Today's edition features:
CyanConnode Holdings (LON:CYAN)
"Today is Trump's day. While the world at large may have been shocked by his confrontation attitude, sneered at his apparent lack of sophistication, dismissed his aggression and criticized obvious conflicts of interest, global markets still have to ask themselves whether in fact he is their corporate saviour? Were the UK's Brexit vote and Trump's US victory actually flashing red lights as to prospective disintegration within the fabric of western society? Was the President-elect the only one smart enough to understand that a US crisis, possibly more obviously moral than economic, as deep as the great depression that faced Roosevelt back in the late 1920s is looming and, more to the point, that he is the only one with the courage to fix it? Time will tell but, of course, getting his revolutionary agenda - which includes the creation of 25m new jobs, more than halving corporation and personal taxes, applying swinging border and import controls, while throwing out the bulk of Federal regulation - through is now the giant challenge. Whether he eventually achieves this through a mixture of threats, coercion, bribery and possibly even charm, or finds himself so bamboozled by Congress that he simply walks off in a huff halfway through his first term in office, for sure Donald Trump is already assured that he will be more than just a footnote in American history. Contemplating all this last night, the principle US indices all struggled to make headway ending slightly down, with some considering the markets had become rather overbought in their push to see the Dow Jones break through the 20,000 marker. Traders gleaned little new from either of Janet Yellen or Theresa May's speeches yesterday, although US Treasuries still suffered their biggest sell-off in four weeks as investors became increasingly resolved to the idea of the Fed kicking off its round of rate hikes sooner rather than later. Asia ended mixed, with the Shanghai Composite making a reasonable gain on news that Chinese economic growth for 2016 came out at 6.7%, comfortably within Beijing's target range and providing relief given evidence of slow industrial activity during the fourth quarter; the Hang Seng and ASX just followed the US market lead into modest losses. Today, the UK Prime Minister is scheduled to meet with senior executives from Wall Street, while London is also due to publish December Retail Sales data along with earnings or trading updates from a few UK second-liners like Bonmarche (BON.L), Brainjuicer (BJU.L) and Midatech Pharma (MTPH.L) and, later this afternoon, a few US majors including General Electric and Procter & Gamble are expected to publish their quarterlies. In reality, however, all this will fade into the background with the new President takes to the microphone afternoon. Awaiting this, London is seen opening in a quiet, contemplative mood with the FTSE-100 seen 5 points either side of unchanged in early trading."
- Barry Gibb, Research Analyst
Markets
Europe
The FTSE-100 finished yesterday's session 0.54% lower at 7,208.44, whilst the FTSE AIM All-Share index closed 0.09% down at 872.31. In continental Europe, the CAC-40 finished 0.25% lower at 4,841.14 whilst the DAX was 0.02% lower at 11,596.89.
Wall Street
In New York last night, the Dow Jones slid 0.37% to 19,732.4, the S&P-500 dropped 0.36% to 2,263.69 and the Nasdaq eased 0.28% to finish the session at 5,540.08.
Asia
In Asian markets this morning, the Nikkei 225 had gained 0.53% to 19,173.51 and the Hang Seng lost 0.57% to 22,918.42.
Oil
In early trade today, WTI crude was up 0.31% to $51.53/bbl and Brent was ahead 0.44% to $54.40/bbl.
Headlines
China's economy grows 6.7% in 2016
China's economy grew by 6.7% in 2016, compared with 6.9% a year earlier, according to official data, marking its slowest growth since 1990. The figure is in line with Beijing's growth target of between 6.5% and 7%. But the news comes just a couple of days after the leader of one Chinese region admitted GDP data was faked. China is a key driver of the global economy and a growth slowdown is a major concern for investors around the world.
Source: BBC News
Company news
CyanConnode Holdings (LON:CYAN, 0.20p) – Speculative Buy
CyanConnode, the world leader in narrowband radio mesh networks yesterday released a trading update for the 12 months ended 31 December 2016. Management confirmed trading for the period had remained in line with its expectations, with revenues of approximately £1.8 million, which is an increase of 560% compared to the same period last year. Cash, as of 31 December 2016, was £3.9 million. It went on to note that a significant portion of revenue growth was underpinned by the PVVNL and CESC deployments in India and that the long-term nature of subsequent contract wins provides improved visibility going forward, with order backlog from existing contracts in multiple regions going into 2017. The Board also went on to underscore its confidence following the acquisition of Connode, declaring it to be transformational to the business plan by significantly expanding the Group's geographic reach while enhancing the product suite with a full standards-based (IPv6/6LoWPAN) technology platform. It considers the enlarged Group is now well-placed to build its presence in new markets and to cross sell to existing customers. There was also positive news on the contracts front: 2016's key win was the £10 million purchase order for smart metering from Micromodje in Iran, which is expected to move into the delivery phase during 2017. In November 2016, the UK Data Communications Company also announced the official go-live of the UK smart metering project with the data centre now active for communication between consumers and the utilities with rollout due to commence this year. Having successfully delivered all 2016 project milestones for the UK smart metering contract, CyanConnode software license and support fees revenue is expected to be £25 million over the life of the contract. Furthermore, it continued to strengthen relationships in India, highlighted by the third smart metering order with Larsen & Toubro; this order for 4,700 additional smart meters is part of a larger framework agreement between Tata Power Mumbai and L&T, and follows previous orders of 10,000 consumer meters in Mumbai. Management understands that the Indian Ministry of Power remains committed to installing a majority of the planned 35 million smart meters by 2019 and are pushing the local smart metering suppliers to accelerate their readiness for volume deployments. The Board is also encouraged by the Group's entry into the market in Thailand, where the local distribution partner has now invested £4 million into CyanConnode equity, based on both the Thai and global opportunities.
Our view: A genuinely global business with market leading technology on the cusp of a dramatic expansion. Smart metering, which provides unique solutions to problems faced by energy suppliers in both the developing and developed world, is just commencing its long-term installation phase. As with all new technologies, first mover advantage, together with a cost-effective but comprehensive solution, is key to capturing and retaining the opportunity. This is exactly what CyanConnode is now providing, as evidenced by its participation in the world's largest and most sophisticated projects, such as the UK's smart metering project and the National Smart Metering Program of Iran. Having established the scale of the opportunity (see Beaufort's publication 'The Future is Smart!' that was released on 21 September 2016), the coming 24 months will see CyanConnode's branded offering occupy the position of 'industry standard' for the sector. This will enable it to add significantly to the already impressive backlog from India, Iran and the UK both with repeat orders and new large, long-term and exceptionally sticky customers. Despite using a chunk of the £12.6m (gross) raised through last summer's Placing and Subscription to acquire Connode and build up working capital, it still holds a significant cash reserve as it heads into 2017. CyanCannode's business model is maturing while its business opportunity remains in its infancy. Recognising the Group's lead in this giant developing opportunity, Beaufort reiterates its Speculative Buy recommendation and price target of 0.6p/share.
Beaufort Securities acts as corporate broker to CyanConnode Holdings plc
Finsbury Food Group (LON:FIF, 109.50p) – Buy
Finsbury Food Group ('Finsbury Food'), the UK speciality bakery manufacturer of cake, bread and morning goods for the retail and foodservice channels, yesterday provided a pre-close trading update for the half year ended 31 December 2016 ('H1 FY2017'). The Group said Christmas trading was "solid" and H1 performance is in line with management's expectations. During the period, revenues remained flat at £156.6m; comprised of -2.9% fall in the UK Bakery division and +31.7% growth in the overseas division (Group's 50% owned European business), against the comparable period (H1 FY2016). The Group have invested £5m in capital projects during H1. As noted before, the Board reiterated that the scale of the current cost inflation is such that despite such internal initiatives (e.g. investment in product innovation and continue to improve efficiency and productivity), further cost recovery will be required and will become inflationary in the second half and beyond.
Our view: Finsbury Food delivered a resilient result for H1 FY2017 against what was an exceptionally strong comparative. Although revenues remained flat at £156.6m, that was against H1 FY2016 which saw +46% growth year-on-year. The flat outcome resulted from a -2.9% fall in the UK Bakery division (FY2016: 88% of revenue), slightly eased from -4.0% seen for the first 4 months, which was then offset by strong growth in its oversea division (FY2016: 12% of revenue) of +31.7%. The growth for oversea division has further accelerated from that seen last year, at +18.8% (or +36.5% for the first 4 months of FY2017). As with last trading update, no LFL sales performance was provided. The market, however, appeared more cautious about persistent cost pressure faced by the Group as a result of weaker Sterling-led commodity price inflation (input costs are globally priced in dollars or euros) and the planned National Living Wage increases, which means the Group will have to do more to protect against margin erosion. We believe consumer staples tend, in any case, to be generally resilient, while the growing overseas division will benefit from translations of weaker Sterling. The consumer confidence in the UK also remain relatively firm, witnessed from recent strong UK major supermarket sales growth. At a forward 11.5x P/E multiple, 6.4x EV/EBITDA together with a 2.6% dividend yield for the current year, the shares remain cheap for such a quality business. Yesterday's share price overreaction created more buying opportunities. Beaufort repeats its Buy recommendation with a price target of 140p per share.
Royal Mail (LON:RMG, 422.50p) – Hold
Royal Mail, the UK's designated universal postal service provider, yesterday provided a trading update for the 9 months ended 25 December 2016. During the period, Group revenue remained flat, due to -2% fall in UKPIL (UK Parcels, International & Letters, 83% of revenue in FY2016), offset by +9% growth in GLS (General Logistics Systems, 17% of revenue in FY2016). For UKPIL, parcels revenue increased by +3%, supported by +3% growth in volumes, while letter revenue declined by -5% due to -6% fall in addressed letter volumes. GLS saw volume growth of +8%, benefitted from the timing of Easter and other public holidays across Europe. Looking ahead, the Group said its cost avoidance programme remains on track to deliver c.£225m of UKPIL operating costs in FY2017, while it continues to target a reduction of up to -1% in underlying UKPIL operating costs before transformation costs. The Group confirmed that total net cash investment will be no more than £500m this year and next. Royal Mail's CEO, Moya Greene commented "Our postmen and women delivered a great service at Christmas, even better than last year, with 138m parcels handled in December alone. Our comprehensive planning, which started much earlier this year, enabled us to deliver this service for our customers right across the UK." The Group will announce its full year result ending 26 March 2017 on 18 May 2017.
Our view: Royal Mail's result remain disappointing, continue to be affected by the challenging market conditions. Addressed letter volumes, particularly advertising and business letters, continue to decline in the UK, while competition surrounding its parcels business remains intense. UK letters and parcels volume tends to be correlated with movements in GDP, and therefore to the general health of the UK economy. While this is true, we also believe the volume of addressed letters are unlikely to improve as consumers fundamentally and irrevocably switch to electronic communications, deserting in the process traditional paper delivery. Companies are likely to increasingly adopt electronic direct mailing for advertising as well, which will be cheaper, delivered immediately while having the capability to observe statistical data/behaviour of the receivers. With a 4-6% decline per annum of addressed letter volumes expected by the management, GLS is now the only driver of revenue growth for Royal Mail. The Group's entry into premium B2C business and the recent partnership with a Chinese e-Commerce company is an interesting move to capture the growth, but the parcels market itself remains highly competitive as Amazon Logistics and a myriad of other me-too players compete for market share. With a difficult UK economic outlook complicated with pension affordability, wage inflation and Union issues to confront, we consider the Group's current FY2017E and FY2018E P/E multiples of 10.9x and 10.7x, with dividend yield of 5.4% and 5.6%, respectively, fairly values the shares. Beaufort reiterate its Hold rating on Royal Mail.