completion of GREEC and Pennon’s client, Glasgow City Council, is said to be supportive of Viridor's actions and the revised plan for completion. In Greater Manchester, the Group repeated that Viridor remains challenging due to prolonged austerity faced by its client (Greater Manchester Waste Disposal Authority). Modifications are currently being undertaken by the original construction contractor. The Group intends to announce its full year FY2017 results on 24 May 2017.

Our view: Pennon continue to progress in line with expectations. Both businesses are trading well and the Board repeated its commitment to a “sector-leading dividend policy” of +4% growth per annum above RPI inflation to 2020. Looking ahead, the Group is on track to deliver an excellent 11.7% Return on Regulatory Equity (‘RORE’) for South West Water and reach targeted EBITDA of c.£100m (H1 FY2017: £50.5m) for Viridor. Separately, the Group has also announced that it has agreed terms with Nomura to unwind a derivative that it entered in 2011 through Peninsula MB Ltd. The derivative was originally due to end in 2027, but following a change in the economic benefit of holding this derivative outlined within the H1 results, the Group has decided to exercising its option to unwind the transaction early. The estimated overall post-tax impact of unwinding this derivative has already been reflected through the £39.5m derivative liability recognised at the H1 FY2017 accounts. The shares are valued at FY2017E and FY2018E P/E multiple of 20.3x and 18.9x, along with dividend yield of 4.2% and 4.5%, respectively. The Group’s continuous investment in ERF ensures its growth momentum, while the management confidently stated that it expects a “good set of results” for the FY2017. In light of the Group’s progress, Beaufort retains its Buy rating on the Shares.

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