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Beaufort Securities Breakfast Alert: Berkeley Group, Cyan Holdings PLC

Beaufort Securities Breakfast Alert: Berkeley Group, Cyan Holdings PLC

Today's edition features:

• CyanConnode Holdings (LON:CYAN)

Berkeley Group Holdings (LON:BKG)

 

"Despite the University of Michigan releasing its preliminary reading of March consumer sentiment on Friday, which suggested US personal finance confidence rising again, this time to a 17-year high as the Nation effectively achieves full employment, US equities remained narrowly rangebound. Industrial production data also released held steady in February which, although slightly below market consensus, still provided underlying confidence in continued growth amid a pickup in manufacturing and mining activity. But this was not enough given receipt of a slightly less hawkish tenor from the Fed. The problem appears to be that investors have heard Trump ‘talk-the-talk’ but, as was seen with the latest judges’ ruling against his travel ban, they are not yet convinced he can ‘walk-the-walk’. Thursday’s White House budget proposals, which focussed on cutting funding for projects deemed to have regional benefits, in order to increase funding to those with national scope, compounded this with some commentators suggesting the new programs will be less effective than existing ones. The President’s joint address to Congress, calling for legislation to procure US$1tr to rebuild the country’s tired infrastructure, for example, makes for great soundbites but Congressional scrutiny, particularly from fiscal conservatives who are reluctant to back massive federal spending, looks set be arduous to say the least. So while the wall of money being liberated globally from bond market rout provides plenty of back pressure, investors appear to be waiting for a new injection of confidence before being prepared to push already heady equity valuations one further step further. Traders also appeared unimpressed by U.S. Treasury Secretary Steven Mnuchin rebuffing a concerted push by world finance chiefs to disavow protectionism, fanning fears that the Trump administration's pursuit of an ‘America First’ policy could ignite global trade conflicts. With many officials suggesting they departed the G-20 meeting confused about where the new administration will ultimately land on trade policy, US equities ended mixed with only the NASDAQ able to put on a minute gain helped by Adobe, while the other two principal US indices were knocked by continued selling of health-care stocks, in particular Amgen which had released disappointing results from a cholesterol drug study. The cautionary mood spread to Asia, where only the Hang Seng put on a modest gain while the region’s other indices stayed in the red with the Nikkei being closed for a holiday. Important macro data from London today is limited to the Rightmove House Price Index for February which was released at midnight at +2.3% y-o-y, in line with expectations, while the EU produces Q4 Labour Costs; the US provides its Chicago Fed National Activity Index and later the Fed’s Charles Evans is due to make a speech. UK corporates due to report today include Volution Group (FAN.L), Satellite Solutions Worldwide (SAT.L), Frenkel Topping Group (FEN.L), Phoenix Group (PHNX.L) and Finsbury Food Group (FIF.L). Equities in London as seen similarly lacklustre this morning, with the FTSE-100 see moving 5 to 10 down in early trading."

- Barry Gibb, Research Analyst

 

Markets

Europe

The FTSE-100 finished Friday's session 0.12% higher at 7,424.96, whilst the FTSE AIM All-Share index added 0.22% to stand at 927.26. In continental Europe, the CAC-40 finished up 0.32% at 5,029.24 whilst the DAX was 0.10% higher at 12,095.24.

Wall Street

In New York on Friday night, the Dow Jones fell 0.1% to 20,914.62, the S&P-500 eased 0.13% to 2,378.25 and the Nasdaq was flat at 5,901.00.

Asia

In Asian markets this morning, the Nikkei 225 had fallen 0.35% to 19,521.59, while the Hang Seng firmed 0.52% to 24,436.83.

Oil

In early trade today, WTI crude was down 0.9% to $48.34/bbl and Brent was down 0.64% to $51.43/bbl.

 

Headlines

Vodafone's Indian unit and Idea Cellular announce merger

UK telecoms giant Vodafone (VOD.L) has merged its Indian business with Idea Cellular, India's third-largest network, to create the country's largest operator. The combined company will have almost 400 million customers, accounting for 35% of the market share, the firms said in a statement. The announcement ends months of speculation over an impending deal. Analysts say the merger was to fend off competition from a new operator - Reliance Jio. Owned by the country's richest man, Mukesh Ambani, Jio has forced Vodafone India and Idea Cellular, together with current market leader Bharti Airtel, to cut prices. Shares in Idea rose almost 4% in Mumbai following the announcement of the deal. India's leading mobile networks are embroiled in what analysts have described as "a vicious price war", started by the arrival of Jio. More than 10 telecom operators are battling it out to try and attract India's one billion mobile phone users. That has forced firms to keep tariffs low - significantly impacting their profitability.

Source: BBC News

 

Company news

CyanConnode Holdings (LON:CYAN, 0.18p) – Speculative Buy

The world leader in narrowband radio mesh networks, on Friday announced a conditional fundraising through new and existing institutional and EIS/VCT investors. It proposes to raise £3.2 million (gross) through the issue of a Placing of 230,441,804 New Ordinary Shares and Subscription of 1,676,470,58 at an Issue Price of 0.17 pence. This represents a discount of approximately 5.6 per cent. to the mid-market closing price of 0.18 pence on 16 March 2017. The New Ordinary Shares will rank pari passu in all other respects with the Company's existing ordinary shares. The net proceeds will be used to support the Company on its journey to large scale commercialisation, and more specifically to (i) Fund staffing costs for the delivery of customer projects won in its markets, as well as to secure new orders and maintain CyanConnode's leadership position in key markets; (ii) For the development and delivery of solutions that are being specifically requested by customers; (iii) To further develop CyanConnode's narrowband mesh network solutions to retain a competitive advantage; (iv) To further invest in business development initiatives to capitalise on opportunities in the Company's existing emerging markets and to secure orders in additional markets; (v) For the integration of CyanConnode's solution into additional Tier 1 meter manufacturer partners, which will allow CyanConnode to target larger contracts; and (vi) For ongoing growth and development. A Related Party, John Stamp, is a substantial shareholder of the Company, being interested in 13.62 per cent of the Company's share capital, and following Admission will be interested in 3,343,137,254 ordinary shares, representing 18.77 per cent of the Company. The Placing and Subscription remains conditional on, inter alia, on the passing of the Resolutions by Shareholders at the General Meeting of the Company to be held at the Company's registered office at 11.00 a.m. on 3 April 2017. Admission and commencement of dealings in the Enlarged Share Capital expected to commence on AIM on 7th April.

Our view: CyanConnode has positioned itself perfectly to secure a significant role in the pending international boom in smart metering. Momentum is building from all sides. Over the last four months, CyanConnode has announced orders relating to a significant number of units of its narrowband radio mesh network solution, including in Bangladesh (US$5.4m order split in hardware and services with 10-year contract), HP Power Sweden (100k software licences), Tata Power Mumbai (third order from Larsen & Toubro), landis + Gyr (€230k legacy solution) and E.ON (pilot project in Sweden). Adding to the Company’s recent momentum, CyanConnode is actively pursuing a number of projects which the Directors believe have a greater than 50% chance of success and an overall significant pipeline of 94 opportunities. In November 2016, the UKDCC also announced the official ‘go-live’ of the UK SMIP and the commencement of operations at the data centre for communication between consumers and the utilities. Consequently, the rollout of smart metering can now commence during the current year and will involve the installation of 53 million gas and electricity meters nationwide before the UK government's targeted completion date of 2020. CyanConnode was selected by Telefonica and Toshiba to provide a software platform that uses narrowband mesh technology to complement Telefonica's existing cellular network, allowing previously off-grid households to be reached as part of the SMIP. Telefonica was awarded a contract as the preferred communications service provider in two out of the three regions tendered by the UK Government. Telefonica's SMIP solution utilises its existing cellular network in the UK, supported by CyanConnode's C4 solution, which connects households without reliable cellular coverage (known as ‘not-spots’ by the mobile network operators). The CyanConnode software license and support fee revenue is expected to total £25 million over the life of the contract, having seen the 2016 milestones under the UK SMIP contract all successfully delivered. In order to properly exploit these opportunities and secure additional orders in its target markets, to deliver against existing customer commitments and to further develop solutions to ensure it retains its competitive advantage, additional investment funds are now being sought. 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 sector ‘industry standard’. 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. Having wisely deployed a good chunk of the £10.1m (gross) raised through last summer’s Placing and Subscription to build up working capital, the new proposed raise should be sufficient to carry it to the point of positive cash generation. CyanConnode’s business model is maturing while its business opportunity remains in its infancy. Recognising the Company’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 Holdings plc

 

Berkeley Group Holdings (LON:BKG, 3,144.00p) – Buy

The UK housebuilder on Friday announced a trading update covering the period from 1 November 2016 to 28 February 2017. It noted the housing market in its focus areas of London and the South East has now stabilised. Overall, underlying reservations in the seven months since the immediate Brexit referendum effect (August to February) were down 16% on the comparable period, although the last two months were ahead of last year. Enquiry levels remain robust, cancellation rates are at normal levels and pricing continues to be resilient and above management’s business plan levels. The reduction in reservations has been across all price points and reflects the ongoing impact of both Brexit uncertainty and the changes in recent years to SDLT and mortgage interest deductibility. This has been partly offset by the continued availability of mortgage finance at low interest rates, favourable currency exchange rates and the quality of Berkeley's well-presented and well-located homes. When coupled with the planning environment and increased demand from the combination of affordable housing, CIL, Section 106 obligations and review mechanisms, this has resulted in new starts in London falling by some 30%. The Board noted that pre-tax profits for the year ended 30 April 2017 are expected to be at the top end of analysts' expectations, with the actual outturn dependent upon completion timing on Berkeley's larger developments. A similar level of profitability is anticipated for the year ending 30 April 2018. As announced on 23 February 2017, a dividend of 85.24 pence per share will be paid on 24 March to shareholders on the register on 3 March. The £117.7 million cost of this dividend (based on the number of shares entitled to receive a dividend at the time of the announcement), when combined with the £21.1 million cost of the 747,367 share buy-backs in the relevant period up to 23 February, will complete the scheduled £138.8 million of returns to be completed by 31 March 2017.

Our view: That’s a relief! Berkeley is uniquely placed to maintain its high levels of production in London and the South East and is onsite in production on 58 sites. There are a further 22 sites that are either in the planning process or temporarily stalled by pre-commencement conditions that are due to be cleared. As such, Berkeley is in a strong position and remains on target to meet its ambition to deliver at least £3.0 billion of pre-tax profit over the five years ending 30 April 2021. Forward sales are expected to be in excess of £2.6 billion at 30 April 2017 at the prevailing rate, which as expected is below the £3 billion or so suggested back in December, and the Group remains ungeared. It continues to make selective acquisitions to its selective land bank. Importantly, Sterling devaluation appears to now be contributing to a more predictable environment, attracting international buyers back to central London premium sites. Surplus cash also continued to be handed back to shareholders; in total, Berkeley has now acquired 1,342,181 shares at a cost of £38.5 million since the 2 December 2016. The next £138.8 million of shareholder returns are scheduled to be made by 30 September 2017 through a combination of share buy-backs and dividends; the amount of the dividend component will be announced in August, taking account of share buy-backs made in the period from 24 February 2017. On this basis, there is scope for Beaufort to upgrade forecasts for periods to both April 2017E and April 2018E taking its pre-tax estimates to £812m and £805m respectively which places the shares on just a 6.5x current year earnings multiple together with a 6.7% yield. Presently on a 1.73x Price/NTAV, this is still not expensive given the Group’s strong strategic position. Beaufort accordingly reiterates its Buy recommendation on Berkeley Group Holdings, retaining an overweight stance on the sector with Persimmon and Taylor Wimpey as its key picks.



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