finnCap Research Company Notes - 5 June 2018

Jun 05, 2018 / Research Notes

Daily finnCap Research Company Notes

Sector: Technology and Telecoms

Altitude Group (ALT): Prelims on track – proving ChannlPro

Key data                              

  • Share price (p): 79.0
  • Target price (p): 105.0
  • Market cap (£m): 42.1
  • Enterprise value (£m): 40.2

With prelims delivered in line with expectations, a strengthened board and momentum in the development of the key AI Mastermind (AIM) partnership, Altitude is doing exactly what is needed in proof of execution of the ChannlPro platform. The build-up of active AIM member distributors on AIMPro, the first iteration of the ChannlPro platform, encourages further suppliers, and further AIM membership utilisation of the platform… leading to interest from further suppliers and so on, in a virtuous circle. On track for our year-end expectations of ChannlPro revenue (a percentage of gross revenue transacted over the platform), we look forward to further proof points of the positive trends. Having raised funds in March, Altitude is expected to be in a comfortable £2.0m net cash position at FY18 after allowing for accelerating investment in the on-boarding of further distributors, and we look forward to the rapid development of scale and profitability: growth in platform participants in FY18 should then lead to a very strong financial performance in FY19. Target 105p reiterated.

KCOM (KCOM): Prelims

Key data                              

  • Share price (p): 97.1
  • Target price (p): 120.0
  • Market cap (£m): 501.6
  • Enterprise value (£m): 564.2

As revealed at the February trading update and subsequently reiterated, KCOM has delivered EBITDA slightly ahead (+8% vs fC) of expectations from revenue slightly behind (-4% vs fC). The 6p dividend was confirmed and reiterated for a further year, while net debt outperformed expectations, benefiting from £11.6m free cash in flow compared with our £6m forecast outflow. Specific Enterprise issues highlighted at interims included complex cloud software contracts precipitated losses, which in addition to a slow down in government spend removed Enterprise growth in the period – however, margins have to turn positive in 2H. Prospects in Hull and East Yorkshire continue to be driven by fibre and remain bright, with more customers now taking broadband over fibre than copper, with genuine fibre to the home unlike BT’s half hearted fibre to the cabinet. With board changes in process (CEO and CFO) but board confidence evident in the maintenance of the 6p dividend, we look forward to recovery in the long-troubled Enterprise division, where underlying value remains the diamond in the rough. Target 120p based on dividend yield, with free cash flow yield set to strongly improve post completion of the Hull & East Yorkshire fibre roll out.

Netcall (NET): MatsSoft contract renewal

Key data                              

  • Share price (p): 62.0
  • Target price (p): 75.0
  • Market cap (£m): 88.5
  • Enterprise value (£m): 89.3

Netcall has announced an important four-year contract renewal for MatsSoft worth £3.7m, with one of the UK’s largest financial services institutions. The customer has developed a broad range of applications based on the MatsSoft low code platform, supporting a significant number of operational processes – from enterprise scale to niche applications, mitigating risk and reducing operating costs. As a market-leading low-code platform acknowledged by Gartner and Forrester, the commercial proof of such a large contract to a leading UK financial institution, for whom Netcall’s MatsSoft has become a fundamental part of certain key processes, serves further to prove the value in Netcall / MatsSoft’s potential in a fast-growing market. Target 75p reiterated, with further contract momentum likely to lift opportunities and aspirations justifiably higher.

Contact: Andrew Darley | adarley@finncap.com

Sector: Energy

Europa Oil & Gas (EOG): The prize is getting larger

Key data                              

  • Share price (p): 4.3
  • Target price (p): 55.0
  • Market cap (£m): 12.8
  • Enterprise value (£m): 10.5

Europa’s latest 3D seismic reprocessing has resulted in a material increase to its prospective resource estimates on licence FEL 3/13, offshore Ireland, in the South Porcupine basin. Incorporating this into our valuation sees our risked NAV and price target rise 28% to 55p/sh. The shares have lagged this year due to delays to UK onshore planning approvals and the wavelength of expected drilling Offshore Ireland. However, confidence in – and the prospective size of – its Irish offshore portfolio continues to improve. A stronger oil price back drop should also improve the interest levels in the farm-out process across its portfolio once this kicks off in the next few months. Patience will be rewarded.

Independent Oil & Gas (IOG): Thames pipeline update

Key data                              

  • Share price (p): 21.8
  • Target price (p): 50.0
  • Market cap (£m): 26.1
  • Enterprise value (£m): 50.0

An operational update on the Thames pipeline Intelligent Pigging Programme has highlighted no problems with this critical enabling asset for the Blythe and Vulcan Satellites development hubs. Visual inspection of sections of the pipe, alongside successful pressure tests, raises the confidence levels in the suitability of this pipeline for recommissioning. Unfortunately, a malfunction of the intelligent pig sets this process back a few weeks while the exercise is repeated, but management does not expect this to affect the ultimate outcome. We make no change to our 50p/sh risked NAV (82p/sh unrisked) and price target.

Contact: Jonathan Wright | jwright@finncap.com

Sector: Support Services

discoverIE (DSCV): Driven by technological change

Key data                              

  • Share price (p): 426.0
  • Target price (p): 487.9
  • Market cap (£m): 301.6
  • Enterprise value (£m): 357.0

discoverIE has reported a strong set of results for FY 2018 with EPS up +16% and a continuing positive outlook supported by a +12% increase in the order book. Gross margins improved in H2 and operating margins have increased again, year-on-year, evidencing the continued move up the value chain. We make no changes to our forecasts but upgrade our target price from 456p to 488p based on our sum-of-the-parts and highlight discoverIE remains a strong play on technological change, a clear and long-term structural growth driver.

Guy Hewett | ghewett@finncap.com

Sector: Industrials

Gooch & Housego (GHH): Interim results – order book points to stronger H2

Key data                              

  • Share price (p): 1345.0
  • Target price (p): 1520.0
  • Market cap (£m): 331.7
  • Enterprise value (£m): 326.6

Interim results are in line with expectations and continue to indicate being on track to achieve full-year expectations, with a build up in trading momentum during H1 and a record order book pointing to a stronger H2 performance. Some delays in subsea telecom projects in H1 should return to give a much stronger H2, while operational investment increases the ability to cope with demand from the robust microelectronics market. No change to forecasts. With increased confidence in H2 trading, we raise our price target from 1450p to 1520p.  

Contact: David Buxton | dbuxton@finncap.com