Beaufort Securities Breakfast Alert: Cyan Holdings, Experian, Halfords Group, Micro Focus International



The FTSE-100 finished yesterday's session 0.24% lower at 6,654.47, whilst the FTSE AIM All-Share index closed 0.22% down at 723.00. In continental Europe, markets ended in the green after the Bank of England (BoE) upheld key interest rates in an unexpected move. Furthermore, investors cheered political stability in the UK with the appointment of Theresa May as the new prime minister. France's CAC 40 and Germany's DAX advanced 1.2% and 1.4%, respectively.
Wall Street
Wall Street ended higher as investors' focus remained on the onset of the earnings season and upbeat economic data on the domestic front. The S&P 500 added 0.5% to close at a record high of 2,168.99, with the materials and industrials sectors being the top gainers.
Equities are trading higher on positive cues from the Wall Street. Moreover, better-than-expected GDP growth in China at 6.7% for Q2 2016 boosted investor sentiment. The Nikkei 225 rose 0.7%, while the Hang Seng was trading 0.3% higher at 7:00 am.
Yesterday, Brent oil prices increased 2.4% to US$47.37 per barrel, while WTI prices surged 2.1% to US$45.68 per barrel.

BoE maintains key interest rates

The BoE's Monetary Policy Committee retained its benchmark interest rate at 0.5%, with 8-1 votes in favour of maintaining the rates. Moreover, the committee left the asset purchase programme unchanged at £375bn.
China's economy expands 6.7% in Q2 2016 on stimulus
As per the National Bureau of Statistics, China's GDP growth in Q2 2016 remained steady at 6.7% compared with the previous quarter. Although this number was lower than the 6.9% expansion in 2015, it exceeded the market estimate of 6.6% growth. The expansion was largely ascribed to the large stimulus measures by the government, which boosted demand for factory output.

Company news
Cyan Holdings (LON:CYAN, 0.18p) - Speculative Buy
Cyan on Thursday announced it had signed a strategic partnership with India's Enzen Global Ltd. Cyan, which designs mesh-based flexible wireless products used for utility metering and lighting control, said it and Enzen will work on delivering narrowband mesh technology to the Internet of Things market in Ireland. No financial details were disclosed on the agreement, although John Cronin, Cyan's executive chairman noted "We are delighted to be working with Enzen in Ireland, a partnership built on our successful relationship with Enzen in India. CyanConnode [Cyan's trade name] has established an eco-system of partners in each target market and it is now starting to build partnerships that are global, which will support our expansion into new markets".

Our view: Smart metering represents a giant, unfulfilled and highly scalable global long-term growth opportunity that prospectively brings exceptionally sticky customers. Cyan's target markets and the contracts generated to date clearly demonstrate this, with the enlarged Group's products providing technology, IP and strong commercial foundations for future growth. Indeed, momentum appears set to build sharply; yesterday's extension of the Group's Enzen partnership into Ireland is just a taster of what is to come. Cyan's legacy business in the developing markets takes advantage of its proprietary end-to-end solutions, wherein customers' ultimate desire must be to converge their networks using standards-based technologies. Convergent networks require a standards-based core programming language in order to permit rapid development, integration and consolidation of applications. The recent acquisition of Connode provides exactly this capability and thereby enables Cyan to effectively future-proof its customer solutions and provide the necessary standards-based interfaces for additional connectivity, as required for the Internet of Things and smart cities. As such, it is prospectively transformational, fitting 'hand-in-glove' with the Group's ambition to develop to the ideal technological solution as part of its effort to capturing a sizeable chunk of both developing and developed market opportunity. Since 2006 utilities and telecom operators have deployed Connode-enabled devices in large-scale projects in Europe which, in turn, creates new opening for the enlarged Group in these and other western markets, such as North America. Further out, Connode's highly complementary product range also offers the additional prospect of creating global leadership in Narrowband Mesh radio solution Internet of Things canopy provision. As Beaufort's research has previously stated, the fact that Cyan has secured contract wins from India, the Middle East, Africa, Brazil, China and Eastern Europe, highlights both the need for and the uniqueness of Cyan's systems approach. The potential to scale early sales to these territories is clearly enormous; in reality, the transformational purchase order worth £10 million from Iran's Micromodje is potentially just a small part of the National Smart Metering Program of Iran that has a stated goal to replace the electricity meters for all customers, representing approximately 33 million meters, in seven years with funding provided by the Iran Power Generation, Transmission and Distribution Management Company; Cyan has already started a dialogue on the next planned rollout of 1 million units. Prospectively, India is an even larger opportunity with prime minister, Modi, in 2015 projecting a phased consumer rollout of smart meters beginning in 2017, with 35 million units installed by 2019; more recently India's power minister, Goyal, cited a proposition for as many as 250 million smart meters. With a good number of large international territories now also reviewing similar options, the business potential for a supplier capable of installing and supporting comprehensive national smart meter implementation programmes is clearly huge. The recent acquisition of Connode will significantly speed Cyan's ambitions to ensure it secures a significant part of these long-term opportunities, while also providing a strong foothold in more developed western markets. Beaufort repeats its Speculative Buy recommendation on Cyan Holdings.
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Beaufort Securities acts as corporate broker to Cyan Holdings PLC

Experian (LON:EXPN, 1,459.0p) - Hold
Experian, the global information service company, yesterday provided its trading update for the three months ended 30 June 2016 ('Q1 FY2017'). During the period, total revenue at actual exchange rates advanced by +1% against the comparable period (Q1 FY2016). At constant exchange rates on the other hand, has shown +5% increase in both total revenue and organic revenue. On the operational front, North America has shown encouraging +11% growth in Credit Services organic revenue year-on-year and both Latin America and EMEA/Asia Pacific has recorded excellent growth in Decision Analytics & Marketing Services. The management expect no change in its full year guidance and reaffirmed organic revenue growth of mid single-digit at constant exchange rates, stable margins and continue to expect further progress in Benchmark earnings per share. Experian's CEO, Brian Cassin commented "We are closely monitoring the possible implications of a UK exit from the European Union. While there is uncertainty as to how and when any exit will take effect, we continue to run our business as usual, and we have seen no significant adverse impact to trading in our UK business. As a global business with a diverse portfolio, we have a good track record of adapting to changing market conditions." Experian will hold its Annual General Meeting on 20 July 2016 and will release half-year results on 9 November 2016.

Our view: Experian delivered a resilient performance in the first quarter of FY2017, registering revenue growth in both actual and constant exchange rates, in line with expectations, although the former had to absorb impact from weaker Sterling and Brazilian Real. Whatever, the point is that since Experian's reporting currency is the US Dollar, further post-Brexit weakness in Sterling will likely to knock reported UK performance. The Group's geographical spread in FY2016 was; North America US$2,471m (55.2%), UK & Ireland US$956m (21.4%), Latin America US$633m (14.1%) and EMEA/Asia Pacific US$417m (9.3%). Continued fluctuation in Experian's exposed currencies is set to take 1% from EBIT, if the current rates remain until the year-end. Experian fundamentals remain strong and resilient during times of economic uncertainty, where demand for credit decisions, fraud prevention and general risk exposure tools and products can be expected to remain robust. The shares have, however, already taken such expectations on board, rising by approximately +10% since the 23 June, supported also by its share buyback programme of US$400m. Even with management continuing to invest heavily, however, without specific new catalyst it's expectation of mid-single digit revenue growth and stable margins appears to be fully discounted in a 22.4x earning multiple to March 2017E when accompanied by less than 2% yield. Now looking fairly priced, Beaufort downgrades the shares to Hold from Buy and recommend lightening overweight positions.
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Halfords Group (LON:HFD, 330.60p) - Buy
Halfords Group (Halfords) released a trading update for the 13 weeks to 1st July 2016. During the period, revenue increased 2.1%, with the Retail segment's revenue rising 1.5% and the Autocentres segment's revenue soaring 5.9%. Like-for-like (LFL) revenue for the group fell 0.6%. LFL revenue from the Retail segment dropped 1.2%, while that for the Autocentres segment increased 3.1%. Adjusting for the timing of Easter, group LFL revenue was flat, while revenue from Retail and Autocentres fell 0.2% and increased 1.7%, respectively. Service-related sales rose 15%, with growth across all services, including 3B fitting and cycle repair. Halfords would release an update on the 20 weeks to 19th August 2016 on 6th September 2016.

Our view: Halfords recorded strong performance in the 13 weeks to 1st July 2016. The group recorded revenue growth across both its segments. Motoring division under Retail performed robustly, supported by car maintenance and travel solutions. Growth in car maintenance was led by bulbs, blades, batteries, and new product and service offerings. Travel solutions performance was aided by double digit growth in child safety seats. Cycling sales were dented by the timing of Easter and poor weather in April and late June. The Autocentres segment recorded the 11th consecutive quarter of LFL growth, driven by sales of tyres and longer opening hours. The segment also witnessed an increase in online sales and improved customer satisfaction. Moreover, Halfords has already hedged three quarters of purchases for FY 2017. The company's Moving Up a Gear strategy, targeted at driving sustainable long-term growth, is delivering strong results, including a step change in customer data, introduction of new services, product innovation and exciting collaborations. The acquisition of Tredz and Wheelies is expected to add to capabilities in the online sales of premium bikes and PACs. The company expects a lift from the 2016 Summer Olympics in Rio de Janeiro, Brazil. We believe Halfords is well placed with adequate resources to deliver long-term growth. Therefore, we maintain a Buy rating on the stock.
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Micro Focus International (LON:MCRO, 1,850.0p) - Buy
Micro Focus International (Micro Focus) declared its audited preliminary results for the year ended 30th April 2016 (FY 2016). During the period, revenue increased 49.2% to US$1,245.0m. Adjusted EBITDA soared 52.9% to US$546.8m. Operating profit increased to US$294.9m from US$147.2m in FY 2015. Consequently, pre-tax profit increased 113.8% to US$195.4m, leading to an EPS of 74.50 cents per share, up 27.3% from last year. Net debt at the end of period fell 23.2% to US$1,078.0m. Cash generated from operations stood at US$455.7m (FY 2015: US$288.7m). Free cash flow during the period increased to US$238.1m from US$173.7m in FY 2015. On the operational front, Micro Focus completed the acquisition of Serena Software Inc. for US$540.0m on a cash and debt-free basis, along with the placing of 10.9 million shares at a price of 1,455 pence to raise US$225.7m gross and US$222.7m net. Micro Focus proposed a final dividend increase of 50.7% to 49.74 cents per share, taking the full-year dividend to 66.68 cents per share (FY 2015: 48.40 cents per share).

Our view: Micro Focus performed robustly in FY 2016. The company recorded solid growth in revenue, well supported by a strong performance from its SUSE product portfolio. Micro Focus's operating profit more than doubled during the period, mainly due to lower operating costs resulting from integration benefits. The company benefitted from the acquisition of The Attachmate Group, Inc. Furthermore, the acquisition of Serena bodes well with Micro Focus' plan to expand into mature infrastructure software segments. The acquisition would also help boost overall efficiency of the company, product management and sales productivity. Micro Focus enjoys a healthy balance sheet with good cash flows, which led to higher dividends payable to shareholders. The company plans to focus on its strategy of simplifying its underlying operations. Micro Focus does not expect revenue growth in FY 2017 as it seeks to build revenue from solid core and aims to grow revenue from FY 2018. We are buoyed by the company's progress in FY 2016 and upgrade the rating to Buy from Hold.

Economic news
US initial jobless claims
Initial jobless claims in the US remained at 254,000 in the week ended 9th July, the Labor Department reported yesterday. Economists expected the claims to increase to 265,000. The four-week moving average fell 5,750 to 259,000 last week.
US PPI final demand
The US producer price index (PPI) for final demand improved 0.5% m-o-m in June, following a 0.4% increase in May, the Bureau of Labor Statistics stated yesterday. The markets expected a 0.3% increase in demand. Core producer prices, excluding food and energy, rose 0.4% in June, from 0.3% in May. On a y-o-y basis, PPI increased 0.3% in June, after a 0.1% fall in the previous month.

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