finnCap Research Company Notes - 10 December 2018

Dec 10, 2018 / News

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Sector: Technology & Telecoms


CyanConnode (CYAN) : Corp

Chinese deal comes with revenue recognition concerns

Key data                              

  • Share price (p)                  12.0
  • Target price (p)                U/R
  • Market cap (£m)                              15.4
  • Enterprise value (£m)                    14.1       

In the outlook statement of the Interim results in September the company flagged a “high-margin license sale opportunity expected late in FY18” to give us confidence in market forecasts. This is now revealed to be a $4m Licensing Agreement with Beijing Instruments. Beijing Instruments will use CyanConnode’s designs to manufacture Advanced Metering Infrastructure (AMI) including RF mesh network technologies, which it hopes to supply to its customers. Beijing Instruments is a large well-established meter manufacturer and the main supplier to the State Grid Corporation of China. CyanConnode and Beijing Instruments will also collaborate on sales opportunities outside of China. This is therefore an impressive agreement, giving us optimism for future sales growth. However we also note the licence fee will become due on unit manufacturing and orders have yet to be secured, making material revenue from it in FY 2018 highly unlikely. The company is taking the opinion of auditors on its revenue recognition but at this stage we are forced to place our forecasts Under Review, pending greater clarity on the FY 2018 results.

Lorne Daniel |

PCI Pal (PCIP) : Corp

Government contract underpins expectations

Key data                              

  • Share price (p)                  24.5
  • Target price (p)                50.0
  • Market cap (£m)                              10.4
  • Enterprise value (£m)                    4.5

The payment card data security solutions specialist has signed a reseller agreement with a major UK based payment service provider. This partnership has immediately delivered an enterprise-sized customer within the UK Government and further validates its channel strategy. The government department operates one of the largest contact centres in Europe and its selection of PCI-Pal is a highlights the scalability and ease of connectivity of its new AWS cloud platform. The contract has an initial value of £0.85m in the first year, of which £0.62m is licence fees. The deal is part of the large expected pipeline of business and helps to underpin our £4.5m forecasts for the year to June 2019; this is more than doubling the £2.1m delivered last year and takes the business closer to profitability. We are reassured but make no change to forecasts or our target price at this stage.


Lorne Daniel |

Sector: Consumer & Other


PPHE Hotel Group (PPH) : Corp

Amsterdam visit emphasises upside potential

Key data                              

  • Share price (p)                  1 690.0
  • Target price (p)                2 141.0
  • Market cap (£m)                              715.5
  • Enterprise value (£m)                    1 375.5

The Netherlands Board of Tourism projects foreign tourist visits to grow by c.4% p.a. to 2030 alongside good growth in domestic tourism and corporate immigration following Brexit. Amsterdam attracts by far the most visitors, has limited new hotel openings and is progressively limiting Airbnb rentals. This is a strong background for maintaining strong occupancy levels and growing room rates and PPHE is leveraging this by repositioning and upgrading two of its hotels. We visited both last week and, similar to the Croatian visit earlier this year, were struck by the obvious potential for reasonable investment to significantly enhance asset values supported by higher room rates. We reiterate our view that the share price materially undervalues the assets PPHE owns.

Guy Hewett |

Mothercare (MTC) : Corp

On the right trajectory; early positive signs; much more to come

Key data                              

  • Share price (p)                  16.2
  • Target price (p)                23.0
  • Market cap (£m)                              55.3
  • Enterprise value (£m)                    137.1    

Having averted a near fatal liquidity crisis earlier in 2018, MTC is in the foothills of an accelerated radical transformation programme funded by the comprehensive equity/debt refinancing completed in July. The pace of change has been accelerated to keep up with the consumer, competition and turbulent economic backdrop. Weak UK LFL sales and gross profit margin trends since Sept 2017 point to problems with MTC’s overall customer value proposition. The immediate focus is on the basics, simplifying the business, and digital. Significant progress has been made on store estate rationalisation (CVA), cost reduction, and creating a new organisational structure to execute the accelerated transformation strategy – all underpinned by rigorous capital/cash discipline. There is significant upside potential on unheroic assumptions if MTC executes well. Turnaround traction gives strategic optionality around the UK business. Initiate with a 23p TP.  

Peter Smedley |

Photo-Me (PHTM) : Corp

Laundry continues on growth path

Key data                              

  • Share price (p)                  106.2
  • Target price (p)                183.0
  • Market cap (£m)                              399.4
  • Enterprise value (£m)                    372.5

H1 results show continued strong growth in Laundry and a faster than expected recovery in Japan but slower B2B and third party sales in the UK. These later two points are expected to improve in H2 and guidance for the full year is maintained but there is clearly some risk here. We retain our target price of 183p based on a 5% FY 2019E free cash flow yield.

Guy Hewett |

Sector: Life Sciences


Avacta (AVCT) : Corp

Therapeutics development partnership with LG Chem

Key data                              

  • Share price (p)                  23.2
  • Target price (p)                120.0
  • Market cap (£m)                              26.8
  • Enterprise value (£m)                    21.6

Avacta announced a significant therapeutic development partnership and licence agreement with LG Chem Life Sciences. With a potential total deal value of $180m plus royalties, the multi-target collaboration is to develop and commercialise Affimer® therapeutics in inflammatory disorders and oncology. Avacta may receive an additional $130m in option fees and milestone payments should LG elect to exercise their options for additional targets. Not only is this a significant endorsement of the therapeutic potential of Affimers, but it provides additional near-term cash to help progress its lead oncology programme, which is targeted to enter the clinic in 2020. With a rich pipeline of interest in the reagent portfolio and ongoing discussions with other pharma companies, we expect further licensing activity. We estimate the risk-adjusted NPV of this deal, based only on the potential milestones to be worth 12-17p. We retain a target price of 120p.

Mark Brewer |

Sector: Industrials


Hardide (HDD) : Corp

FY results – moving towards profitability

Key data                              

  • Share price (p)                  1.3
  • Target price (p)                2.2
  • Market cap (£m)                              22.3
  • Enterprise value (£m)                    19.0

FY results saw a strong increase in revenue to a new record level and ahead of our expectations, with adjusted PBT slightly better than forecast. The continued recovery in the oil & gas sector plus strong demand from the two new supply agreements has propelled revenue. Progress in aerospace is occurring with all technical details agreed. Commercial terms are next prior to the pre-production phase, while the US facility gained aerospace accreditation. The shares’ underperformance is at odds with the strong increase in trading and the process of scaling up facilities in advance of the likelihood of the company’s first aerospace orders this year.

David Buxton |

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