Share sale returns Lloyds to private sector


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Today’s edition features:

  • Ariana Resources (AAU.L)
  • CyanConnode Holdings (CYAN.L)
  • Crest Nicholson (CRST.L)
  • easyJet (EZJ.L)
  • Speedy Hire (SDY.L)

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"US equities demonstrated a lack of direction over the course of trading on Tuesday, having closed mostly higher the previous day. The two major averages spent the session fractionally either side of unchanged, leaving just the NASDAQ to put on an acceptable gain, chalking up a new record close with the technology sector being one of just two S&P-500 sectors to finish in the positive. Microsoft stood out with a 2% gain following Soros Fund Management’s disclosure it had more than tripled its stake in the Group, which is seen to be a long-term beneficiary of the WannaCry ransomware attack. Elsewhere, however, the Washington Post’s claim that Trump revealed highly classified information to Russian officials in a White House meeting last week unnerved investors from the start, even if his National Security Advisor, HR McMaster, considered the discussions to be “appropriate”. The President allegedly asking then-FBI Director James Comey to drop a probe into his former NSC advisor, Michael Flynn, has prompted some congressional Republicans to call for further investigation which investors, in turn, consider to be sapping energy from the White House’s principal mandate to overhaul healthcare and the tax system. Having been weak for the last five sessions, this political drama pushed the US$ to its lowest point against the international currency basket since November. Meanwhile, mix message were again are received on the economic front with housing starts and building permits unexpectedly seeing further downside in the month of April, while a separate report from the Federal Reserve produced a much bigger than expected increase in industrial production for the same period. Early strength in gold, semiconductor, and tobacco stocks largely dissipated, but modest weakness was still visible among healthcare and commercial real estate. A falling Dollar pressured stocks in Japan and cast broader concern over equity markets in the Asian region. Australia’s ASX fell over 1% as the Prime Minister promoted the idea of a new levy on profits for the country’s five largest banks while the principal Chinese markets finished modestly softer. London equities, by comparison, ended Tuesday in fine form, climbing for their eighth consecutive session to hit a new record all-time high and close the day above the 7,500 mark. Riding on the back of China’s proposed US$900bn of infrastructural investment plan that stretches across 65 countries along the Silk Road, major commodity stocks were further boosted by continued Sterling weakness, while investors also increasingly anticipate the Tories securing a large majority in the UK forthcoming General Election with latest opinion polls putting Theresa May 20 points ahead of Jeremy Corbyn. Consumer inflation rose much as expected in April, to 2.7% from 2.3% in March, its highest level since 2013, having been buoyed significantly by Sterling’s Brexit related devaluation. Despite remaining well above the Bank of England’s 2% target rate, Governor Carney appears reluctant to combat rising prices with a rate hike; combine that with the alarming squeeze on real wages and Sterling is set to remain relatively constrained, something that lends significant support for the internationally-weighted FTSE-100. The STOXX 600 ended another day unchanged, with the CAC 40 closing down 0.2%, while the DAX 30 in Frankfurt made a late recovery to end flat. UK macro data due for release this morning includes March’s Claimant Count Rate, Average Earnings, ILO Unemployment along with Claimant Change numbers for April. The EU provides Consumer Prices for April plus Construction Output for March. The US is limited to its MBA Mortgage Applications and EIA Crude Oil Stocks Change. UK Corporates due to publish earnings or trading updates, include British Land (BLND.L), SSE (SSE.L), Sophos (SOPH.L), Patisserie Holdings (CAKE.L), Countryside Properties (CSP.L), Mitchells & Butlers (MAB.L), Premier Oil (PMO.L) and Foxtons (FOXT.L). Uncertainty spreading from the US bodes for a cautious European opening this morning, with the FTSE-100 seen down 15 to 20 points in early trading."
– Barry Gibb, Research Analyst


The FTSE-100 finished yesterday’s session 0.91% higher at 7,522.03 whilst the FTSE AIM All-Share index was up 0.12% at 977.92. In continental Europe, the CAC-40 finished down 0.21% at 5,406.10 whilst the DAX was 0.02% lower at 12,804.53.

Wall Street
In New York last night, the Dow Jones fell 0.01% to 20,979.75, while the S&P-500 eased 0.07% to 2,400.67 and the Nasdaq gained 0.33% to stand at 6,169.87.

In Asian markets this morning, the Nikkei 225 had fallen 0.57% to 19,806.15, while the Hang Seng had lost 0.27% to 25,268.11.

In early trade today, WTI crude was down 0.92% to $48.21/bbl and Brent was down 0.79% to $51.24/bbl.


Share sale returns Lloyds to private sector
The government has confirmed its remaining shares in Lloyds Banking Group (LLOY.L) have been sold, eight years after pumping in £20bn to save it. Lloyds Bank said the government will see a return of £21.2bn on its investment. At the height of the financial crisis taxpayers owned 43% of Lloyds. Its return to the private sector is in stark contrast with the other bailed-out bank – Royal Bank of Scotland – that is still 73% owned by taxpayers. The government has been slowly selling down its stake in Lloyds for the past five years. Ministers have claimed that all the public money used to buy Lloyds shares has been returned.

Source: BBC News

Company news

Ariana Resources (AAU.L, 1.72p) – Speculative Buy
Ariana Resources, the gold-silver exploration and production company operating in Turkey, today announced results from a recent exploration programme at Kiziltepe West. Kiziltepe West is located within 4km by asphalt road from the Kiziltepe mine which is currently in production. The Kiziltepe mine is part of the Red Rabbit JV agreement with Proccea Construction; Ariana owns 50% of the JV and 51% of the profit share. Ariana recently initiated a portable X-Ray Fluorescence (pXRF) soil sampling programme covering the western limits of the Kiziltepe mine. The geochemical signatures of mineralised zones in Kiziltepe West (Ipek vein) appear similar to those identified over the Arzu South, Arzu North, Banu and Derya veins. Rock chip sampling from Ipek returned 2.36g/t Au plus 27.2g/t Ag, 1.94g/t Au plus 13.3g/t Ag and 1.07g/t Au plus 20.6g/t Ag. The pXRF data combined with rock chip sampling suggest that the Kiziltepe vein system extends a further 4km from the area currently being developed.

Our view: Ariana’s most recent drill programmes had confirmed the continuity of mineralisation between Arzu South and Arzu North pits. The above announcement suggests that mineralisation could extend a further 4km into the Kiziltepe West area. We are encouraged with the potential for additional mineralisation at the Ipek vein given the similar geochemical signatures as the Kiziltepe main area. Ariana’s recent exploration success could provide additional resources and further increase the future mine plan at Kiziltepe. We look forward to updates at Kiziltepe as the mine continues to ramp up its production. In the meantime, we maintain a Speculative Buy rating on the stock.

Beaufort Securities acts as corporate broker to Ariana Resources plc


CyanConnode Holdings (CYAN.L, 0.17p) – Speculative Buy
The world leader in narrowband radio mesh networks, yesterday announced its audited results for the 12 months ended 31 December 2016. Revenue for the period was £1.8m compared with £0.3m, while the Operating Loss rose to £7.94m (£4.91m), with the figure excluding acquisition-related costs/amortisation/depreciation coming out at a loss of £6.12m (£4.88m). Period-end cash/cash equivalents were £3.89m (£2.46m). The year recorded a number of landmark events, including the successful acquisition and integration of Connode Holding AB, the largest contract win to date worth £10m in Iran and the securing of new equity funding through tranches completed in July and October/November totalling £12.8m. Post period-end, the Group secured a US$5.4m purchase order in Bangladesh, various new contract wins such as with HM Power Sweden for the supply of 100,000 software licenses and with Innologix India for the supply of US$150,000 of software licenses. A Memorandum of Understanding was also signed with Tech Mahindra India.

Our view: Full year results very much as expected. CyanConnode has spent a year laying technological and international foundations to ensure it captures a significant role in the huge developing and long-term smart metering market. Cash burn necessarily has been high, but management has already bolstered its balance sheet with last month’s £3.2m raise while current activity builds strongly, not just with the recent order from Bangladesh, but also with several important near-term opportunities and a strong order pipeline, including follow-on business from existing customers. Recurring software license revenues will also underpin growth as the Group continues to drive towards profitability. Having got past the short-term US Presidential Election hiccup which, as a result of which Donald Trump’s appointment saw the Iranian government undertake a review of all international business contracts, initial deliveries should now commence in H2’2017 and offer significant scope expansion as the technology becomes standardised throughout the region. Elsewhere in the UK, even if its current commitment to offer smart meters to all the nation’s 30m households and businesses by 2020 is seen to slip, the national roll-out is expected to ramp up quite dramatically later this year with utility groups training up technically qualified personnel and as high profile consumer education programmes continue. Software license and support fee revenue from this alone is expected to total £25m over the life of the contract, following successful delivery of all 2016 milestones required by the SMIP contract. Having established the scale of the international smart metering opportunity (see Beaufort’s publication ‘The Future is Smart!’ that was released on 21 September 2016), the coming 24 months will see CyanConnode’s branded offering occupy the position of sector ‘industry standard’. This will enable it to build significantly to the already impressive backlog with both repeat orders and new large, long-term and exceptionally sticky customers. Having wisely deployed a good chunk of the funds raised last year to build up working capital, CyanConnode is now focussed on broadening further the depth and quality of its order book. CyanCannode’s business model is maturing while its business opportunity remains in its infancy. Recognising the Group’s lead in this giant developing opportunity, Beaufort reiterates its Speculative Buy recommendation and price target of 0.6p/share.

Beaufort Securities acts as corporate broker to CyanConnode Holdings plc


Crest Nicholson (CRST.L, 620.00p) – Buy
Crest Nicholson, a leading residential developer operating in the Southern half of England, yesterday provided its trading update for the 6 months ended 30 April 2017 (H1 FY2017). During the period, unit completions (excluding private rental sector) was 1,021 (2016: 1,033), while average selling prices (excluding private rental sector) increased by +12% to £418k, helped by change in product and location mix. Unit completions including private rental sector was lower at 1,064 (2016: 1,206), due to the timing of PRS completions (H2 weighted). Sales per outlet week (excluding private rental sector) was 0.81 (2016: 0.87). Forward sales at the period end for the 2017 year including year to date completions is +5% higher than previous year, supported by +11% increase in number of outlet to 49. Operationally, the Group has acquired 1,092 plots across 11 sites with a gross development value of £418m, during the period, while converted additional 1,196 plots across 2 sites from the Strategic land pipeline. The Group replenished strategic pipeline with an additional 1,101 plots. It is also planning to establish a new division in the Midlands for the first time in H2, expanding its footprints. Crest Nicholson’s CEO, Stephen Stone, commented “Crest Nicholson has the solid foundations for another year of growth and remains firmly on track to meet our ambitious 2019 targets of £1.4bn sales and 4,000 units”. The Group is scheduled to announce its interim results on 13 June 2017.

Our view: Strong underlying demand continues to drive the UK housebuilding sector forward. Crest Nicholson is enjoying this trend, achieved +12% increase in average selling prices, while sales rate and unit completions were both broadly in line with last year (dipped slightly in return), which suggests financial performances remain strong year-to-date. Moderate sales and build cost inflation means margins are protected. The Group continued its disciplined approach towards land acquisitions, and maintaining its strategic land pipeline to support medium-term growth. Looking ahead, the Group said it is on course to achieve unit sales growth of c.+10% in revenues in FY2017, and confirmed that it is well positioned to achieve its target of 4,000 units and £1.4bn of revenues by 2019. The Shares are currently valued at FY2017E and FY2018E P/E multiple of 9.2x and 8.2x, along with dividend yields of 5.5% and 6.2%, respectively. Beaufort retains its Buy recommendation on the shares for both income and value investors, although Taylor Wimpey and Persimmon remains our top pick amongst the UK housebuilding sector.


easyJet (EZJ.L, 1,215.00p) – Buy
easyJet, a low-cost European short-haul airline company, yesterday announced its results for the 6 months ended 31 March 2017 (‘H1 FY2017’). During the period, revenue advanced by +3.2% to £1,827m, comprised of +2.9% growth in seat revenue to £1,790m and +18% increase in non-seat revenue to £0.98, against the comparative period (H1 FY2016). The revenue growth was supported by +9% increase in passengers to 33.8 million led by a +8.4% capacity growth to 37.5 million seats and improvement in load factor to 90.2%, up +0.5%, while revenue per seat fell by -4.9% to £47.80, primarily due to lowered price. Headline cost per seat has risen by +4.9% to £54.45 due to foreign exchange impact of £175m with lower effective fuel price offsetting partially. At constant currency basis, revenue per seat fell by -9.7% to £46.32 and cost per seat decreased by -4.1% to £49.79 (remained flat excluding fuel). Headline pre-tax loss widened by -£191m to £212m, impacted by timing of Easter (c.£45m) and adverse net currency impact (£82m), while total pre-tax loss after non-headline item was £236m. This resulted to headline basic loss per share of 43.8p (H1 FY2016: loss 4.6p). Net cash at the period end stood at £353m (end H1 FY2016: £296m), comprised of cash and money market deposits of £1,308m and borrowings of £955m. On the operational front, the Group said it remains on track to obtain a European Air Operator Certificate (AOC) by the Summer, which will permit future operations within the European Union post the Brexit. The Group has also agreed to purchase 30 A321 NEO aircraft from Airbus, with the first arriving in summer 2018. easyJet’s CEO, Carolyn McCall, commented “easyJet is delivering on its strategy of purposeful investment in securing and building strong positions at Europe’s leading airports which is driving competitive advantage with sustainable returns. As a result our expectations for the full year are in line with current consensus market expectations”.

Our view: easyJet’s H1 results were broadly in line with its guidance. Capacity growth of +8.4% (guidance: +9% for the full year) and constant currency revenue per seat decline of -9.7% (guidance: “high single digit”) were both in line, while flat constant currency cost per seat excluding fuel was slightly better than the +1% guidance. On the other hand, the impact of Easter timing and adverse net currency movements means headline pre-tax loss widened to £212m, which was also in line with market expectations but prompted investors to take some of their substantial profits in an absence of any other ‘positive surprises’. Looking ahead, subject to normal levels of disruption, the Group said its H2 capacity growth is now expected at a similar level to +8.4% achieved in H1, and revenue per seat in Q3 is expected to fall by “low single digits”. The guidance for a headline cost per seat excluding fuel at constant currency for the full year is maintained at +1% increase. For the medium-term, the Group noted it remains committed to flat cost per seat excluding fuel at constant currency in FY2019 against FY2015 (FY2015: £37.44). With current exchange rates and fuel price range (US$500-US$580 metric tonne), easyJet said unit fuel cost for the H2 is likely to reduce, meaning between £225m-£235m (previous guidance: £215m-£240m) reduction for the full year against FY2016. Additionally, adverse exchange rate movements are now estimated to impact full year pre-tax profit by around £100m, slightly reduced from £105m indicated previously. Forward bookings for Q3 and FY2017 are high at 77% and 55%, respectively (H1 FY2016: 72%, FY2016: 50%). Overall, the management confirmed that it is on course to achieve full year pre-tax profit in line with current consensus market expectations of £370m. We believe yesterday’s sharp fall in its share price an over-reaction, given results in line with expectations, continuing strong demand for easyJet’s flights, easing of capacity growth by its competitors, a strong balance sheet, along with an improving outlook. The Shares are valued at FY2017E and FY2018E P/E multiple of 15.8x and 13.6x, with dividend yields of 3.1% and 3.8%, respectively. Beaufort retains its Buy rating on the shares, while keeping one careful eye on the oil price and economic/political uncertainties.


Speedy Hire (SDY.L, 55.25p) – Hold
The UK’s leading tools, equipment and plant hire services company, operating across the construction, infrastructure and industrial markets, yesterday announced results for the year ended 31 March 2017. Revenue for the period increased to £369.4m (2016: £329.1m), while adjusted profit before tax was up 224.0% to £16.2m (2016: £5.0m) as net debt reduced to £71.4m (2016: £102.6m). Adjusted earnings per share of 2.44p (2016: 0.79p), producing a return on capital employed (ROCE) before disposals of 8.4%, compared with 3.0% last year. The Board demonstrated its confidence through the declaration by lifting its final dividend by 67.5% to 0.67p/share and taking the full year to 1.00p. Management noted that its turnaround phase has been completed and that it has strategy in place to drive sustainable profitable growth. Improved management information is now fully embedded, while asset utilisation has been enhanced and the hire fleet reduced by 11.4% to £194.8m. Chairman Jan Åstrand noted “We have substantially improved our efficiency and ROCE this year and I am confident we can deliver further profitable growth.”

Our view: Back in February Beaufort reviewed Speedy Hire’s progress and concluded its management was successfully delivering on their goals to transform Group operations. The full year results now underline this, with higher operating efficiencies driving a substantial improvement in ROCE and cash flow together with confidence reflected by lifting the H2 dividend. The shares have subsequently performed just about in-line with the FTSE All-Share, justified Beaufort’s ‘Hold’ recommendation, where it now remains. At the same time, Beaufort highlighted the huge (and widening) share price performance gap with Speedy’s most obvious quoted peer, HSS Hire. This is highlighted in the share price chart below:

Source: London Stock Exchange

Investors may also recall the spat between Speedy and one of its major shareholders, Toscafund (which holds 19.37% of Speedy and 26.23% of HSS). In an effort to force a combination of the two groups, Tosca tried and failed to oust Speedy’s Chairman. Since then its CEO, Russell Down, has been completing his proposed turnaround against a background of competitive markets and strengthened its balance sheet. Having made one modest acquisition in December, he goes on to note in his outlook statement with full year results that “…we are well positioned to take advantage of market opportunities….” Indeed, he always insisted that the rebuff of Toscafund’s original proposal to merge the two operations was because their timing wasn’t right, but never formally ruled out such an approach in the future. HSS’s woes since its February 2015 IPO have seen the shares discarded by many investors, to the extent that the Price/Book value at around 0.4x is now less than half that of either Speedy or Lavendon. Yet its Q1’2017 trading update due on 24th May is likely to come with a more optimistic tone; the NDEC transition now all but finished, more focussed branch marketing and centralised logistics are improving efficiencies and plant utilisation is rising, all of which should have started filtering down to EBIDA margins during H2’2017E and continue throughout 2018E. While debt is still high, the December’s £13m raise relieved the balance sheet pressures that was otherwise building up. Beaufort is forecasting 2019E revenues for HSS Hire of £385m, implying EPS of 6.8p or a P/E multiple of 7.8x, which compares with Speedy on 13.4x for the same period. Even after paying a reasonable take-out premium to secure a recommended offer, the transaction should become quite significantly enhancing. The bottom line is that Toscafund’s original view that a combined group should be worth more than the sum of the parts remains true; the problems resulting in HSS’s marked decline since Listing are now significantly resolved and its extended period of underperformance will shortly come to an end. Speedy’s management have demonstrated their ability to manage and consolidate a national operation in a highly competitive marketplace; right now they have the opportunity to pick up a high profile brand name with a complementary user base on the cheap, accruing significant cost savings while reinforcing its position as the UK’s leading hire services operator. Buy HSS Hire, hold Speedy Hire reiterated.


To read Beaufort’s full research archive click here

Compiled by:
Barry Gibb, Kazunaga Senga, Sheldon Modeland, Charles Long & Ben Maitland
(t) +44 (0) 207 382 8384
(e) [email protected]

Weekly diary

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During the three months to end-April 2017, the number of stocks on which Beaufort Securities published recommendations was 216, and the recommendations were as follows: Buy – 73; Speculative Buy – 118; Hold – 22; Sell – 3.

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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