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Markets
Europe
The FTSE-100 finished yesterday's session 2.01% lower at 5,923.53, whilst the FTSE AIM All-Share index closed 2.12% worse-off at 714.90. In continental Europe, markets ended in the red amid increased speculation that Britain would vote in favour of leaving the European Union. Banking shares remained under pressure as a rally in bond prices led to yields falling to record lows. France’s CAC 40 and Germany’s DAX slumped 2.3% and 1.4%, respectively.
Wall Street
Wall Street extended losses for the fourth consecutive session, fuelled by a fall in oil prices and uncertainty over the UK’s vote on Brexit. Better-than-expected retail sales in the US failed to uplift investor sentiment. The S&P 500 fell 0.2%, with the financial sector losing the most.
Asia
Equities are trading higher as investors await the Fed’s decision on interest rates. Investors largely disregarded MSCI’s decision to not include Chinese stocks in its global indexes. The Nikkei 225 gained 0.4%, while the Hang Seng was trading 0.3% up at 7:00 am.
Oil
Yesterday, Brent oil prices fell 1.0% to US$49.83 per barrel, while WTI prices dropped 0.8% to US$48.49 per barrel.
Headlines
UK inflation unchanged in May
As per the Office for National Statistics, the UK’s consumer price index (CPI) remained at 0.3% in May, following a similar reading in April. The CPI remained stable as a rise in transport costs largely offset the decline in clothing and footwear prices. On m-o-m basis, consumer prices rose 0.2% compared with 0.1% in the previous month.
Company news
Amedeo Resources (LON:AMED, 9.25p) - Speculative Buy
Yesterday, Amedeo Resources (Amedeo) declared its audited results for the year ended 31st December 2015. During the period, the company’s revenue increased 41% y-o-y to US$128,000. Administrative expenses fell 20% to US$651,000, primarily due to the fact that there were several one-off items last year. Amedeo’s share of loss in associates stood at US$2,014,000 (11 months to 31st December 2014: US$922,000). This was made up of a loss of US$2,059,000 (11 months to 31st December 2014: US$942,000) at YZJ JV and a profit of US$45,000 (11 months to 31st December 2014: US$20,000 profit) at MGR. Overall pre-tax loss widened to US$2,610,000 as compared with a loss of US$1,411,000 for the 11 months to 31st December 2014. Consequently, loss per share widened to 7.99 US cents compared with 4.40 US cents in the prior period. Cash at the end of the period stood at US$2,340,000 (2014: US$1,179,000). On the operational front, Amedeo completed the physical build of Le Tourneau Super 116E Class self-elevating mobile offshore jack up drilling rig (Explorer 1). The company has started commissioning and expects to deliver in H2 2016.
Our view: Amedeo delivered a resilient performance in FY 2015, despite challenging market conditions. The company completed YZJ Offshore’s first order, Explorer 1, which is one of the most established designs in the offshore world. YZJ Offshore continued discussions with potential customers for additional orders, with the advantage of a physically complete rig available to showcase. MGR recorded an increase in profit levels as it focused on monitoring the market and exploring opportunities for broking other commodities along the East and South East Asia, South Asia, Middle East and Africa corridors. Amedeo remains financially stable with a solid cash position. It remains focused on the long-term strategy of building a vertically integrated business in the resource and energy and related infrastructure sectors. We believe Amedeo is well placed, with substantial resources to mitigate the ongoing difficult conditions. Therefore, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Amadeo Resources plc
Cyan Holdings (LON:CYAN, 0.19p) - Speculative Buy
Cyan yesterday announced the acquisition of Connode Holding AB, a well-established supplier of wireless communication solutions for smart metering and the Internet of Things, with customers in the UK, Europe and Asia. This agreed acquisition will be for a purchase price of £6.8 million, consisting of £4.3 million in cash and £2.5 million in the form of an equity consideration. Connode is a key supplier of mesh technology to the UK Smart Metering Implementation Programme (‘SMIP’); the potential value of the SMIP rollout to Connode is approximately £37 million in software licence and support fees over the rollout and support lifecycle. The Total £12.6 million headline transaction value, comprises a total £10.1 million fund raise plus the aforementioned equity consideration. The cash consideration will be financed through an equity fund raise consisting of a placing of 4,341,777,600 Ordinary Shares and a subscription of 1,280,277,650 Ordinary Shares at a price of 0.18 pence/share (representing a 14% discount to the 13th June closing price), which will also provide the enlarged Group with additional working capital. At the same time, management also confirmed that Biggles Enterprises Limited, which is part of the J. S. Technical Services Company Limited group of companies, in Thailand (with whom Cyan signed a distribution agreement in May 2016) has agreed to make a strategic investment of £2 million as part of the Subscription. All directors of Cyan are investing alongside certain senior managers and a consultant to a total of £304,500 as part of the subscription. Directors and certain senior managers have also agreed that, in the interests of retaining cash within the Group, they will receive all of their net income and bonuses earned during the period from July 2016 to June 2017 as shares issued at the issue price, which will represent an incremental equity investment of £729,904. The expected timetable of events details a General Meeting to approve the above proposals taking place at 11:15hrs on 30th June 2016, followed by Admission and commencement of dealings in the enlarged share capital on 1st July.
Our view: Smart metering is a giant, unfulfilled and highly scalable global long-term growth opportunity that potentially brings with it exceptionally sticky customers. Cyan’s existing business in the developing markets takes advantage of its proprietary end-to-end solutions, wherein customers ultimately desire to converge their networks using standards-based technologies. Convergent networks require a standards-based core programming language in order to permit rapid development, integration and consolidation of applications. The acquisition of Connode provides exactly this capability and thereby enables Cyan to effectively future-proof its customer solutions and provide the necessary standards-based interfaces for additional connectivity, as required for the Internet of Things and smart cities. As such, it is considered prospectively transformational, fitting ‘hand-in-glove’ with the Group’s ambition to develop to the ideal technological solution as part of its effort to capturing a sizeable chunk of this developing market opportunity. Since 2006 utilities and telecom operators have deployed Connode-enabled devices in large-scale projects in Europe which, in turn, creates new opening for the enlarged Group in these territories as well as other western markets such as North America. Further out, Connode’s highly complementary product range also offers the additional prospect of creating global leadership in Narrowband Mesh radio solution Internet of Things canopy provision. As Beaufort’s research has previously stated, the fact that Cyan has secure contract wins from India, the Middle East, Africa, Brazil, China and Eastern Europe, highlights both the need for and the uniqueness of Cyan’s systems approach. The potential to scale early sales to these territories is clearly enormous; in reality, the transformational purchase order worth £10 million from Iran’s Micromodje is potentially just a small part of the National Smart Metering Program of Iran that has a stated goal to replace the electricity meters for all customers, representing approximately 33 million meters, in seven years with funding provided by the Iran Power Generation, Transmission and Distribution Management Company; Cyan has already started a dialogue on the next planned rollout of 1 million units. Prospectively, India is an even larger opportunity with prime minister, Modi, in 2015 projecting a phased consumer rollout of smart meters beginning in 2017, with 35 million units installed by 2019; more recently India’s power minister, Goyal, cited a proposition for as many as 250 million smart meters. With a good number of large international territories now also reviewing similar options, the business potential for a supplier capable of installing and supporting comprehensive national smart meter implementation programmes is clearly huge. The acquisition of Connode will undoubtedly significantly speed Cyan’s ambitions to ensure it secures part of this. Beaufort retains its Speculative Buy recommendation on Cyan Holdings.
Beaufort Securities acts as corporate broker to Cyan Holdings PLC
Ashtead Group (LON:AHT, 985.50p) - Buy
Yesterday, Ashtead Group declared its unaudited results for the fourth quarter and year ended 30th April 2016 (FY 2016). The group’s rental revenue surged 17% y-o-y to £2.3bn in FY 2016. Total revenue for FY 2016 increased 25% to £2.5bn. Pre-tax profit increased 24% to £616.7m, resulting in an EPS of 81.3p, 27% higher than the previous year. Net debt at the end of period increased to £2.0bn as compared with £1.7bn in 2015. Net debt to EBITDA decreased to 1.7 times (2015: 1.8 times) on a constant currency basis. Ashtead proposed a final dividend of 18.5p, taking the full year dividend to 22.5p, 48% higher than the previous year’s. The group plans to commence a share buyback of £200m in 2016/17, subject to shareholder approval at the annual general meeting.
Our view: Ashtead performed strongly in FY 2016, recording solid growth in revenue and profit. The group reported good performance from both segments. The Sunbelt division’s total revenue increased 19% to US$3.3bn, with same-store sales growth of 12%. Ashtead focused on expanding its business as it opened 58 greenfields and spent US$81m on bolt-on acquisitions in the US and Canada, which added another 10 locations. In addition, the A-Plant division continued its growth momentum, with revenue increasing 13% to £365m. The group’s enhanced cash position has paved the way for higher dividends to be paid to shareholders. Additionally, Ashtead announced a share buyback of up to £200m. We are encouraged by the group’s progress in FY 2015 and await further updates. Therefore, we maintain a Buy rating on the stock.
Crest Nicholson (LON:CRST, 520.50p) - Buy
Crest Nicholson, a leading residential developer operating in the Southern half of England, yesterday announced its half year results for the six months ended 30 April 2016 (H1 FY2016). During the period, revenue and operating profit both advanced by +22% to £408.1m and £77.8m, respectively, while operating profit margin remained flat at 19.1% with pre-tax profit expanded by +25% to £72.6m, against comparable period (H1 FY2015). Consequently, basic earnings per share also expanded by +25% to 23.3p. On the operational front, housing legal completion increased +7% to 1,206, open market unit completion (excluding private rental sector) rose +9% to 909. Sales per outlet week including private rental sector rose +4% to 1.06 while Cancellation rates remain low at 10.5%. Housing revenue increased +26% to £384m reflecting volume growth and both sales price and location mix impacts on open market Average Selling Prices (‘ASP’). Forward sales at mid-June FY2016 increased to £520.8m, up +19%. Crest Nicholson’s CEO, Stephen Stone commented “Whilst the debate about the forthcoming referendum on UK membership of the European Union continues to dominate the headlines and the Board notes the risk of business disruption in the event of a vote to leave, purchaser demand for new homes remains strong and Crest Nicholson has delivered a 9% increase in open market completions in the first half of this year. We continue to grow our Private Rented Sector offering and have delivered 173 Private Rented Sector units in the first half, on schemes in Bath, Bristol and Southampton. The business is well positioned to achieve its target of £1bn of revenues in 2016 and to continue growing its contribution to overall housing delivery”. The Group proposed an interim dividend of 9.1p per share, up 42%, but in line with its target to reduce dividend cover to 2x by FY2017. Full year dividends for FY2016 is expected to be covered 2.25x.
Our view: Crest Nicholson’s delivery of yet more excellent operational and financial results was, perhaps, best demonstrated by the Board choosing to hike its interim dividend by +42%. Understandably, however, the CEO adopted a cautious tone ahead of the EU referendum on 23rd June, recognising the possible impact on consumer confidence and setback in house prices that could potentially ensure should the Bank of England feel obliged to protect Sterling with a short-term rise in interest rates, or should the UK rapidly enter recession amid financial markets turmoil and uncertainty. The markets which have, of course, been discounting such factors for some time already, further punished Crest Nicholson yesterday pushing its share price down -7% as BREXIT fears compounded. The fact that positive fundamentals are presently being ignored in favour of fantasies of worse-case ‘what if’ economic scenarios does, however, present investors who possess very firm opinion regarding the BREXIT outcome with an important buying opportunity. Housebuilders, like Crest Nicholson, that have been amongst the worst punished on BREXIT fears should be considered an obvious trading play for those choosing to do so through cash-equities investments. While history reminds us that UK housebuilding can be a viciously cyclical place in which to operate, the current background of low interest rates, more relaxed planning, government subsidies and obvious undersupply at a time when smaller, traditional, jobbing builders are being all-but squeezed out of the existence, suggests the larger quoted vehicles have rarely had it so good. Crest Nicholson itself has continued to deliver on best expectations, presently remains well-positioned to deliver its target revenue of £1bn by October 2016, rising to £1.4bn (on delivery of 4,000 homes) by 2019. Beaufort has recently taken a brave stance on the UK housebuilder and building material sectors, revising its overall stance from ‘Neutral’ back to ‘Overweight’. Although financial markets do routinely overshoot, the sectors’ share prices now appear to largely discount realistic expectations. Following yesterday’s fall, Crest Nicholson looks almost ‘bargain basement’ given a current year P/E of 8.4x, a P/NAV 1.83x and a full year yield 5.5%. While the BREXIT vote is likely to keep volatility high for the next few days, Beaufort has nevertheless upgraded its recommendation on Crest Nicholson to Buy given that the upside scenario for the shares now quite significantly outweighs the downside.