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Beaufort Securities Breakfast Alert: CRH PLC, Servision Plc

Published: 08:08 02 Mar 2017 GMT

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Today's edition features:

• SerVision (LON:SEV)

• CRH (LON:CRH)

 

"Close your eyes and trust the equity markets. Major indices on both sides of the Atlantic achieved new record highs again yesterday. The Dow Jones Industrial Average surged straight through 21,000 for the first time, as investors forgave the President for failing to provide any details of his reform programme, deciding instead to simply believe that he and the Federal Reserve will deliver. Led by financials across the globe, the index was up more than 300 points, with similar percentage gains recorded by the S&P-500 and the NASDAQ following earlier rises in Asia and Europe. Indeed, the Dow has put on its the fastest thousand-point jump in history - it took 24 sessions from the first close above 10,000 for the index to climb to 11,000 in 1999. The wall of cash being liberated as investors continue to ditch US Treasuries, where the two-year yield ended at its highest in 7 years, also found its way into the US Dollar, while Fed-fund futures, which are used by investors to guess coming central bank policy, spiked to a roughly 66% chance of a rate rise in March, up from 35% Tuesday, following hawkish tones from Fed and FOMC members. There are, of course, some sceptics out there, notably ones who consider passage of Trump's programme will stall on its passage through Congress but, right now, their arguments are being lost amid new evidence that economic growth is reviving faster than expected. The Institute for Supply Management, for example, yesterday detailed February US factory sales rising at the fastest rate in three years, while the Beige Book also suggests a tightening labor market. The Eurozone markets also got infected with this euphoria, with the Stoxx Europe 600 moving 1.5% higher as the banking sector added 3%, while the FTSE-100 closing 1.64% higher also powered by construction-related stocks, like CRH (CRH.L), which are seen as likely beneficiaries of Trump's proposed US$1tr spend on rebuilding US infrastructure. This same enthusiasm similarly infected Asian equities this morning, with the ASX leading the way as commodity prices revived following recent weakness and the Nikkei touched its highest since December 2015 on Yen weakness before giving back some of its gains; the two main Chinese indices again went in opposite directions, with the Shanghai Composite in the red as traders contemplated prospective new US trade tariffs once again. London equity markets are, however, likely to open in a rather downbeat mood this morning, having seen Theresa May suffer a Brexit setback as the House of Lords voted to amend legislation to entitle roughly 3m EU citizens presently living in the UK to remain after the UK leaves the Union. Although the PM's plans to commence exit negotiations by the end of March remain on track, the fact that the path there may be somewhat less smooth than hoped means momentum gathered by the FTSE-100 yesterday has now been largely dissipated, leaving it to open around 5 points either side of unchanged in early trade. There is limited UK macro data due for release today, with just PMI Construction figures for February, although the Eurozone will produce a batch of numbers, including Unemployment, CPI and PPI. The US contributes Jobless and its New York ISM index, although the principal anticipation is still likely to be remain on Fed Chair Janet Yellen's speech which is due to take place at 18:00hrs GMT tomorrow. UK Corporates due to release earnings or trading updates include Capita (CPI.L), Cobham (COB.L), Merlin Entertainment (MERL.L), Travis Perkins (TPK.L), Melrose Industries (MRO.L) and Jimmy Choo (CHOO.L). Index holders can also be expected to adjust their portfolios before Rentokil Initial (RTO.L) and the Scottish Mortgage Investment Trust (SMT.L) join the FTSE-100, replacing Capita (CPI.L) and Dixons Carphone (DC..L), upon the close of 17th March."

- Barry Gibb, Research Analyst

 

Markets

Europe

The FTSE-100 finished yesterday's session 1.64% higher at 7,382.90, whilst the FTSE AIM All-Share index added 0.35% to stand at 910.38. In continental Europe, the CAC-40 finished up 2.10% at 4,960.83 whilst the DAX was 1.97% higher at 12,067.19.

Wall Street

In New York last night, the Dow Jones rose 1.46% to 21,115.60, the S&P-500 added 1.37% to 2,395.96 and the Nasdaq gained 1.35% to 5,904.03.

Asia

In Asian markets this morning, the Nikkei 225 had risen 0.88% to 19,564.80, while the Hang Seng fell 0.17% to 23,736.59.

Oil

In early trade today, WTI crude was down 0.26% to $53.69/bbl and and Brent was down 0.10% to $56.26/bbl.

 

Headlines

'Long shadow' of financial crisis hits incomes

Typical household incomes in the UK will not grow for the next two years due to the "long shadow" of the financial crisis, a report suggests. In five years' time, median income will be 4% higher than it is now, the Institute for Fiscal Studies predicts. The recession and tepid recovery mean that from the start of the crisis to 2021, households will suffer the worst income squeeze for 60 years, it says. They will be £5,000 a year worse off than they might have expected. The IFS has produced a report on living standards for the Joseph Rowntree Foundation, which campaigns to reduce poverty. It suggests, based on official forecasts produced for the government by the Office for Budget Responsibility, that long-term income growth is a relatively slow 2% a year. "If the OBR's forecast for earnings growth is correct, average incomes will not increase at all over the next two years," said Tom Waters, an author of the report. "Even if earnings do much better than expected over the next few years, the long shadow cast by the financial crisis will not have receded." This was generally the result of small increases in wages, low productivity levels, tax and benefit policies and the state of the UK economy. The squeeze would be felt worst by low-income households with children, he said, owing primarily to the four-year freeze in working-age benefits.

Source: BBC News

 

Company news

SerVision (LON:SEV, 4.75p) – Speculative Buy

Following on from the announcement on 22 February 2017 regarding the US$2.0m of new capital from Cascade SVP, LLC, SerVision, the leader in mobile live video streaming over wireless and cellular networks, yesterday announced that it has received the first payment of US$1.0m. SerVision has consequently issued 7,044,542 new ordinary shares to Cascade. As per the terms of the subscription, the second tranche of US$1.0m will be transferred in 90 days from 22 February 2017, on receipt of additional 7,044,542 shares. The proceeds will be used as working capital purpose and for debt repayments.

Our view: As noted before, a subscription price of 11.4p by Cascade represents a significant premium to closing price on 21 February 2017 of 2.75p, or +315% higher, valuing the Group at c.£14.4m against just a £3.5m market capitalisation on the day. Cascade now holds 5.3% of the enlarged share capital of the Group, and upon completion of the second tranche, Cascade will be a second largest shareholder of the Group, holding c.10% of the enlarged share capital. Moreover, in addition to the US$2.0m subscription, Cascade have been granted an option to invest up to a further US$4.0m in two further tranches; the first option period runs until 20 October 2017, with an option price of approximately 10.2p per share, and the second option period runs until 29 September 2018, with an option price of approximately 9.3p per share, conditional upon shareholder approval. Should Cascade choose to exercise its Options in their entirely, its total holding will rise to c.27%, assuming no other new ordinary shares are issued in the meantime. SerVision has been demonstrating its products, IVG400-N system, a high definition mobile video gateway system, fulfils the industry needs and standards through extensive trial period with various customers, such as Skills Motor Coaches Ltd and City of Cardiff Council Transport Department which led to a new purchase order in December 2016. SerVision's IVG400-N system 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 increased protection, while 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. The new capital from Cascade will significantly strengthen SerVision's balance sheet for "several years" according to the CEO, giving comfort to its customers, enabling the Group to grasp global opportunities in heavy-duty bus market (e.g. Transit Buses, Coaches, Shuttle Buses, and School Buses) which estimated to grow at CAGR +8.6% from 2015 to 2022 according to Frost & Sullivan. This is also backed by the long-term fundamentals of increasing population and push towards more environmentally-friendly public transport against private vehicles. Although value of each contract remains modest, its large addressable market meaning new customer orders and follow-on orders will likely to see the volume piling up. Beaufort retains its Speculative Buy rating on the shares.

Beaufort Securities acts as corporate broker to SerVision plc

 

CRH (LON:CRH, 2,854.00p) – Buy

2016 was a year of good profit growth for CRH, with margins and returns ahead of last year in every division. Strong cash generation resulted in the group exceeding its de-leveraging target and permitted the full year dividend per share increased by 4% to 65.0 euro cents, covered 2.3 times. Sales of €27.1 billion were 15% ahead of 2015 and up 4% on a proforma basis. EBITDA rose 41% to €3.1 billion, ahead of November guidance, with the proforma figure up 10% and overall margin hiking to 11.5% from 9.4% last year. A total cash inflow of €2.3 billion was achieved from operating activities. The group declared a Return on net assets of 9.7% up from 7.6%, delivering value through capital allocation and reallocation at attractive multiples. Year-end net debt reduced by €1.3 billion to €5.3 billion with Net debt/EBITDA at 1.7x. The CEO noted CRH benefited from positive momentum in the Americas, and also in Europe, particularly in the Northern and Eastern regions where it operates. A focus on cash management resulted in year-end debt metrics being ahead of target and below normalised levels. In addition to organic growth, management continues to develop CRH through acquisitions, having completed eight transactions already this year. With a balanced portfolio of businesses, Albert Manifold suggested his group is "well positioned to capitalise on the ongoing economic recovery and we see continued growth for the Group in 2017".

Our view: Quite impressive stuff! Towards top of consensus expectations, while also pointing confidently to continued expansion in 2017. This point being underlined by the Board authorising the first annual dividend increase in several years, while the balance sheet appears altogether in better condition that expectation, not only because of capex coming out modestly below guesses, but also because working capital is being very effectively contained. The backdrop is also positive. For 2017, Beaufort sees continued positive momentum in the United States construction sector boosted, of course, by the President's promises to invest US$1tr in his countries tired infrastructure. At the very least, we anticipate that the funding stability provided by the FAST Act (which authorises moderate year-on-year increases in federal funding for highways), together with expected increases in state spending on transportation improvements, will result in a positive trend for volumes, particularly in the second half of the year. Residential construction, which has still not returned to long-term average levels, will also advance, while non-residential activity has the opportunity to surprise on the upside. This provides the confidence that Americas business will continue to advance this year. In Europe, most countries should will continue to experience the modest impact of early-stage economic recovery, although the UK's vote to leave the European Union, together with the forthcoming elections in a number of countries, this is not expected to significantly impact underlying momentum. Asia can expect further improvement in economic and construction activity in the Philippines. Based on Beaufort's revised forecasts for this year and next, forward 2017E and 2018E earnings multiples of 17.2x followed by 16.2x now does not appear expensive. Having performed in line with the FTSE100 over the past six months, Beaufort takes this opportunity to upgrade its recommendation from 'Hold' to 'Buy' with a 3,100p price target.

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