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Beaufort Securities Breakfast Today Cambria Africa plc, Arria NLG, CityFibre Infrastructure Holdings, Saga and others

Last updated: 09:09 27 May 2014 BST, First published: 08:09 27 May 2014 BST

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The Markets

Market opening: Markets are likely to open higher today. FTSE 100 futures were trading 32.5 points up at 7:00 am.

New York: Wall Street gained for the third successive day. Upbeat new homes sales data for April triggered a rally in homebuilders such as Lennar, D.R. Horton and PulteGroup. Hewlett-Packard surged 6.1% after unveiling turnaround plans. S&P 500 advanced 0.4% for the day and 1.2% for the week.

Asia: Aggravating tensions in the South China Sea and rising speculation of further monetary easing by the European Central Bank (ECB) provided mixed indications. Nikkei advanced 0.2%, whereas Hang Seng was trading 0.2% down at 7:00 am.

Continental Europe: Encouraging election results in Germany, France and Italy boosted investor sentiment. ECB President Mario Draghi’s assurance regarding the future course of monetary policy action added to the gains. Germany’s DAX rose 1.3% to close at a record high, while France’s CAC 40 advanced 0.8%.

Crude oil: On Monday, the price of Brent Crude Oil dipped 0.2%, while that of WTI crude oil remained unchanged. The spread between the two varieties stood at US$6.0 per barrel.

UK small caps: On Friday the FTSE AIM All-Share index closed 4.49 points (+0.56%) higher at 801.45.

Today’s news

Germany’s consumer confidence remains steady in June

The gauge of consumer confidence in Germany stood at 8.5 for June, unchanged from May and the highest since January 2007, market research agency GfK announced yesterday. The reading was in line with market forecasts and indicates upbeat spending sentiment among German consumers.

Company News

Arria NLG (LON:NLG)

Arria NLG’s subsidiary, Arria Data2Text Limited, entered into a three year agreement with Royal Dutch Shell’s Shell Exploration & Production Company. Under the agreement, Shell would pay Arria US$5-10m over three years, mostly on an annual basis, starting from 1st June 2014 for non-exclusive use of its Natural Language Generation (NLG) Engine and related services. The stock climbed 15% on Friday.

Our view: Arria’s latest deal with Shell presents a lucrative revenue generating opportunity. This deal, spanning over three years, alone would generate revenues of US$5-10m for Arria and marks a major boost from the company’s last year’s total revenue of £816,178. The recognition of the core product, Arria NLG Engine, in Dubai last year has opened up further business prospects for the company. Currently, Arria seems to be riding on a sharp growth trajectory. We recommend a Speculative Buy rating.

Cambria Africa (LON:CMB)

On Friday, Cambria Africa announced that Millchem, one of its core subsidiaries, has signed a number of key regional supply and distribution agreements. The company won a key distribution contract with Sealed Air Corp in Malawi for its Diversey Care range of cleaning, sanitation and hygiene solutions. Besides, Cambria also won exclusive distribution contracts with chemicals trader MEKZ Ltd in Zimbabwe, Zambia, Malawi, Namibia and Botswana; lubricants maker Centlube in Zimbabwe, Zambia and Malawi; and Donau Carbon Corp in Southern Africa.

Our view: The progress of Cambria’s subsidiary, Millchem, towards further commercialisation of its distribution capabilities is encouraging. The company had recently forayed into Zambia and Malawi. For Cambria, these contracts mark another concrete step towards expansion of its scale and geographies of operation. Given the strong business utility of Cambria’s distribution services, ongoing disposal of non-core assets, a well-planned medium-term growth & development strategy for Millchem and Payserv, and February’s placing of US$4.1m, Cambria could witness a strong upside in the coming period. We reiterate a Speculative Buy.

CityFibre Infrastructure Holdings (LON:CFHL)

On Friday, CityFibre Infrastructure Holdings announced annual results for FY2013 ended 31st December 2013. Revenue increased 9.7% on organic basis to £1.9m, majorly driven by the projects located in York. Gross profit climbed 24% to £1.5m due to over 90% margins for owned infrastructure projects, partially offset by projects impacted by the cost of legacy service contracts. Operating loss shrunk to £4.2m from £5.0m and loss per share contracted to £55.60 from £64.72. New contracts valuing £4.7m were signed during the period, including a 20-year contract with Serco to provide fibre connectivity at over 100 locations in Peterborough. The joint venture with BSkyB and TalkTalk, to provide a FTTH network in York, now plans to cover two more cities. In April 2014, Coventry City Council awarded the company preferred bidder status for the acquisition of Coventry Metropolitan Area Network (MAN) fibre optic asset. CityFibre was admitted for trading on the AIM on 17th January 2014, with successful share placing of ~£16.5m before expenses in the IPO. Peter Manning was appointed as the non- executive Chairman of the company in September 2013, while Sally Davis joined in as a non-executive Director in February 2014. Current trading was in-line with the expectations, the company informed. Separately, the company announced a successful placing of £30m to accelerate the work at its existing projects, including the joint venture contract with BSkyB and TalkTalk, as well as the pipeline of other commercial opportunities.

Our view: CityFibre delivered robust performance in its first year as a publicly traded company, with growth in revenues and a series of contract wins. Under the 20-year contract with Serco, more than 500 businesses across Peterborough pre-registered over the Peterborough CORE metro fibre network; CityFibre’s association with service provider Businesscoms is expected to boost the contract conversions. The joint venture’s expansion plans for the Fibre-to-the-Home (FTTH) network to two more cities and CityFibre’s ongoing progress performance deliver at Peterborough also bode well for the company. Given the company’s broad service coverage across 56 UK towns and cities, a rapid progress at multiple projects, and extensive expansion plans, we expect a meaningful appreciation in its stock price.

MoPowered Group (LON:MPOW)

On Friday, MoPowered Group announced award of new long-term contracts with multiple fashion retailers, including Shelikes and Roman Originals. Shelikes, an online fashion retailer, would use the ‘MoPowered Performance’ solution to facilitate a well-integrated m-commerce website. Meanwhile, Roman Originals, a multi-channel clothing retailer, would make use of the company’s ‘MoPowered Professional’ solution. This solution caters to online and multi-channel retailers through the delivery of mobile websites and mobile apps. The group’s investment is focused towards building its client base in the fashion sector and accelerating the sales and marketing initiatives. The group had recently sponsored a US-based Fashion Digital conference’s first event in the UK, named Fashion Digital UK.

Our view: MoPowered is fetching good opportunities in the fashion retailing segment, with several fashion shoppers opting for mobile shopping. The group has accelerated its sales and marketing activities to garner further share of this business opportunity with the fashion retailers. MoPowered is likely to grow substantially going forward in the near term due to its impressive clientele, which spans large enterprises as well as mid-tier and niche retailers and includes companies such as Next and Supergroup, and further commercialisation of MoPowered Professional, its newly launched solution. We assign a Speculative Buy.

Saga (LON:SAGA)

The Saga offer price was set on Friday at 185 pence per Share (the “Offer Price”). Based on the Offer Price, the total market capitalisation of Saga at the commencement of conditional dealings was £2.1 billion. The Offer comprised 297.3 million Shares, representing 27% of Saga’s issued share capital on Admission, excluding the Over-allotment Option. Total gross proceeds raised by the Company were approximately £550 million. Acromas Bid Co Limited (the “Shareholder”) was granted an Over-allotment Option in respect of 44.6 million Shares. If the Over-allotment Option were exercised in full the total gross proceeds raised by the Shareholder in the Offer would be approximately £82 million. Following Admission (and assuming no exercise of the Over-allotment Option), the Shareholder will hold 72% of the Shares; and the Directors and Senior Managers will be interested in 1% of the Shares. Certain of the Directors and Senior Managers are also shareholders of Acromas Bid Co and are owed subordinated shareholder debt by an Acromas Bid Co subsidiary as set out in more detail in the Prospectus. 50% of the Offer was allocated to retail investors, including a substantial majority allocated to Saga’s customers, under the Retail Offer and 50% of the Offer was been allocated to institutions under the Institutional Offer. Heavy oversubscription meant that investors were scaled back sharply; applications of up to £10,000 in the Non-Customer Offer and applicants in the Intermediaries Offer were allocated just 400 Shares each (equivalent to value £740 based on the Offer price).

Our view: The Saga Offer was priced right at the bottom of its 185p -245p range. This equates to a market capitalisation of £2.1m. At this price the shares represent very good value. Based on Beaufort forecasts for the full year to January 2015, the Group will trade on around a 13.1x PE and offer an annualized dividend yield of some 3.3%. The valuation gap, therefore, with the peer group of general insurers, is now small and well below the management and advisor’s original valuations. Why was this? We see two reasons : (i) That institutional investors, who effectively set the price, insisted it should be valued close to other UK general insurer (typically 10 to 12 x PE15 with a 3%+ yield) and, perhaps even more importantly, (ii) that three-quarters of a million or so Saga customers registered for preferential share allocations. Given that the Group enjoys club-like loyalty from its huge customer base, significant damage to the Group’s reputation could have been incurred should a loss have been seen on the first day! Accordingly, Saga’s Advisors bowed to the pressure and appears to have priced it very attractively indeed. The loyalty of its customer base, however is what expressly sets Saga aside from its peers. Effectively, this means that the Group’s cost of customer acquisition for any of its products (be they insurance, travel , healthcare or any other age-related areas into which it chooses to diversify) is particularly low, as its churn rates, while repeat business and recommendation is high. This provides the business with a distinct advantage and provides confidence in its forward visibility. The market will recognise these facts in due course. Beaufort accordingly recommends investors take advantage of Saga’s lowly Admission price, to build their IPO allocations up to a realistic level by paying up to 210p/share.

Economic News

Germany GDP

On a quarterly basis, German GDP growth doubled to 0.8% in Q1 2014, unchanged from the preliminary estimate, from 0.4% in Q4 2013, the Federal Statistics Office said on Friday. The pace of increase in the GDP was the fastest in three years. Positive contribution primarily came from gross fixed capital formation, which rose 3.2% from the previous quarter. Meanwhile, household consumption and government expenditure grew 0.7% and 0.4%, respectively. On a y-o-y basis, calendar adjusted GDP advanced 2.3% and non-seasonally adjusted GDP was up 2.5% in Q1 2014. Both the readings were unchanged from the prior estimates.

Germany IFO

German business sentiment index edged down to 110.4 in May from 111.2 in April, survey results from IFO Institute revealed on Friday. The index was forecast to decline by a lesser margin to 110.9. The Current Assessment Index dropped to 114.8 from 115.3 in the previous month, while markets were expecting a slight improvement to 115.4. The Business Expectations Index, a gauge of attitude towards business prospects over the next six months, fell to 106.2 in May from 107.3 in April, and was below the economists’ expectation of 106.5.

US new home sales

New home sales in the US increased 6.4% to a seasonally adjusted annual rate of 433,000 units in April, the Commerce Department said on Friday. The annualised sales figure for March was revised upwards to 407,000 from the previously reported 384,000. Economists expected new home sales to surge 10.7% to an annualised rate of 425,000. The median price of a new home stood at US$275,800 in April 2014 versus US$281,700 in March 2014 and US$279,300 in April 2013.

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