Beaufort Securities Breakfast Alert: Harvest Minerals, Legendary Investments, PHSC, Strat Aero, Dixons Carphone, Micro Focus International, Zoopla Property Group



The FTSE-100 finished yesterday's session 0.18% higher at 6,858.70, whilst the FTSE AIM All-Share index closed 0.89% higher at 808.87. In continental Europe markets ended in the red after the ECB kept interest rates on hold and did not expand its monetary stimulus. Moreover, strengthening euro exerted pressure on export-driven stocks. Germany's DAX and France's CAC 40 declined 0.7% and 0.3%, respectively.
Wall Street
Wall Street ended lower, as investors were disappointed after the European Central Bank (ECB) maintained interest rates and did not announce any additional stimulus to boost Europe's economy. The S&P 500 dropped 0.2%, with the information technology sector losing the most.
Equities are trading mixed, as investors remained concerned over reports that North Korea conducted a nuclear test. Investors were disappointed over the ECB's decision to keep its monetary policy unchanged. The Nikkei 225 closed broadly flat. The Hang Seng was trading 1.4% up at 7:00 am after China opened a new channel for its insurers to invest in securities.
Yesterday, WTI prices increased 4.7% to US$47.62 per barrel, while Brent oil prices rose 4.2% to US$49.99 per barrel.

ECB maintains interest rates

The ECB kept its main interest rates on hold at zero percent. In addition, the bank kept the rate on deposits from commercial banks unchanged at -0.4% and the marginal lending facility rate at 0.25%. The ECB also maintained its bond-buying stimulus package at €80bn per month.

Company news

Harvest Minerals (LON:HMI, 19.5p) - Speculative Buy
Harvest announced it has received an environmental permit for its Maximus project, a JORC resource area within the much larger Arapua fertiliser project in Minas Gerais, Brazil. Harvest has now lodged a trial mining permit application and will hire contractors within a few days to start preparatory work on site. Maximus is being brought into production this year as a trial mine. Assuming it goes well, Maximus will be the precursor to a significantly larger mining operation across the Arapua land package.

Our view: The environmental licence is a key part of any mine development process so this is very good news. It provides comfort that the authorities are supportive of Harvest, the Arapua fertiliser project, and that the mining licence is most likely en route - management expect it within a month. Harvest management is demonstrating its ability to operate efficiently in Brazil and we look forward to more news flow as Maximus is brought into production in Q4.

Beaufort Securities acts as corporate broker to Harvest Minerals plc

Legendary Investments (LON:LEG, 0.22p) - Speculative Buy
Legendary, the proactive investment company that focuses on making early stage investments in and assisting companies which exhibit the potential to generate significant return, yesterday released its full year results to March 2016. Highlights included an operating profit at £2,132,000 (2015: loss of £466,000), a record for Legendary along with a net profit of £2,118,000 (2015: loss £470,000). Fair value of investments (fixed asset investments and current asset investments) was stated at £4,275,000 (2015: £1,785,000), a rise of 139%, while net and total assets for the year were £4,071,000 (2015: £1,906,000), an increase of 114%, and £4,354,000 (2015: £1,986,000), an increase of 119%, respectively. Execurtive Chairman, Zafar Karim, noted "The year under review has been one of dramatic progress. Virtualstock won further landmark clients in the retail sector, and importantly won its first client in the health sector, Guy's and St Thomas's Trust. In addition, its pipeline of new clients is strong and growing in both sectors. Virtualstock's success attracted highly reputable executives in the form of a new CEO, Andrew Mills, and a Director of Healthcare and Public sector, Robert Knott. Success also resulted in substantial value crystallisation when Nick Jenkins, founder of Moonpig.com and angel investor, acquired a small stake in Virtualstock at a valuation of £58 million."

Our view: During 2015/16, Virtualstock stood out as Legendary's exceptional investment. Nick Jenkin's decision to invest in the Company, based on a £58m valuation, allowed Legendary to record a net gain on the Group's fair value of investments of £2,391,000 (2015: net loss of £235,000). Elsewhere, losses were incurred on the majority of the Legendary's listed investments, although Sula and Oracle were disposed of after the year end, leaving only Amedeo and Medgold as the Group's listed investments. While longer-term potential for 5.5%-held Manas Resources and 40%-owned Bosques Energeticos remains, Beaufort's analysis (see note of 16th May 2016) apportioned the bulk of the portfolio value to Legendary's 7.1% holding of Virtualstock at £12.5m. On visiting the company, we were truly impressed. Based on its software-as-a-service model, Virtualstock provides next generation solutions to optimise supply chain efficiencies and visibility to a varied range of supplier, retailers and customer service groups. Its client list for this highly 'sticky' offering already includes several of the UK's blue-chip retailers. Very significantly also, the suite of products that centre on its 'The Edge' platform, is now being trialled by the UK's largest NHS Trust hospital, which may be joined by other UK trusts and, ultimately have the potential to create a standardised product for incorporation across the entire UK health service. Prospectively this could offer quite dramatic cost savings for this mission critical service. Legendary continues to trade at a discount to Beaufort's estimated 'sum-of-parts'. With relatively near-term potential to create significant additional investor value, Beaufort repeats its Speculative Buy recommendation on the shares and confirms a target price to 0.5p/share.

Beaufort Securities acts as corporate broker to Legendary Investments plc

PHSC (LON:PHSC, 23.0p) - Hold
PHSC, a provider of health, safety, hygiene and environmental consultancy services and security solutions to the public and private sectors, yesterday provided pre-AGM trading statement for the first 4 months ended July 2016. During the period, an unaudited management accounts indicated a consolidated EBITDA loss of c.-£94k on sales of £2.3m. The management anticipates this to improve by the end of H1, and remain stable in the H2. The Group last month announced placing of 1,590,909 shares at 22p each, raised £350k before expenses, represented 10.8% of the enlarged issued ordinary shares of the Group. The cash balance as at 6 September stood at £565k. PHSC expects to announce its interim results in early December.

Our view: Although the performance year-to-date since the FY2016 remain disappointing, partly due to margin pressure caused by a weaker Sterling, the management still expects condition to improve between now and the end of FY2017. During the period, a number of Group's subsidiaries reported encouraging updates. Personnel Health & Safety Consultants Limited delivered a profit of £70k and the management sees it delivering c.£100k in the H1. The subsidiary's largest client has extended its contract for three months for negotiations on a new terms, conditions and arrangements. Inspection Services (UK) Ltd achieved a profit of £15k and expects c.£20k for the H1, somewhat ahead of this time last year. The subsidiary recently secured its largest single contract, worth £25k, through an insurance broker. QCS International Ltd registered a profit of £40k and anticipates c.£60k for the H1. The management said they are confident for a "good" H2 performance, given bookings already received for training courses and hoping that a new medical device consultancy project will begin in Q3. Against the backdrop of the major contract loss, and subsequent impairment charges, with Adamson's Laboratory Services Ltd, the recent fund raise provides some short-term comfort for the shareholders. As it stands, PHSC has now positioned itself for recovery in the current year. Relative weakness in balance sheet and its modest cash resources, however, remains key obstacles that could either limit scope for the re-organised Group to maximise its new divisional structure or limit scope for opportunistic acquisitions. We also recognise that income investors are increasingly concerned that the high yield presently afforded by the shares might find itself under threat going forward. Without a sizeable injection of new funding, management will find its potential to seek & secure future opportunities limited and, accordingly, Beaufort retains its 'Hold' rating on PHSC while awaiting further operational progress.

Beaufort Securities acts as corporate broker to PHSC plc

Strat Aero (LON:AERO, 0.78p) - Hold
Strat Aero plc, the international aerospace company focused on the rapidly emerging Unmanned Aerial Vehicle sector, yesterday announced that its wholly-owned subsidiary, Geocurve, has been awarded a further contract to provide aerial inspection and level survey services for the Environment Agency's Thames Estuary Asset Management 2100 (TEAM2100) programme. The contract was awarded after a rigorous competitive tender process and follows the successful completion of the Isle of Grain survey project where Geocurve combined multiple UAV flights, land-based surveys and bathymetric surveys to deliver a suite of video, orthomosaic photo, 3D model and survey products. Depending on contract options and call-off timing, the TEAM2100 programme could deliver in the region of £1m in revenue to Strat Aero over the next 18 months, and £2.5m over the duration of the whole programme. TEAM2100 is delivering the first 10 years of capital investment in the tidal flood defences of the Thames Estuary as recommended by the TE2100 Plan. TEAM2100 aims to reduce the risk of tidal flooding to 1.25 million people and £200 billion worth of property by replacing and refurbishing the tidal flood defences. TEAM2100, which was established in 2014, is an integrated and co-located team comprising the Environment Agency, global engineering company CH2M, and key supply chain partners. The £300million programme covers the tidal flood defences of the Thames estuary between Teddington in the west, Shoeburyness in Essex, and the Isle of Grain in Kent.

Our view: Finally, some heart-warning news for Strat Aero! Not only is the contract valued at a multiple of last year's £0.43m full year's reported revenues, but it has also managed to demonstrate it is a UAV topographic and hydrographic surveying, inspection and engineering services provider of choice through competitive tender. In a sector that is otherwise becoming crowded-out with 'me too' player, that is a big 'tick in the box'. It also tells us that if players like the Environment Agency are prepared to engage with such 'newfangled' technologies, then UAVs are rapidly going mainstream, with all the giant market opportunities this presents. The reality is that the ATC regulators globally, including the likes of the US's Federal Aviation Administration and the UK's Civil Aviation Authority, have been running significantly behind with UAV/UAS curve for some years now and, given the relatively low cost of entry and the vehicle's potential to create safety hazard, criminal or terrorist opportunity in national airspace, this has to change. When they do catch up, new legal and operating constraints will likely squeeze out the bulk of the 'mom and pop' entities that have saturated this early stage opportunity, leaving larger, more credible player with a comprehensive offerings, like Strat Aero, to seize the longer-term opportunity. That's the upside vision but, back on earth the Group's management still has to contend with many challenges, including restructuring the numerous different operations that were thrown together over the past 18 months or so, into a series fully integrated and complementary operations while taking the knife to costs. Having recorded an operating loss of some US$5.9m during FY2015, and having managed to raise only around US$0.5m in last month's equity placing, Strat's balance sheet is clearly under strain. Meanwhile, ongoing litigation remains an expensive distraction. Once these issues have been resolved, shareholders will be able to focus back on the scale of the opportunity and the Group's early mover advantage. Until then, Beaufort retains its 'Hold' recommendation.

Beaufort Securities acts as corporate broker to Strat Aero plc

Dixons Carphone (LON:DC., 389.0p) - Buy
Dixons Carphone released a trading update for the 13 weeks ended 30th July 2016 (Q1 FY 2017). The company's revenue rose 9% y-o-y, with like-for-like (LFL) revenue growth of 4%. The UK & Ireland reported growth of 3% in revenue and 4% in LFL revenue. Nordics recorded a 17% rise in revenue, and LFL revenue growth of 2%. Southern Europe's revenue rose 24%, with LFL revenue increasing 13%. CWS reported a 45% increase in revenue. On the operational front, the UK & Ireland's property programme remains on track.

Our view: Dixons Carphone started FY 2017 on a positive note. The company performed robustly in Q1 FY 2017, with solid revenue growth across markets and high level of customer satisfaction. LFL revenue also increased in all markets during the period. Dixons Carphone's performance has not been impacted by the Brexit thus far. Meanwhile, in the UK & Ireland, the company's new eCommerce platform for Carphone Warehouse is now live, and its 3-in-1 property programme is on track. The company now delivers the entire Dixons Carphone small-product range to customers across 500 Carphone Warehouse stores. In the Knowhow division, the company continues to plan for Leeds services pilot later this month and develop its brand and propositions. In view of Dixons Carphone's encouraging LFL revenue growth, increasing market share and operational progress, we maintain a Buy rating on the stock.

Micro Focus International (LON:MCRO, 2,243.0p) - Buy
Micro Focus International (Micro Focus) reached an agreement to acquire Hewlett Packard Enterprise (HPE)'s software business segment (HPE Software) by merging with a wholly owned subsidiary of HPE incorporated to hold the business of HPE Software. The transaction is valued at US$8.8bn. The consideration comprises issuance of American Depositary Shares to HPE shareholders representing Micro Focus' shares. Thus, immediately after the merger, HPE shareholders would own 50.1% of the fully diluted share capital of the combined group. In addition, Micro Focus would pay US$2.5bn in cash to HPE. Micro Focus plans to return US$400m to shareholders before the deal closes.

Our view: Micro Focus' agreement to merge with HPE Software is an important step in its growth story. This is in line with the company's long-term plan of becoming a global provider of infrastructure software. The merger would create one of the world's largest infrastructure software companies with leading positions across several key products. HPE Software and Micro Focus would have combined annual revenue of US$4.5bn and EBITDA of US$1.35bn. The combination holds the potential to deliver enhanced shareholder returns consistent with Micro Focus' stated objectives. The board of Micro Focus expects an increase in adjusted EPS by the first full year of completion of the merger and operational developments in the combined group. The merger provides Micro Focus an opportunity to increase business prospects, aided by a business operating in adjacent and complementary product areas with similar characteristics, high proportion of recurring revenue and strong cash conversion. We are buoyed by the aforementioned news and maintain a Buy rating on the stock.

Zoopla Property Group (LON:ZPLA, 329.80p) - Buy
Zoopla Property Group released an update on the current trading. The company's property services division continues to trade in line with the expectation. Zoopla reported an increase in the total number of property partners, with UK Agency partner numbers having grown for 16 consecutive months to 13,275 as at 31st August 2016 (up 5% y-o-y). Property listings increased to 925,000 as at 31st August 2016 (up 5% y-o-y). Zoopla's comparison services continued to perform well. The board expects EBITDA for FY 2016 to be at the top end of current market expectations.

Our view: Zoopla expects to deliver good performance in FY 2016, driven by solid growth across both divisions. The growth in property services was led by continuous increase in UK Agency partner numbers and property listings. The comparison services unit's growth was aided by competitive offers from energy suppliers and a supportive regulatory environment encouraging energy customers to switch providers. Zoopla continued investment in product innovation and marketing across both divisions. We are encouraged by the company's trading update and believe it would meet the expectation for FY 2016. Therefore, we maintain a Buy rating on the stock.

Economic news
US initial jobless claims
Initial jobless claims in the US dropped by 4,000 to 259,000 for the week ended 3rd September, the Labor Department reported yesterday. Economists expected the claims to increase to 265,000. The four-week moving average declined 1,750 to 261,250 from the prior week.

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