Hardman & Co – DirectorsTalk Interviews https://www.directorstalkinterviews.com LSE London Stock Exchange PLC Company Interviews Mon, 05 Aug 2019 09:26:19 +0000 en-GB hourly 1 Burford Capital Results don’t need to be appealed https://www.directorstalkinterviews.com/burford-capital-results-dont-need-to-be-appealed/412789372 Mon, 05 Aug 2019 09:10:59 +0000 https://www.directorstalkinterviews.com/?p=789372 Burford Capital (LON: BUR) has announced its interim results for 1H’19 and has produced another excellent set of figures. After stripping out third-party interests, revenue was up 40% to $287m and earnings grew 36% to $225m. Litigation investment was again the star, with income also increasing 36% to $265m. While this saw some benefit from ...

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Burford Capital (LON: BUR) has announced its interim results for 1H’19 and has produced another excellent set of figures. After stripping out third-party interests, revenue was up 40% to $287m and earnings grew 36% to $225m. Litigation investment was again the star, with income also increasing 36% to $265m. While this saw some benefit from the recent Petersen transaction, there were strong results beyond that with the rest of the portfolio producing a first-half RoIC of 78%. These brought total recoveries to $1.16bn from 99 investments, with a cumulative RoIC of 98% (from 85% to 31 December 2018) and IRR of 32% (from 30%).

  • New commitments: It was good to see a return to growth in commitments, with 36% growth to $751m in the half-year; 2018 had been relatively flat compared with 2017. Deployments had slower growth of 8%, affected by a $130m portfolio investment for which the entire deployment is deferred.
  • Cash and capital: Cash generation from operations was $184m, although payment of receivables since 30 June would have lifted this by $126m. Deployments in the half were $198m. So, period-end cash of $171m, has risen to $297m now, slightly in excess of the $277m in place at 31 December 2018.
  • Risks: The investment portfolio is highly diversified, with exposure to more than 1,100 claims. However, it retains some very large investments, which means revenue could be volatile, particularly in the smaller divisions. The Petersen case shows that this volatility is not simply a negative.
  • Investment summary: Burford Capital has already demonstrated an impressive ability to deliver good returns in a growing market while investing its capital base. As the invested capital continues to expand, we would anticipate that the litigation investment business will continue to generate strong earnings growth.

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Gateley Plc Excellent full-year results https://www.directorstalkinterviews.com/gateley-plc-excellent-full-year-results/412789374 Tue, 30 Jul 2019 09:11:04 +0000 https://www.directorstalkinterviews.com/?p=789374 Gateley plc (LON: GTLY) reported another strong set of results, again beating market expectations, underlining its consistency and predictable performance. A broad-based, legal and professional services group, Gateley is a leader in serving the UK mid-market. It continues to deliver on its pre-IPO plan, growing revenue, profit, breadth of service offering and geographical footprint since ...

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Gateley plc (LON: GTLY) reported another strong set of results, again beating market expectations, underlining its consistency and predictable performance. A broad-based, legal and professional services group, Gateley is a leader in serving the UK mid-market. It continues to deliver on its pre-IPO plan, growing revenue, profit, breadth of service offering and geographical footprint since flotation. Strong cash generation and organic revenue growth were highlights, with 10.7% of revenues coming from acquisitions. Gateley made two strategic acquisitions this year, for shares and cash, which enhances its long-term excellent organic growth performance. A recent strategic placing improved liquidity and further expanded its institutional shareholder list.

  • Strategy: Gateley has proved itself a consistent performer in this new and exciting sector, with solid organic growth, boosted by complementary legal and professional services acquisitions. A high-growth core business with strong cash generation, is led by a seasoned management team with a track record of delivery, pre and post-IPO.
  • Results: Results were strong, with EPS of 11.8p, up 7%, vs. our forecast of 11.3p, and accompanied by a generous 14.3% hike in the dividend. The outlook comment was extremely positive – “the Group is well positioned to make even greater progress in the current financial year” – this after a 20% revenue growth year!
  • Valuation: The valuation, based on our forecasts, is shown in the table below, and the stock is clearly modestly rated, given the track record, attractive dividend yield and resilience. Particularly attractive are the inherently strong financial characteristics, with good cash generation and a limited investment requirement.
  • Risks: This is a people business. People can leave. Gateley’s record, since IPO, in lateral hires and limited losses is impressive, with retirees handing over to the next generation and securing clients. Any new CEO is also a risk, but the change is being closely managed, planned a long way out, and strategy will be unchanged.
  • Investment summary: Gateley is a quality player in a new and exciting space, which is increasingly attracting investor attention. It is a high-quality legal and professional services group with significant growth potential, an excellent delivery track record, a strong management team, and a strategy to diversify further in complementary professional services. Its valuation is far from demanding, in our view.

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ARBUTHNOT BANKING GROUP 1H’19 results: diversified, low-risk growth continues https://www.directorstalkinterviews.com/arbuthnot-banking-group-1h19-results-diversified-low-risk-growth-continues/412789376 Mon, 29 Jul 2019 09:14:54 +0000 https://www.directorstalkinterviews.com/?p=789376 The 17 July 1H’19 results showed the further progress made in profitably deploying the capital Arbuthnot Banking Group (LON: ARBB) generated from the partial sales of its stake in STB. Loans grew 16% to £1,275m, and deposits increased 18% to £1,829m, driving net interest income up 15%. Other new businesses continue to show strong growth. ...

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The 17 July 1H’19 results showed the further progress made in profitably deploying the capital Arbuthnot Banking Group (LON: ARBB) generated from the partial sales of its stake in STB. Loans grew 16% to £1,275m, and deposits increased 18% to £1,829m, driving net interest income up 15%. Other new businesses continue to show strong growth. Commercial Banking generated profits of £3m (1H’18 loss: £0.8m). The group is well-funded (loans 70% of deposits) and has surplus group capital of ca.£70m (core equity Tier 1 surplus in excess of £30m). In July, ABG announced the acquisition of two mortgage portfolios for £258m; this shows the company’s flexibility to take value-added acquisition opportunities.

  • 1H’19 results: The key financial highlights were i) PBT of £2.9m (1H’18: £1.2m), underlying PBT of £3.4m (£2.7m), ii) operating income up 14% to £35.6m, iii) costs up 7%, and iv) impairments of £1.3m (2H’18: £2.5m, 1H’18: £0.2m). EPS fell to 16.6p from 21.7p, with the change in treatment of STB.
  • Outlook: Our 2019 PBT estimates are broadly unchanged, with the part-year benefit from the mortgage acquisition offsetting the higher cost of recently issued Tier 2 capital. Our 2020 estimates have been raised by over 10%, as the benefits are factored in for a greater part of the year and more than offset the Tier 2 cost.
  • Valuation: The average of our approaches is now £17.93 (previously £17.42), 1.4x 2020E NAV. The rise reflects higher dividends, equity and divisional profits with the 2020 earnings upgrade, and increases all our valuation approaches. Despite the 2019 YTD rally, the share price is still around the 1H’19 NAV (1,321p).
  • Risks: As with any bank, the key risk is credit. ABG’s existing business should see below-market volatility, and so the main risk lies in new lending. We believe management is cognizant of the risk, and has historically been very conservative. Other risks include reputation, regulation and compliance.
  • Investment summary:  Arbuthnot Banking Group offers strong-franchise and continuing-business (normalised) profit growth. Its balance sheet strength gives it wide-ranging options to develop organic and inorganic opportunities. The latter are likely to increase in uncertain times. Management has been innovative, but also very conservative, in managing risk. Having a profitable, well-funded, well-capitalised and strongly- growing bank priced close to book value is an anomaly.

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Koovs Plc New year started with a bang https://www.directorstalkinterviews.com/koovs-plc-new-year-started-with-a-bang/412789380 Wed, 24 Jul 2019 09:24:42 +0000 https://www.directorstalkinterviews.com/?p=789380 The important information from Koovs’ FY19 results is not the results for the year but the trading since the company secured its additional financing. With Gross Order Value (GOV) up 104% in 1Q20, Koovs is once more showing the sort of growth associated with online success. FY19 itself was a lost year, as the company ...

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The important information from Koovs’ FY19 results is not the results for the year but the trading since the company secured its additional financing. With Gross Order Value (GOV) up 104% in 1Q20, Koovs is once more showing the sort of growth associated with online success. FY19 itself was a lost year, as the company conserved cash while it successfully sought new investors; they eventually arrived – not only with money but with important synergistic benefits too. The GOV data is a function of being able to finance growth again. The benefits of the Future Lifestyle (FLFL) tie-up are still to come in additional distribution and improved buying.

  • Strategy: Koovs’ plan to become the ASOS of India is back on track. The impact of the lack of resources in FY19 showed up in the low growth in reported revenue (+9%). With the tap turned back on, GOV has doubled in 1Q20 and web traffic is up 148% (and this not achieved at the expense of the trading margin: up to 21%).
  • Forecasts: We have, effectively, shifted our forecasts one year later. The expected revenue in FY20 is roughly what we were anticipating for FY19, had the funding arrived straightaway. The base is slightly lower, but we would expect that the benefits from the FLFL tie-up should accelerate growth prospects.
  • Valuation: Our valuation has changed – under the old estimates, the value should have risen, as the growth came through and the discount unwound. By delaying for a year, this has not happened, and there has been some dilution. Our central estimate of value suggests that Koovs is worth £300m today, or 74p per share.
  • Risks: We see the two key risks as being slower uptake of e-commerce in India than we forecast, and damaging discounting by Koovs’ direct and indirect competitors. Koovs also needs to manage the relationship with FLFL successfully to optimise its benefits. In addition, it will need further funding in FY21 to achieve its plans.
  • Investment summary: With the money raised and the new partners on board, Koovs becomes an exciting way to play the last big world retail market to move online. The prize, if it gets it right, is a billion-pound company and more. It is likely to be a bumpy, exciting ride, but investors have the reassurance of a highly experienced management team in charge, and the backing of two major Indian corporations straddling both retail and media.

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City of London Investment Group Finishing ahead in a volatile year for markets https://www.directorstalkinterviews.com/city-of-london-investment-group-finishing-ahead-in-a-volatile-year-for-markets/412789378 Wed, 24 Jul 2019 09:19:49 +0000 https://www.directorstalkinterviews.com/?p=789378 City of London Investment Group (LON: CLIG) has announced its pre-close trading update for FY2019. After a volatile fourth quarter, FUM finished ahead of the end-March figure, at $5.39bn. This was an increase of $282m (5.5%) over a year ago, of which $96m was net inflows, with the balance from market movements. As indicated in ...

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City of London Investment Group (LON: CLIG) has announced its pre-close trading update for FY2019. After a volatile fourth quarter, FUM finished ahead of the end-March figure, at $5.39bn. This was an increase of $282m (5.5%) over a year ago, of which $96m was net inflows, with the balance from market movements. As indicated in the quarterly statements, both the Developed Markets and Opportunistic Value strategies saw net inflows over the year. Emerging Markets and Frontier Markets experienced net outflows. Performance in the Emerging Markets strategy was good, with outperformance of ca.300bps over the year.

  • Operations: Expected pre-tax profit for the year will be £11.4m, which, after tax and deducting of non-controlling interests, gives £8.8m attributable to shareholders. This a very slightly ahead of our forecast of £8.7m. Basic and diluted EPS are expected to be 34.9p and 34.1p, respectively.
  • Dividend: The recommendation is for a final dividend of 18p, the same as last year. This will bring the total for the year to 40.5p, including the special dividend of 13.5p. The underlying dividend of 27p is covered 1.26x by fully-diluted earnings.
  • Valuation: The 2020E P/E of 10.1x is at a significant discount to the peer group. The underlying 2020E yield of 6.4% is attractive, in our view, and should, at the very least, provide support for the shares in the current markets.
  • Risks: Although emerging markets can be volatile, City of London has proved to be more robust than some other EM fund managers, aided by its good performance and strong client servicing. Further EM volatility could raise the risk of such outflows, although increasing diversification is also mitigating this.
  • Investment summary: Having shown robust performance in challenging market conditions, City of London is now reaping the benefits in a more supportive environment. The valuation remains reasonable. FY’17 and FY’18 both saw dividend increases and, unless there is significant market disruption, more should follow in the next few years.

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Redx Pharma Phase I trial resumed https://www.directorstalkinterviews.com/redx-pharma-phase-i-trial-resumed/412787919 Thu, 11 Jul 2019 07:47:29 +0000 https://www.directorstalkinterviews.com/?p=787919 Redx Pharma plc (LON: REDX) is a clinical-stage R&D company focused on drugs targeting oncology and fibrotic disease. 2018 was a year that reset the benchmarks – new management team, restructured organisation focused on two therapeutic areas, and a clean balance sheet. 2019 will be characterised by a number of major milestones, including the recent ...

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Redx Pharma plc (LON: REDX) is a clinical-stage R&D company focused on drugs targeting oncology and fibrotic disease. 2018 was a year that reset the benchmarks – new management team, restructured organisation focused on two therapeutic areas, and a clean balance sheet. 2019 will be characterised by a number of major milestones, including the recent restart of the Phase I/IIa trial with RXC004 with a revised protocol, and we note that RXC006 has been nominated as the first development candidate in the anti-fibrotic programme. Meanwhile, operating costs have been reduced while management considers all options available to strengthen its balance sheet.

  • Strategy: REDX is focused on the discovery and early clinical development of small molecule therapeutics in oncology and fibrotic disease. Its strategy is to develop assets through proof-of-concept clinical trials and then partner them for late-stage development and commercialisation.
  • Interims: REDX took the opportunity provided by its interim results to update the market on the advancement of its pipeline and financial position. The main news is the start of the trial with RXC004 with a revised protocol. REDX has also announced a £2.5m short-term loan. Net cash at 31 March was £3.3m.
  • Trial re-started: The Phase I trial with a reformulation of the porcupine inhibitor RXC004 has been resumed using a revised protocol, and REDX has indicated that the first patient has initiated, and additional patients are planned for enrolment. Initial safety and tolerability results are anticipated in 2H’19.
  • Risks: REDX has emerged from fiscal 2018 in a clean position with a focused strategy. The company has limited cash resources, boosted by a short-term shareholder loan, while it continues to explore the long-term funding of the group to advance the proof-of-concept trials for its development programmes.
  • Investment summary: The business plan focuses cash resources on progressing its drug leads in oncology and fibrotic disease to proof-of-concept early clinical development. Big pharma has been shown to pay substantial prices for good science and novel and/or de-risked assets with clinical data, reinforcing REDX’s strategy, potentially generating good returns and enhancing shareholder value.

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Burford Capital Petersen appeals to investors https://www.directorstalkinterviews.com/burford-capital-petersen-appeals-to-investors/412787917 Tue, 09 Jul 2019 07:45:36 +0000 https://www.directorstalkinterviews.com/?p=787917 Burford Capital (LON: BUR) has made a double announcement about the Petersen case. Argentina had appealed to the US Supreme Court over the decision about where the case will be heard. The Court has declined to hear the appeal, so proceedings will take place in the US. Burford has also sold another 10% of its ...

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Burford Capital (LON: BUR) has made a double announcement about the Petersen case. Argentina had appealed to the US Supreme Court over the decision about where the case will be heard. The Court has declined to hear the appeal, so proceedings will take place in the US. Burford has also sold another 10% of its entitlement in the case for $100m; implying a market price of $1bn, ca.25% above the value implied by the smaller July 2018 transaction. Additional disclosure is that the sale took place to 11 institutional investors, with 40 having participated in the market now. This adds credibility to the valuation generated by the transactions to date.

  • Teinver: At the end of last month, Burford announced that Argentina’s annulment application in the case had been dismissed. This will allow the $7m value for the put option to be released. This case generated a $107m return on a $13m investment, with 722% RoIC and 39% IRR.
  • Risks: The investment portfolio is highly diversified, with exposure to more than 1,100 claims. However, it retains some very large investments, which means revenue could be volatile, particularly in the smaller divisions. The Petersen case shows that this volatility is not simply a negative.
  • Investment summary: Burford Capital has already demonstrated an impressive ability to deliver good returns in a growing market, while investing its capital base. As the invested capital continues to grow, the litigation investment business should continue to produce strong earnings growth.

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Oxford BioMedica Eying up long-term value https://www.directorstalkinterviews.com/oxford-biomedica-eying-up-long-term-value/412787915 Mon, 08 Jul 2019 07:43:59 +0000 https://www.directorstalkinterviews.com/?p=787915 Oxford BioMedica (OXB) is a specialist, advanced therapy, viral-vector biopharma company. It offers vector manufacturing and development services, while developing proprietary drug candidates, with its LentiVector® platform. 2018 saw significant growth in gross income, the majority through licensing deals. A new R&D collaboration deal with Santen, coupled with the recent equity financing and debt repayment, ...

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Oxford BioMedica (OXB) is a specialist, advanced therapy, viral-vector biopharma company. It offers vector manufacturing and development services, while developing proprietary drug candidates, with its LentiVector® platform. 2018 saw significant growth in gross income, the majority through licensing deals. A new R&D collaboration deal with Santen, coupled with the recent equity financing and debt repayment, demonstrate OXB’s deal-making ability and its strategy to secure future, long-term potential. Near term, this R&D arrangement will provide modest additional profit, adding confidence to OXB’s new net cash status in 2019.

  • Strategy: OXB has four strategic objectives: i) delivery of vector development services that embed its technology within partners’ commercial products; ii) bioprocessing and commercial manufacture of vector; iii) out-licensing of proprietary candidates; and iv) investment in R&D and the LentiVector platform.
  • New R&D deal: Santen Pharmaceutical Co. (Santen) and OXB have agreed to collaborate in developing a gene therapy for an inherited retinal disease. The financial details have not been disclosed, although the potential royalty is high at up to 10%. Commercial development income will increase in the short term.
  • Equity investment: OXB recently signed an agreement with Novo Holdings A/S for an equity investment of £53.5m, at £6.90/share, representing 10.1% of OXB’s enlarged share capital. This greatly strengthens the balance sheet, with OXB repaying in full its debt facility with Oaktree Capital on 28 June 2019.
  • Risks: OXB’s mid-term sales model is dependent on successful progress of partners’ clinical trials and commercialisation of LentiVector-enabled products. OXB is investing heavily in infrastructure for manufacturing capacity and in personnel, which could potentially affect the bottom line depending on deal flow.
  • Investment summary: OXB is an exciting company with market-leading technology. It has been extensively validated through large deals with leading (bio)pharmaceutical partners and through grants from the UK government. On expectations of further milestones in 2019, OXB is now profitable, net cash positive and cashflow positive at the operating level.

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Arbuthnot Banking Group Plc Mortgage portfolio acquisitions https://www.directorstalkinterviews.com/arbuthnot-banking-group-plc-mortgage-portfolio-acquisitions/412787913 Wed, 03 Jul 2019 07:41:43 +0000 https://www.directorstalkinterviews.com/?p=787913 On 3 July, Arbuthnot Banking Group (LON: ARBB) announced the acquisition of two mortgage portfolios for £258m (£6m discount to book value). The overall yield on the portfolios is 3.6%, before accounting for the negotiated purchase discount effect. The credit profile is excellent (average loan to value sub-70% and 75% of the loans originated before ...

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On 3 July, Arbuthnot Banking Group (LON: ARBB) announced the acquisition of two mortgage portfolios for £258m (£6m discount to book value). The overall yield on the portfolios is 3.6%, before accounting for the negotiated purchase discount effect. The credit profile is excellent (average loan to value sub-70% and 75% of the loans originated before 2008). 85% of the loans are owner-occupied, with the balance buy-to-let. The loans are of sufficient quality to be included in the pool of assets used by ABG as collateral for the Sterling Monetary Framework at the Bank of England, and so be included in its liquidity resources. ABG’s record on such acquisitions has been good. We will review numbers with the results on 17 July.

  • Portfolio 1: At 31 March 2019, this book was 1,457 loans, with balances of £201m, of which 20% are buy-to-let and the remainder are owner-occupied, with an average loan to value of 67.4%. It has been in run-off since it was originated by Edeus Mortgages and Victoria Mortgage Funding between 2005 and 2008.
  • Portfolio 2: This book has 462 loans, with customer balances of £65m, all of which are owner-occupied, with an average loan to value of 70%. It was originated in 2018 and 2019 by Magellan Homeloans. Like Portfolio 1, it is geographically distributed around the UK.
  • Valuation: The average of our approaches is £17.42 (previously £17.46), 1.3x 2020E NAV. Since our last report, there has been a small change in the STB share price, which feeds through to the sum-of-the-parts model. Despite the 2019 year-to-date rally, the current share price is still around the 2018 NAV (1,283p).
  • Risks: As with any bank, the key risk is credit. ABG’s existing business should see below-market volatility, and so the main risk lies in new lending. We believe management is cognizant of the risk and, historically, has been very conservative. Other risks include reputation, regulation and compliance.
  • Investment summary: ABG offers strong-franchise and continuing-business (normalised) profit growth. Its balance sheet strength gives it wide-ranging options to develop organic and inorganic opportunities. The latter are likely to increase in uncertain times. Management has been innovative, but also very conservative, in managing risk. Having a profitable, well-funded, well-capitalised and strongly growing bank priced at book value appears anomalous.

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Volta Finance Manager’s Hardman & Co Forum presentation https://www.directorstalkinterviews.com/volta-finance-managers-hardman-co-forum-presentation/412787911 Tue, 02 Jul 2019 07:39:13 +0000 https://www.directorstalkinterviews.com/?p=787911 Serge Demay, from Fund Manager AXA IM, gave an investor presentation at the Hardman & Co 17 June 2019 Forum (video https://www.hardmanandco.com/june-investor-forum/). We produced a short note for this event, Volta Finance : 9% yield from diversified corporate loan portfolio. In this report, we address the questions that were raised at both the Forum and ...

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Serge Demay, from Fund Manager AXA IM, gave an investor presentation at the Hardman & Co 17 June 2019 Forum (video https://www.hardmanandco.com/june-investor-forum/). We produced a short note for this event, Volta Finance : 9% yield from diversified corporate loan portfolio. In this report, we address the questions that were raised at both the Forum and in the one-on-one discussions our analyst had with attendees post the event. The bias was on credit and how the portfolio may optimise returns if the expected gentle economic deterioration happens.

  • Credit outlook: There were a number of questions on the credit outlook: how and why it may be better to be invested in CLO equity securities than debt if the economy deteriorates; the impact of cov-lite trends; and how Volta Finance (LON: VTAS) has changed from before the financial crisis.
  • Other questions: Other questions included an exploration of the relationship between Volta and its asset manager (we see benefits from this relationship), the level of fees, gearing (and how it is both low and structured to ensure Volta will not be a forced seller of assets), and the impact of sentiment.
  • Valuation: Volta trades at a 16% discount to NAV. Peer-structured finance funds, and a range of other debt funds, on average, trade at smaller discounts. Volta has delivered faster NAV growth than its immediate peers and in-line/lower volatility, making this absolute and relative discount an anomaly.
  • Risks: Credit risk is a key sensitivity (Volta has a widely diversified portfolio). We examined the valuation of assets, highlighting the multiple controls to ensure its validity, in our initiation note last September. NAV is affected by sentiment towards its own and underlying markets. Volta’s long $ position is only partially hedged.
  • Investment summary: Volta is an investment for sophisticated investors, as there could be sentiment-driven, share-price volatility. Long-term returns have been good: ca.10% p.a. returns (dividend reinvested basis) over five years. The current portfolio-expected NAV return is broadly similar. The 2019/20E dividend yield of 9.0% will be covered, in our view, by predictable income streams.

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The 600 Group Acquisition of CMS attractive and EPS-enhancing https://www.directorstalkinterviews.com/the-600-group-acquisition-of-cms-attractive-and-eps-enhancing/412787909 Tue, 02 Jul 2019 07:36:18 +0000 https://www.directorstalkinterviews.com/?p=787909 The Control Micro Systems Inc (CMS) acquisition (US) is strategically attractive. Trading remains good, with a healthy and improved order book, and growth enhanced by new product launches and new market entry. The group remains competitively well positioned, with a world-class reputation in machine tools and laser marking. The shares stand at a discount to ...

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The Control Micro Systems Inc (CMS) acquisition (US) is strategically attractive. Trading remains good, with a healthy and improved order book, and growth enhanced by new product launches and new market entry. The group remains competitively well positioned, with a world-class reputation in machine tools and laser marking. The shares stand at a discount to the peer group and to a DCF valuation, and offer an appealing yield.

  • Strategic developments: The CMS acquisition strengthens the competitive position of the group’s TYKMA laser marking subsidiary. The $10m consideration was part-funded from the group’s cash resources, boosted by monies from the recent pension scheme settlement, a new $3.25m five-term loan and $1m in new shares.
  • Financial impact: The consideration represents transaction multiples of around 0.9x sales and 5x EBITDA. We believe the deal will be immediately earnings-enhancing (over 10%), even before any synergies or efficiency gains. (We will be adjusting our forecasts post release of the group’s final results in early July.)
  • Current trading: Despite the continued macroeconomic and political (trade war/Brexit) uncertainties, enquiry and quotational activity has remained good, with further progress in the group’s order book.
  • Competitive position: The 600 Group has strong global brand recognition, with, as a key differentiator, the provision of high-service/customer support. The group is regarded as well positioned within highly competitive and fragmented industries, where barriers to entry are generally low.
  • Investment summary: The shares offer the opportunity to invest in a de-risked cyclical stock with good operational leverage, enhanced by new product launches and new market entry. Cyclicality has been de-risked through development of repeat/recurring business and activities in high-margin, economically less sensitive spares/services operations. The risk/reward profile is favourable, and the shares stand at a discount to the peer group and to a DCF valuation, with an appealing yield.

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Allergy Therapeutics plc Successful legal outcome removes uncertainty https://www.directorstalkinterviews.com/allergy-therapeutics-plc-successful-legal-outcome-removes-uncertainty/412787907 Mon, 01 Jul 2019 07:33:27 +0000 https://www.directorstalkinterviews.com/?p=787907 Allergy Therapeutics plc (LON: AGY) is a long-established specialist in the prevention, diagnosis and treatment of allergies. The Pollinex Quattro (PQ) platform, an ultra-short-course subcutaneous allergy immunotherapy (SCIT), continues to gain market share despite its availability in the EU on a ‘named-patient’ (NP) basis only. Several products are in clinical development, with the aim of ...

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Allergy Therapeutics plc (LON: AGY) is a long-established specialist in the prevention, diagnosis and treatment of allergies. The Pollinex Quattro (PQ) platform, an ultra-short-course subcutaneous allergy immunotherapy (SCIT), continues to gain market share despite its availability in the EU on a ‘named-patient’ (NP) basis only. Several products are in clinical development, with the aim of moving the platform to full registration under the new regulatory framework. AGY has issued a positive trading update highlighting the strong operating performance of the group. Also, it has reached a successful settlement of an ongoing legal dispute with one of its third-party R&D contractors.

  • Strategy: AGY is a fully-integrated pharmaceutical company focused on the treatment of allergies. There are three parts to its strategy: continued development of its European business via investment or opportunistic acquisitions; the US PQ opportunity; and further development of its pipeline.
  • Trading update: Underlying sales growth appears close to expectations, rising 8.7% to £74.0m (£68.3m). Although further Brexit costs (-£0.5m est.) have dented any prospect of gross margin improvement, this has been more than offset by lower spend on marketing (+£1.0m), G&A (+£1.0m) and R&D (+2.0m).
  • Legal settlement: AGY has settled a legal dispute with Inflamax Research Inc (Inflamax) regarding the inconclusive US Phase II Grass MATA MPL trial. Inflamax has paid AGY $7.4m/£6.0m in full settlement of the dispute. In addition, Inflamax has agreed to pay a ‘substantial portion’ of AGY’s legal costs.
  • Risks: AGY’s primary risk lies in the timings of the regulatory approval process, mostly outside of its control, related to the PQ Birch immunotherapy and the European TAV process for full approval. Ongoing trials do represent a risk, but this is limited by the products’ use on a named-patient basis.
  • Investment summary: The share price continues to recover from the overly pessimistic view of the PQ Birch trial primary endpoint failure in March and the positive trading update and news that the legal dispute has been settled will help. Despite the recovery to date, AGY is trading on an EV/sales of only 0.93x 2019E, down to 0.86x 2020E – well below the multiples commanded by its direct competitors.

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Oxford BioMedica De-leveraging the balance sheet https://www.directorstalkinterviews.com/oxford-biomedica-de-leveraging-the-balance-sheet/412785896 Mon, 24 Jun 2019 07:01:34 +0000 https://www.directorstalkinterviews.com/?p=785896 Oxford BioMedica (LON: OXB) is a specialist, advanced therapy, viral-vector biopharma company. It offers vector manufacturing and development services, while developing proprietary drug candidates, with its LentiVector® platform. 2018 saw significant growth in gross income, primarily through licensing deals, to deliver OXB’s first underlying operating profit. OXB is, however, carrying a significant loan of $55m, ...

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Oxford BioMedica (LON: OXB) is a specialist, advanced therapy, viral-vector biopharma company. It offers vector manufacturing and development services, while developing proprietary drug candidates, with its LentiVector® platform. 2018 saw significant growth in gross income, primarily through licensing deals, to deliver OXB’s first underlying operating profit. OXB is, however, carrying a significant loan of $55m, which is relatively expensive with an interest rate of 9% plus US LIBOR, and also exposes it to forex risk. Equity financing of £53.5m from Novo Holdings A/S has been agreed, allowing repayment of the loan and securing a strategic partner.

Strategy: OXB has four strategic objectives: i) delivery of vector development services that embed its technology within partners’ commercial products; ii) bioprocessing and commercial manufacture of vector; iii) out-licensing of proprietary candidates; and iv) investment in R&D and the LentiVector platform.

Equity investment: OXB has signed an agreement with Novo Holdings A/S for an equity investment of £53.5m, at £6.90/share, representing 10.1% of OXB’s enlarged share capital. This greatly strengthens the balance sheet and is a clear demonstration of the industry’s confidence in OXB’s growth potential.

Balance sheet: With the new cash arriving at the start of June, the loan is likely to be paid off as soon as possible, leaving the interim balance sheet ungeared and with gross cash driven by Capex timing and the cost of the fundraise. With the removal of ongoing interest payments, free cashflow forecasts are positive from 2020.

Risks: OXB’s mid-term sales model is dependent on successful progress of partners’ clinical trials and commercialisation of LentiVector-enabled products. OXB is investing heavily in infrastructure for manufacturing capacity and in personnel, which will affect the bottom line.

Investment summary:  Oxford BioMedica is an exciting company with market-leading technology. It has been extensively validated through large deals with leading (bio)pharmaceutical partners and through grants from the UK government. On expectations of further milestones in 2019, OXB is now profitable, net cash positive and cashflow positive at the operating level.

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Tissue Regenix Credit facilities expand cash runway to 2021 https://www.directorstalkinterviews.com/tissue-regenix-credit-facilities-expand-cash-runway-to-2021/412785894 Mon, 24 Jun 2019 06:59:44 +0000 https://www.directorstalkinterviews.com/?p=785894 Tissue Regenix plc (LON: TRX) has a broad portfolio of regenerative medicine products for the biosurgery, orthopaedics, dental and cardiac markets. It has two proprietary decellularisation technology platforms for repair of soft tissue (dCELL) and bone (BioRinse). Following the acquisition of CellRight in the US in 2017, TRX embarked on a revised commercialisation strategy, which ...

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Tissue Regenix plc (LON: TRX) has a broad portfolio of regenerative medicine products for the biosurgery, orthopaedics, dental and cardiac markets. It has two proprietary decellularisation technology platforms for repair of soft tissue (dCELL) and bone (BioRinse). Following the acquisition of CellRight in the US in 2017, TRX embarked on a revised commercialisation strategy, which is clearly gaining traction. Sales grew 47% in 2018, reflecting strong demand, particularly for DermaPure in the US. To support further business expansion, including investment in facilities and working capital, credit facilities of up to $20m/£16m have been secured.

  • Strategy: TRX is building an international regenerative medicine business with a product portfolio using proprietary dCELL and BioRinse technology platforms, underpinned by compelling clinical outcomes. It aims to expand its global distribution network, via strategic partnerships, to drive sales momentum.
  • Credit facilities: TRX has entered into an agreement with MidCap Financial Trust to access credit facilities composed of a term loan of $15.0m and a revolving credit line of up to $5m. The loan is structured into three tranches, providing cash until 2021 on current forecasts. The first $7.5m/£5.9m tranche has been drawn down.
  • 2018 results: Sales grew 47% to £11.6m (£7.9m 2017 pro forma), largely driven by the US performance of DermaPure (+79%). The EBIT loss, at -£8.32m, was 14% lower helped by an overall increase in DermaPure margins. Period-end cash of £7.8m was achieved by tight control of both operating costs and working capital.
  • Risks: TRX is exposed to many of the risks common to medical device companies, including the regulatory hurdles based on the manufacture and distribution of human tissue products, and the commercial risks of operating in a highly competitive market. A hybrid sales strategy, however, mitigates the latter.
  • Investment summary: Tissue Regenix plc has three near-term value drivers: sales of BioSurgery products in the US; expansion of CellRight and TRX technologies into the orthopaedics/spine and dental markets; and preparation for the EU launch of OrthoPure XT in 2019. Management has been prudent in securing a US dollar loan that relieves some of the working capital pressure during this growth period and is non-dilutive for shareholders.

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Non-Standard Finance Back to basics https://www.directorstalkinterviews.com/non-standard-finance-back-to-basics/412785892 Mon, 24 Jun 2019 06:57:35 +0000 https://www.directorstalkinterviews.com/?p=785892 While there has been deafening noise around the lapsed Provident Financial (PFG) bid, the fundamental outlook for Non-Standard Finance (LON: NSF) is unchanged. It still has the market-leading network in unsecured branch-based lending and is number two in guarantor loans, both growing strongly. It is number three in home credit. The direct costs of the ...

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While there has been deafening noise around the lapsed Provident Financial (PFG) bid, the fundamental outlook for Non-Standard Finance (LON: NSF) is unchanged. It still has the market-leading network in unsecured branch-based lending and is number two in guarantor loans, both growing strongly. It is number three in home credit. The direct costs of the bid were ca.5% of NSF’s market capitalisation and we estimate a further disruption/ extra finance effect of 2%-3%. This may be compared with a share price fall of 28%. Delivery of consensus earnings and franchise growth expectations will be the key to restoring management credibility and reducing the discount to the peer group.

  • Strategy: With the lapsing of the PFG bid, NSF is expected to focus on the operational delivery of the franchise growth in both Everyday Loans (ELD) and Guarantor Loans (GLD) divisions. In home collect (HCC), we expect profit growth to come from improving impairments and operational efficiency.
  • Post-deal effects: We see minimal disruption to ELD or GLD. Earnings delivery and dividend payments may restore the share price rating. NSF may itself become a bid target until such time. The Woodford holding is unclear, but NSF doesn’t seem a priority sale. Multiple directors have been buying recently.
  • Valuation: We roll forward our valuation base year to 2020. The strong profit growth forecasts see a material uplift in valuation with this change. Our approaches now indicate a 96p to 109p range. The highest valuation is from the dividend discount model; we detail below NSF’s actions on its dividend.
  • Risks: Credit risk remains the biggest threat to profitability. NSF’s model accepts higher credit risk where a higher yield justifies it. NSF is innovative, and may incur losses piloting new products, customers and distribution. Regulation is a market issue; management is acting to mitigate this risk.
  • Investment summary: Substantial value should be created, as: i) competitors have withdrawn; ii) Non-Standard Fiance is well capitalised, with committed debt funding; iii) macro drivers are positive; and iv) NSF’s experienced management delivers operational efficiency without compromising the key face-to-face model. Targets of 20% loan book growth and 20% EBIT RoA appear credible, and investors are paying ca.7.3x 2019E P/E and getting a ca.7.7% yield.

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IPSX The first regulated property exchange in the world https://www.directorstalkinterviews.com/ipsx-the-first-regulated-property-exchange-in-the-world/412785890 Mon, 24 Jun 2019 06:54:43 +0000 https://www.directorstalkinterviews.com/?p=785890 A regulated exchange like no other.This is the first and only regulated securities exchange – anywhere in the world – dedicated entirely to real estate. It will be the venue for investors to trade shares in single-asset-owning real estate companies, or multi-asset real estate companies where there is commonality in the assets. For simplicity, we ...

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A regulated exchange like no other.

This is the first and only regulated securities exchange – anywhere in the world – dedicated entirely to real estate. It will be the venue for investors to trade shares in single-asset-owning real estate companies, or multi-asset real estate companies where there is commonality in the assets. For simplicity, we refer in this document to singleasset real estate companies as SARCs. The unique benefits of SARCs are increased transparency and cost efficiency, in contrast to wider-ranging REITs (Real Estate Investment Trusts). IPSX has explicit and robust requirements of issuers as regards initial and ongoing disclosure, as well as transparency and board governance. Investors and issuers will be excited by the new opportunity that IPSX will provide. In short, IPSX reimagines real estate investing.

  • The reassurance of a Recognised Investment Exchange: The Financial Conduct Authority (FCA) approved IPSX in January 2019 after a long process that included examination of IPSX’s infrastructure, trading and settlement processes, and outsourced partners.
  • Wide appeal: The fractional ownership of ‘quasi-direct property’ through IPSX will attract the widest range of investors, e.g. retail investors will be able to access what is effectively a new asset class. Family offices have a clear preference for direct property ownership. Institutional investors will value the chance not just to consider a wider pool of assets, but also to use SARCS as part of a strategy to improve liquidity in Open Ended Investment Companies (OEICs).
  • Secure assets: IPSX quoted companies will own completed, fully-let, long-lease real estate developments, providing a secure income, as well as an opportunity, for capital growth. A minimum of 25% of the shares will be available to new investors, and gearing will be capped at 40% on listing.
  • Low operating costs: By focusing on single assets or multiple assets with commonality, SARCs should have very low running costs.
  • Low transaction costs and faster completions: Deals in the direct property market can take six months to complete and incur substantial costs (Stamp Duty Land Tax alone can be 5%). IPSX offers investors exposure to proxies for direct property at a fraction of the cost and with completion in a matter of days.
  • Investors appreciate focused real estate: While even well-regarded generalist REITs can trade at wide discounts to Net Asset Value (NAV), market appetite for specialist REITs means that their share prices currently trade at a small premium, on average. SARCs will enable investors to take this focus even further.
  • Liquidity and low correlation: By bringing to the table investors with differing strategies and time horizons, IPSX should see strong levels of liquidity. We argue that, given the nature of some likely investors on IPSX, SARCs may have even lower correlations to other assets than existing property – another attraction for some investors.
  • An attractive venue for issuers: IPSX will generate wide interest among issuers. Just one example illustrates this: we might see generalist REITs ‘spin off’ part ownership of an asset to demonstrate to the market that they deserve a smaller discount to NAV.

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Anglo Asian Mining Prodigious cashflow AND bigger “system” potential https://www.directorstalkinterviews.com/anglo-asian-mining-prodigious-cashflow-and-bigger-system-potential/412785888 Mon, 24 Jun 2019 06:52:41 +0000 https://www.directorstalkinterviews.com/?p=785888 Anglo Asian Mining (LON: AAZ) is a highly cash-generative miner of gold, silver and copper from four mines in Azerbaijan, where it has close ties to the government. In 2018, it produced 83,376 of gold equivalent ounces (GEOs), paid its first dividend and had net cash on its balance sheet. At this stage, we have ...

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Anglo Asian Mining (LON: AAZ) is a highly cash-generative miner of gold, silver and copper from four mines in Azerbaijan, where it has close ties to the government. In 2018, it produced 83,376 of gold equivalent ounces (GEOs), paid its first dividend and had net cash on its balance sheet. At this stage, we have made the highly conservative assumption of no production beyond 2025. Nevertheless, our DCF valuation of 156p reflects AAZ’s prodigious cash generation and gold/copper stockpiles. Indeed, we estimate that the company’s aggregate underlying free cashflow during 2019-25 will be in excess of its current market capitalisation and the annual free cash yield will average 16.2%.

  • Lowest-quartile cost position: AAZ’s FY’18 reported figure for AISC was $541/oz, putting it in the first quartile of the gold mining industry’s cost curve. This is due to its Azerbaijani jurisdiction, predominance of open-pit mining, power grid access, modest reinvestment levels and efficient downstream processing – all of which contribute to the group’s cash generation.
  • Production upside: Our 2019-25 production estimates are conservatively based on 482,000 oz of Proved & Probable gold reserves (and related copper/silver) for the Gedabek, Gadir, Ugur and Gosha mines. They exclude i) an additional 553,000 oz of Measured & Indicated Resources, and ii) the potential for commissioning an underground mine at Gedabek before 2025.
  • Beyond 2025: It is highly likely that production will continue well beyond our current forecast horizon. Besides the potential for an underground mine at Gedabek, we believe that the Gedabek-Gadir area could be part of a much bigger porphyry-epithermal system of copper-gold-silver mineralisation.
  • Risks: AAZ faces the normal risks for a junior miner, albeit without the funding risk faced by explorers/developers. These include volatility in gold prices, political (albeit mitigated) and environmental risk, as well as operational risks in successfully executing the mining plan and operating downstream processing facilities.
  • Investment summary: The outstanding aspect of Anglo Asian Mining’s financial performance is its cash generation, which is reflected in our DCF valuation of 156p per share, using a discount rate of 8% and long-term gold price of $1,350/oz. We expect AAZ to pay a $0.07 dividend in 2019, implying a dividend yield of 4.7%.

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R.E.A. HOLDINGS Strong production continues; deferred 1H pref. dividend https://www.directorstalkinterviews.com/r-e-a-holdings-strong-production-continues-deferred-1h-pref-dividend/412785886 Mon, 24 Jun 2019 06:50:44 +0000 https://www.directorstalkinterviews.com/?p=785886 REA Holdings Plc (LON: RE.) FY’18 results showed a marked recovery in the group’s FFB production, up 50.8% YoY, to a record level of 800,050mt; CPO production increased by over 51%, to 217,721mt. However, revenue was up only 5.2%, to $105.5m ($100.2m); crop growth was strong but results were significantly dampened due to commodity prices, ...

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REA Holdings Plc (LON: RE.) FY’18 results showed a marked recovery in the group’s FFB production, up 50.8% YoY, to a record level of 800,050mt; CPO production increased by over 51%, to 217,721mt. However, revenue was up only 5.2%, to $105.5m ($100.2m); crop growth was strong but results were significantly dampened due to commodity prices, with the palm oil price hitting a 10-year low, at $440/mt, in November 2018. The CPO price suffered a 17% drop to an average $596/mt for 2018, and the PKO price plunged 27.2% for the year. With the PBJ transaction completed, REA is focusing on raising production efficiency and planting out the remaining land bank should funding become available.

  • FFB production:  Despite the slightly muted start to 2018, REA’s FFB production has recovered to record levels since 2Q’18 – partly due to FFB production pattern recovery, and partly due to REA’s much-improved harvesting process and fertiliser regime, started in 2H’16. REA expects FFB production of ca.900,000mt in FY’19; our expectation is slightly lower.
  • PBJ and financing position:  In August 2018, REA closed the sale of its PBJ estate to Malaysian operator KLK for $85m, or ca.$11,333/planted ha. The transaction transformed the group’s operation into a more geographically concentrated development project, as well as releasing some balance sheet pressure.
  • Financing:  Management recognises the need to deleverage REA’s indebtedness. Net debt, with the sale of PBJ, was $189.5m at end-FY’18, from $211.7m in FY’17. Net debt to equity was 72.5%, down from 76.5% in FY’17. A further reduction in cost of borrowings should help reduce some funding risk.
  • Valuation:  Palm plantation stocks have fallen out of favour with investors in recent years, due largely to weak commodity prices. The Asian Palm Oil Plantation Index fell 12.8% since Jan’18, while the Asian palm plantation sector saw an 18.8% valuation decrease, ending Jun’19 at $10,933/planted ha vs. $13,468/planted ha at end-Dec’17.
  • Investment summary:  For investors attracted by palm oil assets, now could be an opportunistic time to review this sector, with the sector valuation down ca.12.8% since the beginning of 2017. We expect REA Holdings to have ca.33,423 mature ha by end-2019, as well as stronger agricultural production across the estates, and the plantations to be fully planted by end-2025.

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PALACE CAPITAL Conversion to REIT status; FY19 results announced https://www.directorstalkinterviews.com/palace-capital-conversion-to-reit-status-fy19-results-announced/412784767 Mon, 10 Jun 2019 10:08:23 +0000 https://www.directorstalkinterviews.com/?p=784767 Palace Capital’s results (4 June) show 37 new leases were completed. Most importantly, these were 14% above ERV (i.e. the level which previous valuers had estimated). This is one of several factors underpinning significant medium-term expansion in capacity to pay growing dividends. Further, the REIT status enhances the capacity for investment and for dividend payment, ...

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Palace Capital’s results (4 June) show 37 new leases were completed. Most importantly, these were 14% above ERV (i.e. the level which previous valuers had estimated). This is one of several factors underpinning significant medium-term expansion in capacity to pay growing dividends. Further, the REIT status enhances the capacity for investment and for dividend payment, through the elimination of corporation tax payable. Total property return was 7.1%, ahead of the MSCI UK Index figure of 4.6%. Like-for-like valuations edged ahead by 0.5%, compared with MSCI UK index capital growth at 0.1%. Cost of debt fell to a competitive 3.3%.

  • REIT status and FY’19 results: Both items are of great significance for Palace Capital shareholders. REIT status brings a rise in earnings as a function of the REIT nil tax regime. The results confirm the company’s continued outperformance – which we quantify in this report. We initiate FY21 estimates.
  • Results and prospects: Property return was strong – beating the benchmark; as did rents. NAV, though, fell 2%, primarily due to tax and a modest loss on part-disposal of the RT Warren portfolio. We expect a covered dividend next year, ahead of the large benefits from the York development in FY22.
  • Cash paid by tenant for early lease surrender a further positive: A lease event, announced on 7 May, saw an FY20 profit and cash upgrade. A £2.85m cash premium has been agreed with the tenant. We note the most recent valuation of this asset was only £2.2m. Economic value has been created.
  • A track record of outperformance: In the five years to 2018, Palace Capital’s accounting return has been in the first or second quartile vs. our small basket of six most comparable regional UK REITs. (Note that, in FY18, this excluded the distorting effect of equity.) Since 2013, NAV has more than doubled.
  • Risks: The normal risks of real estate apply. The weighted average length of unexpired lease to break is 4.5 years. Generally, covenants are good. Retail exposure (bar Wickes and Booker) is minimal. Gearing, at 34% LTV, is conservative and, although expected to rise as the York development progresses, management has previously stated an intention to keep it below 40%.

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RM Secured Direct Lending Predictable revenue streams generating high yield https://www.directorstalkinterviews.com/rm-secured-direct-lending-predictable-revenue-streams-generating-high-yield/412784769 Wed, 05 Jun 2019 07:00:13 +0000 https://www.directorstalkinterviews.com/?p=784769 RM Secured Direct Lending (RMDL) offers investors an ongoing ca.6.5% dividend yield, whose sustainability is supported by multi-year assets, a rising revenue yield and economies of scale. Credit, we believe, is well controlled, and we provide readers with a detailed review of its assessment, monitoring and recovery. We believe the gearing level is appropriate, the ...

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RM Secured Direct Lending (RMDL) offers investors an ongoing ca.6.5% dividend yield, whose sustainability is supported by multi-year assets, a rising revenue yield and economies of scale. Credit, we believe, is well controlled, and we provide readers with a detailed review of its assessment, monitoring and recovery. We believe the gearing level is appropriate, the investment manager’s interests are aligned to shareholders, and that any discount will be actively managed. Like any lender, there are risks when the cycle turns; also, RMDL has some junior debt positions, and its book has shown a propensity to turn over, which in the future could see more external refinancing. The shares trade at a 3% premium to NAV.

  • Strategy:  RMDL operates where competition is moderate. Complex loans of £2m-£10m fall outside high-street banks’ model-driven approach and are too small for market-driven competition. This, good service, structuring skills, well-developed origination and exploiting illiquidity, see RMDL deliver good returns.
  • Confidence in NAV:  RMDL has 44% of its book Level 2 accounted (significant market observable inputs), backing confidence that its NAV is real. It does not have legacy issues around historical loss situations, and the gain on its warrant sale shows an accounting conservatism. Mazars is the independent valuer.
  • Valuation:  RMDL trades at a small premium to NAV and to its closest peers’ average. As well as the factors above, we estimate further equity issues at a premium to NAV will enhance current shareholders by 1%. RMDL has not seen a major loss and has no discount for uncertainty over loan realisable values.
  • Risks:  Credit remains key for any lender, and we examine in detail the investment manager’s approach. We think the right approaches to limit both the probability of default and loss, given default, are in place. The book has shown a surprising propensity to turn over. There are modest currency and key personnel risks.
  • Investment summary:  Debt investment companies offer investors a different asset class with which to generate substantial yields on a sustainable basis from long-term assets with predictable income streams. Like any lending business, credit needs to be correctly assessed, and managed once drawn down and recovered. RMDL has all these characteristics. The market has given it a small premium to NAV, reflecting these traits, and a material element of market-driven valuation.

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AstraZeneca Where has all the cash gone? https://www.directorstalkinterviews.com/astrazeneca-where-has-all-the-cash-gone/412784088 Tue, 04 Jun 2019 11:49:24 +0000 https://www.directorstalkinterviews.com/?p=784088 Historically, AstraZeneca (LON:AZN) was a leading global pharmaceutical company, but it has slipped down the rankings following a period of patent expiry on major drugs, notably Nexium, Losec and Seroquel. Understandably, the financial performance, particularly operational cashflow, has suffered during this period. Over the past two months, there have been two events which I did ...

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Historically, AstraZeneca (LON:AZN) was a leading global pharmaceutical company, but it has slipped down the rankings following a period of patent expiry on major drugs, notably Nexium, Losec and Seroquel. Understandably, the financial performance, particularly operational cashflow, has suffered during this period. Over the past two months, there have been two events which I did not expect to see during my time as a pharmaceuticals analyst in the City in the absence of major corporate activity. First, despite a considerable difference in the size and market share of their respective pharmaceuticals businesses, both globally and in the US, the market capitalisation of AstraZeneca (AZN) has exceeded that of GlaxoSmithKline (GSK). Secondly, AZN needed a Placing of shares to bolster its balance sheet immediately after paying its final dividend for 2018. As an experienced industry follower, these events set off ‘alarm bells’ in my mind.


Placing: On 27 March 2019, AZN paid its final dividend for fiscal 2018, which cost the company $2.43bn. Just two days later, the company announced a Placing of shares at 6050p, a discount of 6.7% on the previous close and at an estimated cost of $70m, to raise $3.5bn for working capital.
EPS: Like most companies, AZN uses a number of non-GAAP measurements to generate a ‘core’ EPS figure which is used in management KPIs and to calculate dividend cover. Because this calculation includes profits on asset disposals it overstates the performance vs. cashflow per share (CFPS).
Cashflow: AZN has been through a 10-year period where operational cashflow has been in decline, to a point where the dividend has been uncovered for four years. Payment of the 2018 final dividend and an upfront payment to Daiichi Sankyo for trastuzumab has left net debt at ca.$17.5bn (net debt/EBITDA 2.5x).
Dividend policy: AZN has a policy to “…maintain or grow dividend per share…”, which is a key KPI on which long-term management remuneration is based. However, payment of a large dividend, followed two days later, by a cash call to shore up its balance sheet, at huge cost to shareholders, seems inappropriate.
Investment summary: AZN is a good and well-run company, with one of the more promising R&D pipelines in the industry. However, the audit committee’s comfort with the over-statement of underlying operating performance through the use of ‘core’ EPS, has left the dividend uncovered, resulted in increased debt, and necessitated a Placing of shares to raise fresh capital. The current market valuation leaves little scope for any R&D disappointments.

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LightwaveRF 1H’19 results: 120% YoY revenue growth https://www.directorstalkinterviews.com/lightwaverf-1h19-results-120-yoy-revenue-growth/412784070 Tue, 04 Jun 2019 10:46:50 +0000 https://www.directorstalkinterviews.com/?p=784070 LightwaveRF (LON:LWRF) has announced strong results for the six-month period to end-March 2019. Revenue more than doubled, accompanied by an uplift in gross margin, reflecting the evolution of the company’s routes to market. The efforts to expand the distribution base and retail presence plus the focus on direct-to-consumer sales are paying dividends. Direct sales doubled ...

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LightwaveRF (LON:LWRF) has announced strong results for the six-month period to end-March 2019. Revenue more than doubled, accompanied by an uplift in gross margin, reflecting the evolution of the company’s routes to market. The efforts to expand the distribution base and retail presence plus the focus on direct-to-consumer sales are paying dividends. Direct sales doubled during the period, while a number of new distribution agreements have been announced, adding Rexel in the UK and, notably, Tech Data on a Europe-wide basis. New and upgraded product launches continue, including ranges for markets beyond the UK designed to support the growing distribution in new markets.

1H’19 results: Revenue for the period was £2.50m, up 120% YoY from £1.13m in 1H’18. The 1H’19 outturn is in excess of 90% of the revenue reported for the whole of 2018. Gross profit also more than doubled to £0.95m, representing an increased gross margin of 37.9%, up from 35.3% reported for FY’18. Heavy reinvestment in product and sales and marketing resulted in a pre-tax loss of £1.35m.


Strategy: Central to the transformation of Lightwave’s growth trajectory has been the strategic emphasis on broadening the retail base. Apple sells Lightwave products across Europe, while retail stockists include Screwfix, John Lewis, Currys, AO, B&Q, and many other specialist electrical online and physical retailers.


Distribution channels: These have been similarly strengthened with a constant flow of new agreements. Recent months have seen the addition of Rexel, a nationwide UK distributor and Tech Data, one of the largest global IT distributors for its pan-European network. The high level of interest reflects both the favourable trends in the smart home market and Lightwave’s recognised position as a leading vendor.


Direct-to-consumer focus: Alongside the third-party agreements, extensive effort and resources have gone into the direct-to-consumer segment, which has the highest gross margin profile. Social media and other online marketing have been a focus in terms of investment, alongside enhancements to customer support.


Risks: Lightwave will need to remain innovative with respect to competitive trends to maintain strong brand recognition vs. larger players in the market. The product refresh programme remains ambitious as further upgrades to the first-generation products are rolled out; execution will need to be strong.

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Chamberlin Plc Trading remains difficult; forecasts lowered https://www.directorstalkinterviews.com/chamberlin-plc-trading-remains-difficult-forecasts-lowered/412784045 Tue, 04 Jun 2019 07:19:05 +0000 https://www.directorstalkinterviews.com/?p=784045 Chamberlin Plc (LON:CMH), Prospects remain very uncertain, and cost reduction measures continue to be implemented. Chamberlin remains on track strategically. The group continues to develop its product offering to the automobile turbocharger industry through development of its main operational facilities. The recent disposal of Exidor has financially de-risked the group, and the shares remain attractively ...

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Chamberlin Plc (LON:CMH), Prospects remain very uncertain, and cost reduction measures continue to be implemented. Chamberlin remains on track strategically. The group continues to develop its product offering to the automobile turbocharger industry through development of its main operational facilities. The recent disposal of Exidor has financially de-risked the group, and the shares remain attractively valued against the peer group on most methodologies.

Trading conditions are challenging: We have further reduced our 2019/20 forecasts to reflect this continued challenging operating environment and the company’s outlook statement:

“Although revenues are expected to reduce, we are positioning Chamberlin to deliver an improved operating financial performance in the 2019/20 financial year”.


2018/19 final results: Results were below our forecasts with continuing operations revenues up 9.3% to £33.0m. Gross profit was £3.8m with margins at 11.4% and an underlying operating loss before tax of £0.9m. This reflects the continued deterioration in performance of the principal foundry operations.


Risks: Potential risks include developments within the automotive industry, Brexit uncertainties, foreign currency and raw material price fluctuations. From a financial standpoint, the group has been significantly de-risked with the Exidor disposal proceeds used to reduce the pension scheme deficit and pay down debt.


Valuation: The shares remain lowly valued, trading on 2021E EV/sales of 0.3x, compared with sector averages of around 1.0x.


Investment summary: Despite the current trading difficulties, the disposal of Exidor has de-risked the group. The shares offer the opportunity to invest in a cyclical stock with good operational leverage; however, they are likely to tread water until brighter prospects become more evident.

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Morses Club Plc Steady, reliable core, growth in new business lines https://www.directorstalkinterviews.com/morses-club-plc-steady-reliable-core-growth-in-new-business-lines/412783992 Mon, 03 Jun 2019 06:37:18 +0000 https://www.directorstalkinterviews.com/?p=783992 Morses Club Plc (LON:MCL) We took two key messages from the FY’19 results announced on 2 May. First, the core business is now in a reliable, steady state with modest organic volume growth. It should, however, generate profit growth from acquisition opportunities and technology-driven efficiency improvements. As always, the agents remain core to the group ...

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Morses Club Plc (LON:MCL) We took two key messages from the FY’19 results announced on 2 May. First, the core business is now in a reliable, steady state with modest organic volume growth. It should, however, generate profit growth from acquisition opportunities and technology-driven efficiency improvements. As always, the agents remain core to the group but incremental returns can be generated from managing them better. Conservatively managed growth is being driven from the new business lines. Management has indicated it expects FY’22 pre-tax profits of between £3m and £5m from its recent online lending acquisition (consideration was £8.5m). Our absolute valuation range is 181p to 243p.

FY’19 results: Looking through the accounting noise, revenue was up 6%, credit issued by 2.4%, and the net loan book by 6%. Efficiency improved with adjusted pre-tax profits up 14.6%. Impairments remained well controlled (22.4% of revenue, like-for-like FY’18, 22.5%). Customer numbers increased by 3% to 235k.


Outlook: The CTL deal could introduce some noise (both real and accounting). It will transform the profit and loss account, being a lower-cost but higherimpairments business than home collect. Although FY’19 was a beat against our forecasts, we have at this stage left our FY’20 forecast EPS largely unchanged.


Valuation: We detailed a range of valuation approaches and sensitivities in our initiation note, Bringing home collect into the 21st century, published 2 February 2017, and do so again in the section below. The range in absolute valuation methodologies is now 181p to 243p (previously 169p to 223p).
Risks: Credit risk is high (albeit inflated by accounting rules) but MCL adopts the right approach to affordability and credit assessment. Regulatory risk is a factor, although high customer satisfaction suggests a limited need for change. MCL was the first major HCC company to receive full FCA authorisation.


Investment summary: MCL is operating in an attractive market, and it has a dualfold strategy that should deliver an improved performance from existing businesses and new growth options. MCL conservatively manages risk and compliance, especially in new areas. The agent network is the competitive advantage over remote lenders. The valuation appears an anomaly, and we forecast a 5.7% February 2020 dividend yield, with cover of 1.6x (adj. earnings).

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Urban Logistics Plenty of future growth stored up https://www.directorstalkinterviews.com/urban-logistics-plenty-of-future-growth-stored-up/412783757 Tue, 28 May 2019 13:46:07 +0000 https://www.directorstalkinterviews.com/?p=783757 Urban Logistics (LON:SHED) results (24 May) were robust. Prospects for continuing value-adding investment and capital recycling are clear and strong. SHED owns “mid-box”, “last mile” distribution warehouses. Just as important is that this asset class is clearly placed to benefit consistently from engrained market trends in logistic requirements. SHED’s marketplace is broader than the rising ...

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Urban Logistics (LON:SHED) results (24 May) were robust. Prospects for continuing value-adding investment and capital recycling are clear and strong. SHED owns “mid-box”, “last mile” distribution warehouses. Just as important is that this asset class is clearly placed to benefit consistently from engrained market trends in logistic requirements. SHED’s marketplace is broader than the rising demand for logistics space from online (or multichannel) retail. But, this driver alone sustains strong demand. Supply is strictly constrained by the dominant trend ‒ that the cost of new-build is generally above the current valuations placed on assets in SHED’s category (last-mile logistics).

FY’19 (March): Results showed an encouraging total accounting return (NAV rise plus dividend) at over 17% and solid asset growth at 41%. The scale of this underlines the sustainable ambition and another year of success since the IPO in April 2016 – and the dichotomy of a sub-NAV share price.


Sector dynamics: Attention focuses on the different, “big-box” sector. Asset price rises there have bid net initial yields (NIYs) below 6.0%. SHED’s average purchase NIY is 7.1%. There is no obvious logic; demand is just as strong and, in SHED’s “mid-box” specialism, supply is falling and demand rising.


Valuation: The shares trade at 94% of 2019 EPRA NAV. We find this odd, as 20% of SHED space has short leases, meaning prospects for growing rental income are clear, as rents rise to current market levels. MSCI states 6.5% 2018 sector market rental growth. SHED adds value through asset management.


Risks: 5.5-year leases mean there are reversionary rent rises to come, but also that new leases must be secured. In the past ca.20 years, aggregate rent rises have been minimal. So, once rents and values rebase to higher levels and omni-channel retail growth tails off, new macro drivers need to be found.


Investment track record: Urban Logistics listed on AIM in April 2016 and has since built a £185m portfolio of warehouses, generating annualised NAV and dividend returns of 17.7%. Across the market, nationwide, vacancies are low, ca.5% (and SHED nil), so there are many years of growth “baked in”, yet to come. Market rents have risen to ca.25% above SHED’s current £4.83 sq. ft. level.

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