Deutsche Bank agrees $7.2bn penalty with US regulators

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Today’s edition features:

  • Advanced Oncotherapy (AVO.L)
  • HSS Hire Group (HSS.L)
  • Watkin Jones (WJG.L)

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Wishing you a Merry Christmas and a Happy New Year!

Breakfast Today is taking a break for the festive season. Today’s issue is the last for 2016. We will be back again on Tuesday, 3rd January 2017. We wish all our readers a Merry Christmas and a Prosperous New Year!



Markets

Europe
The FTSE-100 finished yesterday’s session 0.32% higher at 7,063.68, whilst the FTSE AIM All-Share index closed 0.79% better-off at 831.06. In continental Europe, the CAC-40 finished 0.02% higher at 4,834.63 whilst the DAX was down 0.11% at 11,456.10.

Wall Street
In New York overnight, the Dow Jones fell 0.12% to 19,918.88, the S&P-500 shed 0.19% to 2,260.96 and the Nasdaq was off 0.44% to 5,447.42.

Asia
In Asian markets this morning, the Nikkei 225 had fallen 0.09% to 19,427.67, while the Hang Seng fell 0.59% to 21,509.54.

Oil
In early trade today, WTI crude was down 0.45% to $52.71/bbl and Brent was down 0.35% to $54.86/bbl.


Headlines

Deutsche Bank agrees $7.2bn penalty with US regulators
Germany’s Deutsche Bank says it has agreed a $7.2bn (£5.9bn) payment to US authorities over an investigation into mortgage-backed securities. The sum, which needs final approval, is far lower than the $14bn the US had asked the bank to pay in September. That looming fine had caused concerns that a failure of the bank could pose a risk to the global financial system. The sale of residential mortgage-backed securities played a significant role in the 2008 financial crisis. Several banks in the US have been subject to investigations over allegations of giving mortgages to unqualified borrowers, then repackaging those loans as safe investments and selling the risk on to others. The inquiries related to deals done between 2005 and 2007. Meanwhile, Credit Suisse has said it has agreed a $5.28bn deal to settle its own dispute with US authorities over mortgage-backed securities. The Swiss bank will pay US authorities $2.48bn, and will also give consumers $2.8bn in compensation over the next five years.

Source: BBC News


Company news

Advanced Oncotherapy (AVO.L, 59.00p) – Speculative Buy
The developer of next-generation proton therapy systems for cancer treatment, yesterday announced that it has integrated the proton source and Radio Frequency Quadruple (RFQ) required for the final development stages of its LIGHT system, following a successful testing and calibration programme at ADAM, in Geneva. This important step has demonstrated there is a predicted acceleration of the proton beam through this very sophisticated structure, the RFQ, and that the measurements matched those expected from computer simulations. The completion of this key milestone is a significant indicator of the continued successful technical development of the Company’s LIGHT proton system. Advanced Oncotherapy’s Professor Steve Myers, Executive Chairman of ADAM and previously Director of Accelerators and Technology at CERN and Head of CERN Medical Applications, stressed the significance of designing and building an RFQ with notably higher frequency and, hence, shorter wavelength and smaller dimensions than current comparable linear accelerators.

Our view: Major development steps continues to move LIGHT toward a final working, full scale prototype. Management insists that the Company now presents no technological risk and offers giant commercial potential, while Board members have recently been building their equity positions. Sounds good, but despite the minor share price recovered of the past few days investors still appear to be in a state of disbelief. Yesterday’s news may go a little way further to repairing the damage inflicted by the disclosure that two highly prestigious orders sourced through their agent, Sinophi Healthcare, would no longer be installed at the China hospitals originally announced due, amongst other things, to concerns regarding AVO’s inability to provide a fixed delivery schedule. But at the very least, investors still want to have a peek inside the laboratories where this ‘rocket science’ is reportedly coming together. Even then there remain many uncertainties. It still has to be something of a gamble whether or not a working LIGHT can be demonstrated without having to tap shareholders on the shoulder, one more time, for yet more funding (current cash-burn is thought to be around £1.2m/month+). Also, will the relationship with Sinophi, who is formally responsible for the two orders with a total estimated value for AVO of around US$80m, end up turning ugly and go to court? Will the advantages that LIGHT apparently offers, in reality, be capable of making an establish, cyclotron-based, first-generation proton beam therapy system effectively obsolete, thereby creating giant demand for this smaller, safer and much cheaper Linac-based product? These questions still need to be either proven or answered before investors will again be willing to price in the potential value such a revolutionary system could create. So what are we left to conclude? AVO’s reputation has taken a blow that will still take some time to repair; investors are getting fed up with perpetual slippage on the route to first commercialisation, even though this might be due more to planning, rather than scientific risk; maybe also the Group deserves criticism for being less diligent in selecting partners than might have been expected, although with a high reputation operator like Sinophi this would not normally raise an eyebrow. For Beaufort, all this means that AVO’s risk profile has moved up one or two notches. As Beaufort has detailed in numerous research notes, however, it believes LIGHT offers the opportunity to power dramatic expansion of the global radiation market, becoming the natural replacement not only for existing proton systems, but also as the natural replacement in current, rather technologically antiquated and more dangerous, X-ray radiation products as well. Many investors will not actually believe LIGHT can do ‘what it says on the tin’ until they see it for themselves (in Harley Street or Pebble Mill), so they will probably have to wait until summer 2018. In the meantime, a possible broker/media visit to Geneva or CERN (hopefully Q1’2017) for a presentation of their part-assembled demo model might just be enough to persuade some of the non-believers. Despite the higher risk profile that AVO now presents, Beaufort still retains its Speculative Buy recommendation on the shares in the hope of realising bonanza returns within the next 12 months.

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HSS Hire Group (HSS.L, 83.00p) – Hold
HSS Hire, a leading provider of tool and equipment hire and related services in the UK and Ireland, yesterday informed that it has raised £13m via equity placing of 15,445,238 new ordinary shares at 83.875p with existing institutional shareholders, Exponent and Toscafund who each contributed £6.5m. As previously noted in the trading update announced on 24 November 2016, the proceed will be used to strengthen the balance sheet and provide additional flexibility to fund fleet investment as the Group completes the operational change programme in Q1 FY2017. The Group said this programme, especially the introduction of the new National Distribution and Engineering Centre, is transforming operational practices across the Group and is set to deliver both significantly enhanced customer service levels and greater operational efficiencies upon completion. The scale and complexity of the operational change programme, which includes £12.5m one-off costs for the 9 month ended 1 October 2016), together with the on-going investment to support revenue growth has led to the decision to raise new capital. The Group reaffirmed that the full year FY2016 outlook is remain unchanged.

Our view: HSS has raised £13m gross through two of its major shareholders, Exponent and Toscafund, who now holds 50.34% and 25.48% of the Group, respectively. Having been forced to provide shareholders with a Q4’16 warning this time last month, detailing the fact that expect adjusted EBITA for the full year to be below the range of market expectations, this raise represents a strong endorsement of management and Group strategy. The complex operational change programme, for which the completion has now been extended to Q1 FY2017, together with its on-going funding needs led to the decision to raise new capital, which will provide the flexibility to continuing building-out its fleet while also bolstering its strained its balance sheet. Not that trading for the first 9 months of the year, in which the Group detailed an increase in market share by advancing revenues by +11% (comprised of +2% in Rental and related revenue and +67% in Services), was by any means disastrous. Adjusted EBITA in fact rose by +5.8% to £14.6m with EBITA margin improved by +1.2% to 5.7% (against the H1 FY2016). What it does remind us, however, is about the well-publicised divergence between the national housebuilders themselves (with rising profits, exceptional cashflow and lack of Brexit fall out), and the suppliers building materials like SIG, Travis Perkins, etc. who have recently been downgrading expectations. Having significant exposure to ‘jobbing’ builders, HSS remains highly depended on activity in home repairs, maintenance and improvement (‘RMI’), as opposed to new builds. This would explain why services and key accounts (which now include Amey) delivered a good performance but pure rental revenues actually contracted almost 4%. Given that the Board guided investors to a figure a little above last year’s £20.3m (Beaufort’s own 2016E EBITA stands at £20.7m), this highly leveraged Group (net debt having risen to £240.4m at 9M’2016) still remains uncomfortably expensive, based on a 25.6x 2017E P/E multiple, a 16.4x EV/EBIT and a 0.5% yield. Against this background, the key question might now be what exactly powered the sharp upward spike in the shares earlier last month. Some recovery in RMI is certainly expected and the NDEC implementation looks more than priced in. Could it instead be due to Russell Down, Speedyhire’s CEO, who after reporting interims back on 16th November suggested that Toscafund’s original proposal of merging the two operations had been rebuffed simply because their timing wasn’t right? If the market still considers HSS to be a takeover target, perhaps it should first ask exactly who would be prepared to inherit such a big pile of debt? Beaufort retains its Hold recommendation on HSS Hire shares.

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Watkin Jones (WJG.L, 117.88p) – Speculative Buy
Watkin Jones, the leading UK developer and constructor of multi occupancy property assets, with a focus on the student accommodation sector, yesterday provided a developments update. The Group said it has forward sold the student accommodation element of its Duncan House development in Stratford High Street, E15 to an institutional investor for an undisclosed fee. The remaining residential units and academic floor space that form part of the wider scheme will be sold in separate transactions by Watkin Jones. The total gross development value of the scheme is over £100m. This follows June’s announcement that the Group received planning consent to progress with the redevelopment of the site. Demolition work has already commenced on site and the completion is expected during summer 2019. Watkin Jones also announced that it has received planning consents for 3 developments; Caledon House in Aberdeen and Rockingham Street development in Sheffield due for delivery during summer 2018, and Pittodrie Street development in Aberdeen expected to complete during summer 2019. Moreover, the Group said its Athena Hall development in Ipswich, which was built by Watkin Jones, in 2010 and has since been held and operated in a joint venture arrangement, has now been sold for an undisclosed amount to Arlington Investors Limited. Watkin Jones’ CEO, Mark Watkin, commented “It is very pleasing to provide such a positive update on a number of our developments, all at different stages of their life cycle. The planning consents granted for Pittodrie Street and Caledon House are exciting as Aberdeen is an important contributor to the knowledge economy in Scotland, with two universities and approximately 21,000 full time students, and there is a recognised need for purpose built student accommodation in the city. The redevelopment of Rockingham Street in Sheffield provides us with an opportunity to further extend our reach in this important University city.”

Our view: The Group continues to progress well. The forward sale of Duncan House is expected to make contribution to Group earnings within the next 3 years. The sale of Athena Hall will strengthen its cash position and the Group will maintain its exposure through Fresh Student Living Limited, a wholly owned subsidiary of the Watkin Jones, to continue manage the asset for Arlington. This excellent news reminded us that Watkin Jones’ management is operating the right business model at the right time. The alternative asset class of Privately Built Student Accommodation offers both excellent cash flow visibility and highly stable property-sector yields from operations that tend to be well insulated from underlying economic activity. As such, it is able to pre-sell and forward-fund its projects through a long list of hungry institutional buyers – like M&G, L&G, AIG etc. – creating an ideal high return, high visibility, capital light model that is almost unique in the world of residential development. With just 6% of the UK’s total full-time student population currently occupying PBSA (Purpose Built Student Accommodation), at a time when government legislation is limiting HMO (House in Multiple Occupation) supply and introducing higher stamp duty on buy-to-let property, the sector is expected to enjoy quite significant growth for years to come while capital growth continues to sharpen returns. The shares have performed reasonably well since IPO, but there is still more to go for. The Group is set to deliver double digit earnings growth (implying a 2016E P/E of 8.9x, followed by 7.9x) for the next several years, with tightly controlled operating costs combined with a generous progressive dividend. With significant net cash still in hand following the IPO, management remains confident enough to project a yield to September 2016 of over 4% (based on second-half payment only), followed by 6.2% for full year 2016/17; beyond this, surplus generation could also find its way into shareholder’s pockets through specials as well. But with such a positive story, the question has to be asked as to why the past month has seen underperformance relative to the All Share Index. The answer may be because of various media reports have suggested government policy could be impacting the country’s competitiveness as a leading global study destination. Reports even suggest the composition of the international student body in the UK is changing with parts of Asia contributing fewer students, a scenario that Brexit could accelerate. Should investors take this seriously, or should they treat the relative share price weakness as a buying opportunity? Beaufort suggests the latter. For the academic year 2017/18, at least, the UK government has already confirmed that there will be no change to fees and financial aid (such as loan and Research Council studentships) for the EU students. Beyond this, the expectation that is that a long-term accommodation, effectively sustaining the current status quo, will be reached, while a worse-case scenario suggests imposition of higher fees along with Visa and work opportunity restrictions, although even this has been compensated by the fall in value of the Sterling post the Brexit. High quality English language education should remain a major draw for foreign students. Beaufort retains its Speculative Buy rating on the shares with price target of 148p, recommends to both income and growth investors.

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To read Beaufort’s full research archive click here

Compiled by:
Barry Gibb, Kazunaga Senga, Sheldon Modeland & Charles Long
(t) +44 (0) 207 382 8384
(e) info@beaufortsecurities.com


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Recommendations
During the three months to end-November 2016, the number of stocks on which Beaufort Securities published recommendations was 263, and the recommendations were as follows: Buy – 93; Speculative Buy – 131; Hold – 38; Sell – 1.

Full definitions of the recommendations used by Beaufort Securities in its publications and their respective meanings can be found on our website here.

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