Beaufort Securities Breakfast Alert: PHSC, ValiRx, Advanced Oncotherapy, Daily Mail & General Trust, McColl's Retail Group


"By late Sunday, we should have a good idea whether or not Italian Prime Minister, Matteo Renzi, will be stepping down. The polls suggest his constitutional referendum, which has effectively become a confidence vote on his premiership, will get a 'thumbs down'. No new election is actually required until February 2018, but any attempt to simply replace him with another technocrat leader could well see a public, suffering from implosion of their bad-debt laden banking system, 38% youth unemployment and an inability to stifle giant capital outflows, clamouring for a snap election. This, of course, would open the door for Bepe Grillo's Five Star Movement, whose denouncement of the Euro could, in turn, generate in a wave of similar populist referendum voting across other dissatisfied EU nations, with France's own presidential election, due to take place on 7th May, the headline this morning following Francois Hollande's overnight declaration that he has decided not to stand. The prospect of Eurozone's collapse, however, was not the driver of the US session, which started in the positive following release of strong November Manufacturing ISM data, but waned later as a sell-off amongst tech issues pushed the NASDAQ sharply down, while the Dow Jones managed to hold onto modest gains due to sustained switching into financials, as divergence between the two sectors and the rout in government bond markets since Trump's election continued. Asian shares were lower across the board, with the Nikkei suffering as the Yen found buyers amongst US$ sceptics waiting for flaws in the Trump rally to show through, which dragged the other regional markets with it. With investors now virtually taking a 25bp hike by the Fed later this month for granted, focus this afternoon is likely to centre on the important US employment report, with forecasts in the 180k to 200k range, taking unemployment to 4.8% with a modest rise in hourly earnings of around 0.1%. The UK will also report Construction PMI figures this morning while corporates due to disclose earnings or trading updates include 88 Energy (88E.L), Altona Energy (ANR.L) and Berkeley Group Holdings (BKG.L). Traders meanwhile continue to watch oil futures carefully; although prices moderated during the Asian session, sentiment following OPEC's agreement remains positive with January's light, sweet crude trading a whisker below US$51 on the Mercantile Exchange, as they weigh up expectations on the terms being upheld or the various participants instead deciding to cheat on quotas rather than give up market share to US shale producers. London equities opened in a nervous mood this morning, with the FTSE-100 down over 57 points in early trading."
- Barry Gibb, Research Analyst


The FTSE-100 finished yesterday's session 0.46% lower at 6,752.93, whilst the FTSE AIM All-Share index closed 0.69% down at 813.33. In continental Europe, the CAC-40 finished 0.39% lower at 4,560.61 whilst the DAX was 1.00% off at 10,534.05.
Wall Street
In New York overnight, the Dow Jones rose 0.36% to 19,191.93, the S&P 500 fell 0.35% to 2,191.08 and the Nasdaq shed 1.36% to 5,251.11.
In Asian markets this morning, the Nikkei 225 had fallen 0.47% to 18,426.08, while the Hang Seng was off 1.2% to 22,604.42.
In early trade today, WTI crude was down 0.24% to $50.94/bbl and Brent was down 0.65% to $53.59/bbl.

Train fares to rise by average of 2.3%
Train fares in Britain will go up by an average of 2.3% from 2 January, the rail industry has announced. The increase in regulated fares, which includes season tickets, is capped at July's RPI inflation rate of 1.9%. Unregulated fares, such as off-peak leisure tickets, can go up by as much as the train companies like. The Rail Delivery Group, which represents train operators and Network Rail, said the industry was working to simplify fares and improve services. "We understand how passengers feel when fares go up, and we know that in some places they haven't always got the service they pay for," said Paul Plummer, chief executive of the Rail Delivery Group. "Around 97p in every pound passengers pay goes back into running and improving services."

Company news

PHSC (LON:PHSC, 19.00p) - Hold
PHSC plc, through its trading subsidiaries Personnel Health & Safety Consultants Ltd, RSA Environmental Health Ltd, Adamson's Laboratory Services Ltd, QCS International Ltd, Inspection Services (UK) Ltd and Quality Leisure Management Ltd, provides a range of health, safety, hygiene, environmental and quality systems consultancy and training services to organisations across the UK. Yesterday, the Group provided unaudited Interim Results for the six months ended 30 September 2016. Financial highlights included turnover for first half up 7% at £3.587m compared with £3.354m last year; loss of £93k measured as EBITDA after bad debt provision, versus £229k profit in 2015, resulting in a loss per share of 0.85p compared with 1.23p in the comparable period. Cash balance of £301k at period-end (£611k), with a NAV of £6.098m. The Board went on to state it is confident of improvement in the second half of the year and does not currently anticipate any additional provisions for bad debts.

Our view: PHSC investors are largely there for the income. Based on last year's 1.5p dividend, the shares were yielding over 8.3% on yesterday's closing share price. So, by stating that "if the Group does not generate a profit for the year, it may recommend a lower distribution or elect to forego a dividend entirely on this occasion", it was bound to knock the shares back. But having taken that on board, can investors instead find value in the equity itself? A pro-forma net asset value per share of 41.5p, compared with a current share price 18p, suggests they can. And, in fact, Q2'16 did see a return to profitable trading, although the bottom line was impacted by a £44k bad debt provision; indeed, the Board states it expects to trade profitably in the second half assuming similar charges do not pile up again. The divisional performances which have most impacted Group profitability are those of Adamson's Laboratory Services Ltd ('ALS') and SG Systems (UK) Ltd ('SG'). In the case of the former, the ongoing loss-making situation has largely been brought about by a continuing erosion of the prices at which work can be obtained, and a general reduction in revenues against a background of a predominantly fixed cost base. Management are taking steps to address this situation and several options are being considered, although the cost of redundancies at the company were not reflected in the results for the first half results. Discussions for the sale of ALS to a third party also foundered, although other opportunities could possibly be forthcoming. Based on a cash position of £356k at end-November, the Group appears to have just about enough to keep its head above water until next summer's preliminaries. By then various decisive actions (by way of cost elimination, corporate reorganisation, disposals/asset sales, etc.) will have been taken, or management will need to call on shareholders again for additional funding. In light of this, Beaufort will retain its Hold recommendation while awaiting more positive newsflow.

Beaufort Securities acts as corporate broker to PHSC plc

ValiRx (LON:VAL, 6.75p) – Speculative Buy
ValiRx, the life science company which focuses on clinical stage cancer therapeutic development, taking proprietary & novel technology for precision medicines towards commercialisation and partnering, yesterday provided a development update on the clinical development of ValiSeek, the joint venture between ValiRx and Tangent Reprofiling Limited. Further to its announcement of 3 November regarding the successful dosing of the first patient with VAL401, ValiSeek confirmed the initiation of the process to commission a second clinical testing site under protocol VAL401. Management noted that this represents "A Phase II study to assess the efficacy, safety and tolerability of VAL401 in the treatment of patients with locally advanced or metastatic Non-Small Cell Lung Cancer (NSCLC) after failure of at least one prior chemotherapeutic regimen". As part of this process, the protocol and supporting documentation have been reviewed by the ethics committee at the second Tbilisi site, the JSC Neo Medi Clinic, and they have now returned a positive opinion and approval.

Our view: This trial expansion to include a second site is a strong endorsement of the results currently being acquired and re-confirms the excellent progress ValiSeek is making. Patient recruitment will now be accelerated for the trial, for which 2 of the targeted 20 have been identified. In anticipation of continuing progress with the Group's clinical trials for both VAL201 and VAL401, Beaufort retains its Speculative Buy recommendation on ValiRx.

Beaufort Securities acts as corporate broker to ValiRx Plc

Advanced Oncotherapy (LON:AVO, 60.00p) – Speculative Buy
The developer of next-generation proton therapy systems for cancer treatment, after market close on Wednesday provided additional clarification surrounding the update released on 24 November 2016. Management repeated its confidence that the technical development of its first LIGHT system is proceeding as expected, while also advancing the arrangements with its manufacturing partner Thales. It went on to reiterate the fact that despite the recent news that two Chinese customers are not now proceeding with LIGHT installations, the sale and purchase agreements between Sinophi Healthcare Limited and Advanced Oncotherapy for two machines remain in place. AVO remains focused on delivering the technical development of its first LIGHT system and states its confidence that the long-term commercial success of the LIGHT machine will follow. Since signing the lease for the Harley Street site in January 2015, emphasising that its first LIGHT installation would be in the UK. Quite emphatically, it believes that demand for its next-generation proton therapy system, which has numerous advantages over existing technology, will be strong and that additional commercial sales will be secured, be this either through the existing Sinophi sale and purchase agreements and its distribution agreement in China, or through the conversion of existing letters of intent and other expressions of interest received by the Group for additional sites in the UK, the US, Europe or elsewhere in Asia. There are currently only 62 proton therapy centres worldwide and the number of treatment rooms available is expected to increase by over ten times by 2030.

Our view: Believe it or believe it not. In fact, this RNS release simply spelt out the detail of a lengthy conversation Beaufort had with the CEO last Friday and then reproduced in Beaufort's 'Breakfast Today' release of the following Monday. As such, it tells us nothing new, other than recognising that a dispute now exists regarding the legal, contractual understanding established between Sinophi and AVO following signing for the two Chinese contracts. An uncomfortable complication but, in reality, the only thing the market can now truly accuse AVO's management of at this time, is naivety. And, in truth, a very public legal tussle is the last thing either party would want; given the understanding that the original contracts were composed under English law with numerous detailed indentures to protect AVO in circumstances of non-completion, some sort of out-of-court settlement is probably the most likely outcome. That is unless, of course, in the meantime AVO does manage to formally demonstrate to a very eager world a full-size working prototype LIGHT system that does 'exactly what it says on the tin'. Sinophi would most likely then find itself 'strongly-bid' for its metaphorical 'Ferrari', exactly when the international medical fraternity would be desperate to get their hands on one. Is that likely to happen? Probably not. While the science behind LIGHT has been adequately proven at CERN, creating a relatively tiny modular system that can emulate process demonstrated in the Haydron Collider requires something close to rocket science, as recognised by the schedule having slipped several times already. In reality, the earliest we can expect such an event now is the tail-end of 2018, for which some investors have already decided they are simply not willing to wait. But all good things take time and, as Beaufort's initiation research on AVO from more than two years ago made abundantly clear, the value of LIGHT's highly protected technology is huge; it has the potential not only to make existing first generation cyclotron-based systems obsolete, but also creates a giant new market as the natural replacement for the similarly-priced and relatively archaic X-ray radiation system, of which there are perhaps 22,000 models operational around the world. So the opportunity is big, very big. Although whether or not it is AVO that eventually captures it, or a predatory medtech group who recognises that the value AVO has created can now be bought on the cheap, remains to be seen. Beaufort retains its Speculative Buy recommendation on Advanced Oncotherapy.

Beaufort Securities acts as corporate broker to Advanced Oncotherapy plc

Daily Mail & General Trust (LON:DMGT, 785.50p) – Buy
Daily Mail & General Trust ('DMGT'), a multinational media group who owns newspaper and supplies high-value data B2B, yesterday announced its preliminary results for the year ended 30 September 2016 ('FY2016'). During the period, revenue advanced +4% to £1,917m against the comparable period (FY2015). On a statutory basis, operating profit fell by -40.8% to £129m but pre-tax profit rose +14.4% to £247m due to gains on disposals of Local World and Wowcher and lower finance cost during the period, leading earnings per share decreased to 57.8p from 60.1p. On an adjusted basis, operating profit fell by -4% to £277m (-11% underlying) and pre-tax profit fell -7% to £260m, leading earnings per share decreased to 56p from 59.7p. Net debt reduced by -3.3% to £679m with net debt to EBITDA ratio of 1.8x. On the operational front, the Group made total acquisitions of £42m and total disposals of £128m throughout the year, majority by the dmg information division. DMGT's CEO, Paul Zwillenberg commented "Our focus has been on prudent financial and strategic management of DMGT's diversified portfolio. We have continued to invest in long-term growth opportunities across a variety of organic initiatives whilst making small bolt-on acquisitions, maintaining a strong balance sheet and continuing to deliver real dividend growth for our shareholders. The significant organic and M&A investments made across the Group over the past few years have started to bear fruit. Alongside this we have been expanding MailOnline while our newspapers continue to outperform the market." The Group declared final dividend of 15.3p per share, up +2.7%, to be paid on 10 February 2017, bringing full year dividend to 22p per share (FY2015: 21.4p).

Our view: DMGT performed resiliently during FY2016, helped by good organic growth in its B2B and consumer digital operations and despite continuing challenging market conditions. Long-term trend continues to demonstrate increasing dominance of the B2B businesses which the Group generated 78% (FY2015: 72%) of this year's adjusted operating profit with remainder 22% (FY2015: 28%) generated by consumer businesses. Reported revenue for B2B grew +9% as RMS, dmg information and dmg events recorded +10%, +16% and +12%, respectively, in revenue year-on-year, while dmg media fell by -3%. The Group has benefitted from the foreign exchange translation as more than 50% of revenue generated outside the UK, with 40% coming from North America. Post the period, the Group said performance so far has been in line with its expectations and said it expects to resume underlying revenue growth across the B2B division in FY2017 (FY2016: 0%). Performance for consumer side, on the other hand, remains largely dependent on the print advertising environment from which management expects to sustain current margin. DMGT's revised strategy focuses on improving operational execution, increasing the portfolio's focus and enhancing financial flexibility. Its diversified portfolio of businesses protects its profitability and should turn fruitful as the environment turns favourably. Beaufort reiterates its Buy rating on the shares.

McColl's Retail Group (LON:MCLS, 175.00p) – Hold
McColl's Retail Group ('McColl's'), the UK's second largest multiple convenience retailers operating the convenience and newsagent sectors, yesterday provided trading update for the 13 week ended 27 November 2016 ('Q4 FY2016'). During the period, revenue advanced +1.7% while like-for-like ('LFL') sales fell by -1.7%, against the comparable period (Q4 FY2015). For the full year, revenue grew +1.9% and LFL decreased -1.9%. Operationally, the Group acquired 58 new convenience stores during the period, taking total number of convenience store to 1,001. McColl's identified supply chain partner (Nisa) for the 298 acquired stores from the Co-operative Group Limited ('Co-op') and said integration planning is progressing well. The Group had 559 Post Offices in operation and installed 183 Amazon lockers across the estate at the end of period. The Group increased convenience product range and continue to work to enhance customer service. McColl's CEO, Jonathan Miller commented "I am delighted to announce that with the recent opening of our new Erdington store, we have achieved our target of operating 1,000 convenience stores by the end of 2016. This is a significant milestone in our strategy to grow our neighbourhood presence and serve more McColl's customers. The business has traded robustly in the final quarter with total sales for the full year up 1.9% and we expect our overall financial performance for the year to be in line with the Board's expectations". Preliminary Results for the 52 week ended 27 November 2016 will be released on 27 February 2017.

Our view: McColl's achieved its 6th consecutive year of sales growth, while surpassed the target of 1,000 convenient stores slightly ahead of the end-December schedule. It also noted that it is on track to meet full year expectations. The Group delivered satisfactory results in Q4, resulting full year with a slight fall in rate of revenue growth at +1.9% (39 weeks ended 28 August 2016: +2.0%), but perhaps more importantly marginally slowed its LFL sales contraction to -1.9% (39 weeks ended 28 August 2016: -2%). Breaking this down, LFL sales for recently acquired and converted stores improved +0.8%, with premium convenience, food and wine units down -1%, while newsagents and standard convenience outlets fell -3.3%. In an effort to turnaround its struggling newsagents and standard convenience stores, which are heavily impacted by continuing fall in sales of 'traditional categories' such as tobaccos and newspapers, the Group has converted 27 newsagents to food and wine stores during Q4, taking the number of conversions to 59 stores for the year. In line with its strategy, opening of 13 Subway franchises and 18 new food-to-go units, along with expanded Post Offices to 559 and Amazon lockers to 183 are all encouraging. McColl's also rolled out LED lighting across the estate, delivering expected 35% reduction in lighting costs. Looking ahead, as announced in July, the Group will accelerate its convenience store rollout in FY2017 with the "transformational" acquisition of 298 Co-op stores announced on 13 July 2016. The conversion programme is on course to commence in January following approval from the Competition and Markets Authority ('CMA'), which is expected to announce its findings before the Christmas. We are encouraged with the progress and the opportunities that Co-op stores brings to the Group. Having noted this, wage-related cost inflation and market competition remains the Group's principal concern, at the time when inflation is expected to hit UK hard in 2017. The shares presently trade on a FY2016E P/E multiple of 12x along while offering a dividend yield of 5.8%, but even so this cannot be considered cheap until shareholders have greater confidence in the Group's ability to continue to service its dividend promises, following the recently announced lowered payout ratio, without impacting investment (capex) and debt reduction. Beaufort reiterates its Hold rating on the shares, although the favourable CMA announcement should provide a short-term boost to the shares in the next couple of weeks or so.

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