Beaufort Securities Breakfast Alert: MySQUAR, Bovis Homes, San Leon Energy and boohoo.com


Today's edition features:
• boohoo.com (LON:BOO)
Bovis Homes (LON:BVS)
• San Leon Energy (LON:SLE)

London equities appears set to open 2017 in an upbeat mood. Having achieved new all-time highs as 2016 drew to a close, the FTSE-100 is see opening some 45 points up during this morning's early trade, borrowing confidence from yesterday's firm European closings, which were driven significantly by banks and financials as well new macro data from Italy which surprisingly hinted at some recovery in an economy that had otherwise remained depressed throughout most of 2016, and firm closings across Asia. While a national holiday kept the Nikkei closed for the session, the ASX drove sharply higher on similar demand for financials while also seeing good support for its major commodity plays; the Shanghai Composite was not far behind, with evidence of broad investor interest following release of strong Caixin Manufacturing Purchasing Managers index data and despite concern that Beijing could impose additional capital controls on households by restricting individuals from using their existing annual US$50,000 allocation in foreign currencies through Yuan conversion, having already seen the PBOC tighten its supervision of money transfers while lowering the disclosure threshold. The latter in particular has been pointed at as the reason behind the recent surge in the Bitcoin cryptocurrency, which powered through the psychological US$1,000 barrier for the first time in three years yesterday. US equity futures also look to a firm opening across all principal indices this afternoon as Wall Street logs its first 2017 trades. Against this, of course, investors will be keeping a wary eye on the international bond markets, which traditionally make their major syndicated launches of new government bonds during the first quarter, with the global sell-off inspired by Trump's election not expected to wane anytime soon and expected to force very keen pricing in order to get the larger issues away. Today the UK and US are both expected to release their own Manufacturing PMI data, with New York also providing Construction Spending figures. No major corporate earnings or trading updates are due today, although some second liners, such as Hot Rocks Investments and Walls & Futures REIT, are anticipated."
- Barry Gibb, Research Analyst

The FTSE-100 finished Friday's session 0.32% higher at 7,142.83, whilst the FTSE AIM All-Share index closed at 842.31. In continental Europe, the CAC-40 finished 0.41% higher at 4,882.38 whilst the DAX was 1.02% higher at 11,598.33.
Wall Street
In New York, the Dow Jones finished 2016 0.29% lower at 19,762.60, the S&P-500 fell 0.46% to 2,238.83 and the Nasdaq was little changed at 5,383.12.
In Asian markets this morning, the Nikkei 225 was down 0.16% to 18,997.70, while the Hang Seng had risen 0.58% to 22,129.44.
In early trade today, WTI crude was $54.01/bbl and Brent was $57.14/bbl.

Train fares rise by an average of 2.3%
Rail passengers are facing higher fares across the UK as average price increases of 2.3% are introduced on the first weekday of the new year. The increase covers regulated fares, including season tickets, and unregulated, such as off-peak tickets. Campaigners said the rise was a "kick in the teeth" for passengers after months of widespread strike disruption. The government said it was delivering the biggest rail modernisation programme for more than a century. The increase in fares came as a strike by conductors on Southern Rail entered its third day, as a long-running row about the role of guards on new trains continued. The RMT union began the 72-hour walkout on New Year's Eve, while another strike is set for 9 January.
Source: BBC News

Company news

MySQUAR Limited (LON:MYSQ, 2.25p) – Speculative Buy
MySQUAR, the Myanmar-language social media, entertainment and payments platform whose principal activity is to design, develop and commercialise Myanmar-focused internet-based mobile applications, on 29 December 2016 announced that it has fully launched its new game,ChakraNinja, and soft-launched its VoIP application, CallHome. ChakraNinja is based on Naruto, one of the most famous and successful Japanese manga comic characters of all time, and is already a highly popular character in Myanmar via TV, films and books. CallHome VoIP service enables both on-net calls (app to app) and off-net calls (app to mobile phones and landlines) for the users. As announced on 6 December 2016, VoIP technology licensing agreement was entered with M800 Limited, the Hong Kong-based communication service and technology provider for an undisclosed up front license fees and a monthly license fee per active user. MySQUAR said it will target the Myanmar market as well as South East Asia countries, such as Thailand, Singapore, and Malaysia, where many Myanmar people live. MySQUAR's CEO, Eric Schaer, commented "It will be exciting to watch as ChakraNinja leverages both the celebrity of the Naruto character and MySQUAR's existing user base. Its anticipated popularity will in turn increase the prospects for the new game launches in early 2017 and beyond. Our new CallHome VoIP app has the potential to become a major revenue earner. The service can dramatically reduce the cost of calls compared with traditional call methods, particularly for the millions of Myanmar people calling home from overseas. These new product launches are an excellent way to end this year and enter 2017 and underline our commitment to keep pushing towards rapid monetisation."

Our view: MySQUAR's product launches continue at a pace! Efforts to accelerate monetisation of what is now believed to be well in excess of 6 million user registrations are paying off . ChakraNinja is the fourth game release from MySQUAR following Destroyer King (May 2016), MyFish (August 2016) and Hawk Hero (September 2016). The Group recently noted in its FY2016 final result that mobile game revenue has been growing strongly from US$27,674 in August to US$65,659 in September, US$73,113 in October and US$86,098 in November. Naruto manga comic has sold 220 million copies worldwide as at October 2015, according to Anime News Network and it is already a highly popular character in Myanmar via TV, films and books. With this background, an addition of the ChakraNinja has potential to attract both new and existing customer into its gaming business. Beside the gaming, CallHome VoIP app is the next obvious step for MySQUAR who secures its position as Myanmar's trusted, branded and only local language offering of social media, communications and entertainment in what is effectively the world's last major telecom frontier. Management plans to offer bundle-pricing for the on-net and off-net calls, which should offer Myanmar people a very economic means for their daily communication, particularly for international access, while creating the potential to become a major revenue generator. VoIP service has seen an attractive growth recently and according to Market Research Store, the global VoIP Services Market is set to reach US$140bn by 2021 (estimated CAGR growth of over +9.1% between 2016 and 2021). Looking ahead, the Group is scheduled to release new "hardcore games" (games such as ChakraNinja which tend to require at least 30 minutes of attention for effective usage) in February and March 2017, and soft-launch a platform of multiple "casual games" (games can be played for a short time) targeted for release in mid-January (initially expected to include 4-5 casual games). MySQUAR's principal objectives for the current financial year remain clear. Firstly, to continue growing its user base and revenue numbers as quickly as possible through monetisation of games, VoIP, payment services, mobile marketplace, advertising and paid features in MyCHAT and, secondly, to reach operating cash-flow break-even. Given current momentum, Beaufort now sees MySQUAR achieving monthly cash flow break even during the second half of the current financial year (ended-June 2017). Considering MySQUAR's track-record of over-delivering on its operational promises, we believe this is something that is unlikely to have been missed by the numerous and very cash-rich global hubs, who remain determined to ensnaring players in virgin territories that have successfully participated in an online user 'landgrab'. In this respect, MySQUAR appears quite dramatically undervalued; Beaufort retains a price target of 21.0p/share and repeats its Speculative Buy recommendation, although it does recognise that the terms of the recently issued CLNs do potentially create a stock overhang which some fear could result in a drag on the share price.

Beaufort Securities acts as a corporate broker to MySQUAR Limited
boohoo.com (LON:BOO, 134.75p) – Buy
boohoo.com ('boohoo'), one of the UK's largest online own-brand fashion retailers, on 28 December 2016 announced that it has entered into an asset purchase agreement to acquire certain intellectual property assets from US fashion retailer Nasty Gal Inc. for US$20m. Founded in 2006, Nasty Gal sells women's clothing, shoes, and accessories in 180 countries. Nasty Gal generated net revenue of US$77.1m and a net loss after tax of US$21m (includes operating costs) in the year ended 1 February 2016. The revenue includes vintage clothing and third party brands that are not part of the proposed transaction, and the acquisition will exclude all operating costs. On 9 November 2016, Nasty Gal has filed for Chapter 11 Bankruptcy Code protection in the US Bankruptcy Court, and subject to US court approval, to be sought on 5 January 2017, boohoo's subsidiary, Boohoo F I Limited, will be appointed as the "stalking horse" bidder for the Nasty Gal brand and customer databases, in accordance with Section 363 of the United States Bankruptcy Code. The sale of the Nasty Gal assets will be governed by a court approved bidding process lasting at least 30 days. The Group's bid may not result in a transaction if higher or more favourable offers are obtained by Nasty Gal during the auction process. The Group is expected to provide a further update on the proposed transaction on or post 5 January 2017. boohoo's joint CEOs, Mahmud Kamani and Carol Kane, commented "Should we be successful in acquiring Nasty Gal it would represent a fantastic opportunity to add such a well-established, global brand to the Boohoo family. Following our recent acquisition of PrettyLittleThing.com we believe this would represent an ideal next step in inspiring an ever-growing range of young customers internationally." boohoo will provide trading update for the 4 months ended 31 December 2016 on 10 January 2017.

Our view: The proposed acquisition of certain assets of Nasty Gal follows the earlier announcement of 14 December 2016 when boohoo acquired PrettyLittleThing for a cash consideration of £3.3m. Nasty Gal is based in Los Angeles and has a presence in 180 countries targeting fashion for 'young women'. The acquisition will further broaden the Group's product range and accelerate its international presence, particularly in the US, adding Nasty Gal's databases and expanding customer reach. Nasty Gal has over 3.5 million social media followers which are an attractive resource for fast fashion online retailers like boohoo. In a trading update for the period between 27 September 2016 to 14 December 2016, boohoorevised its full year revenue growth guidance to 38%-42% from 30%-35%, having already revised upward three previous times during the year. The EBITDA margin was also slightly upgraded from 11% to 11-12% having been lifted from 9.6% at the interim. The Group also noted that it continues to see strong trading and expect this to remain during the key Christmas and New Year trading period. The recent dash for acquisitions demonstrates the Group's confidence in its ability to further bolster its strong growth and can also be seen to demonstrate management's determination to continue building its overseas presence. Beaufort believes that the worldwide market for internet fashion sales will continue to expand as shopping preferences shift towards the convenience and competitive pricing affordable by online retailers, such as boohoo. We view proposed acquisition as an excellent strategic fit and expect it to accelerate the enlarged Group's growth momentum while maintaining ability to meet rapidly changing customer demand patterns. The shares have performed extraordinarily well over the past year, yet we believe there remains further upside for the share price. Beaufort reiterates its Buy rating on the shares.

Bovis Homes (LON:BVS, 820.00p) – Buy
Bovis Homes, the UK housebuilder, on 28 December 2016 provided a pre-close trading update. The Board said build production during December was "slower than expected", resulting deferred completion of some 180 largely built and sold private homes into early 2017 (previously expected within 2016). The Group now expect the volume delivery for 2016 to be lower than previously anticipated at between 3,950-4,000 homes (previously guided: over 4,130 homes), while reiterated that average sales price is expected to increase by c.+10% (FY2015: £231,600), supported by improved mix and increased underlying market pricing. Bovis have sold at a weekly sales rate per site slightly ahead of last year (FY2015: 0.56). Total revenue is expected to be in a range between £1.04bn-£1.06bn delivering an improvement in capital turn (2015: 1.05x) supporting return on capital employed in 2016. The revenue and profit from land sales in 2016 has amounted to c.£26m and c.£7m, respectively (FY2015: revenue £30m and profit £7.8m), in line with expectation. Operating profit margin is expected to fall "modestly" against last year. Considering all, the pre-tax profit for the FY2016 is expected to be within a range of £160m-£170m (FY2015: £160.1m) subject to the final volume delivery. Looking ahead, due to impact of some 180 deferred completions, the Group is expecting to hold around 900 private forward sales at the start of 2017 (start 2016: 841). Bovis said it has greater number of homes in production compared to last year, and the Group has already secured detailed planning for all homes expected to legally complete in 2017. As expected, management has remained disciplined in its land investment as it focusses on purchase of high quality consented land in prime locations outside London. Bovis will announce trading update for the year ended 31 December 2016 on 13 January 2017, followed by full year results on 20 February 2017.

Our view: The announcement caused a fall of some 5% fall in Bovis' share price on 28 December 2016, with the downward revised volume delivery expectation and profit warning. This came as a particular surprise to investors whose confidence for the Group's continuing good performance was reassured within its pre-close trading update announced on 10 November 2016. The Group blamed "slower than expected" production across its sites during December and said completion of c.180 private homes will now be expected early next year. The slower production could be due to labour availability constraining its activity but no further explanation was provided by management. The environment for housebuilding in the UK, on the other hand, continues to be positive with demand for new homes running ahead of housing supply. Political support remains in place as evidenced by the improved planning regime and the continuation of the Help to Buy equity loan scheme, while, at the same time unemployment continues to be low and the mortgage market remains competitive. The Group has confirmed improved margin, better weekly sales rate per site and reaffirmed its FY2016 final dividend. Even at the lower-end of the volume delivery expectation, it is still ahead of the year before (FY2015: 3,934) and expected revenue remains at record level. The Group has a strong balance sheet and net cash position is expected at the close of the year. While results for FY2016 is impacted by the deferred completion, this should instead simply find itself deferred into a stronger first half performance for FY2017. Beaufort retains its Buy recommendation on Bovis Homes, but has prudently decided to trim back its price target from 960p to 925p/share until operational confidence for the coming period has been fully restored.

San Leon Energy (LON:SLE, 55.00p) – Speculative Buy
San Leon, a company focused on oil and gas development and appraisal in Africa and Europe, on 30 December 2016 provided its operational update and cash flow receipts regarding its initial indirect 9.72% interest in the OML 18 project, onshore Nigeria. The Group said reperforation operations within a group of wells was successful that it increased gross OML 18 production (before losses and downtime) to approximately 61,000 barrels of oil per day ('BOPD'). The well has since been temporarily shut in to allow minor production upgrades and additional workover operations, and current gross OML 18 production is around 53,000 BOPD. The Board said reperforation programme will continue to be implemented across a number of wells in this field in the coming months. For the Krakama field, wells are now ready to produce, pending completion of the production facility modifications. The Board said production from Krakama is now expected online during the first two months of 2017. On the Buguma field, a scoping study has been undertaken ahead of operations required to bring the field into production. Equipment has been identified and a procurement process is already underway. Eroton, the Operator of OML 18, anticipates production to commence in March 2017. San Leon provides services to Eroton in OML18 through its oilfield services subsidiary under the Master Services Agreement, and San Leon expects to provide workover rig, drilling rig and production facility construction services to Eroton starting in 2017. In accordance with the terms of the US$173.05m loan note instruments held by San Leon pursuant to the OML 18 assets, approximately US$20m of loan principal and interest repayments became payable on 1 October 2016, and an additional quantum of approximately US$19m becomes payable on 1 January 2017. Amounts will be payable by Midwestern Leon Petroleum Limited, which is 40% owned by the San Leon Group, and has a 50% shareholding and an initial effective 90% economic interest in Eroton. Dividends from Eroton to be made via Midwestern Leon is subject to satisfaction of the certain conditions where currently two of these; 1) reservation of 9 months' worth of upcoming debt repayments due in the debt service reserve account, and 2) submission of audited financial statements by Eroton whereby 60% of audited net profits can be paid to dividends account, are yet to be satisfied. San Leon has been informed by Eroton that the timing for the satisfaction of these conditions is also influenced by the receipt by Eroton of the outstanding balance of historic cash calls from the Nigerian National Petroleum Corporation, which was expected during 2016 but has yet to occur. Only once all the RBL debt service reserve account conditions have been fulfilled will Eroton be in a position to complete its audited financial statements for the year ended 31 December 2016, whereupon the Eroton Board will be in a position to declare and pay dividend(s) to its shareholders. The Group will update the market in due course regarding progress on the ability of Eroton to declare and pay a dividend in respect of year ending 31 December 2016.

Our view: Investors initially registered thier shock with this announcement last week, as two dividend payments worth US$39m due from Eroton will now be further delayed; later, the share price recovered to end flat by the market close. The Group, confirmed that any delay in satisfaction of the RBL facility's debt service reserve account conditions and the subsequent delay in Eroton declaring and paying a first dividend, will not impact the amounts of interest and principal due and payable by MidWestern Leon on the Loan Note Instrument held by San Leon. San Leon has raised approximately £170.3m (US$221.4m) through an issue of 378,400,000 new ordinary shares at a placing price of 45 pence per Ordinary Share with institutional and other investors, back in August 2016 to purchase the loan notes. The OML 18 field, the world-class Nigerian onshore oil and gas asset, has since progressed well, including the approximate doubling of production over what was expected when the RBL was first put in place, and now reached production level of 61,000 BOPD before the temporary shutting-in of the wells. This demonstrates that the size of the opportunity San Leon presents is quite overwhelmingly large. OML 18's estimated gross 2P reserves are approximately 576 MMbbl of oil and approximately 4.2 Tcf of gas and its gross 2C contingent resources are approximately 203 MMbbls of oil and approximately 1.6 Tcf of gas. Eroton, the Operator of OML 18, has entered into an Offtake Agreement at a gross price of US$95/bbl (US$91.5 net) for approximately 35% of the expected 2P production to the end of 2017. We believe San Leon can secure substantial long-term pay-back from OML 18, while the additional doors that such an arrangement could open in Nigeria/West Africa generally are significant with, perhaps, OPEC's recent international production cut also providing opportunity for firmer long-term oil prices. The Group has also confirmed that it is has received an approach from a possible offeror on 21 December 2016, that may or may not lead to a bid being made for San Leon. Further details of the party behind this approach for control of the Group, and potentially even expressions of interest from other players, will however be needed to power a further significant uplift in the shares. Beaufort retains its Speculative Buy recommendation on the shares.

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