Beaufort Securities Breakfast Alert: National Grid, Concepta, Cyan Holdings PLC, DS Smith, ValiRx Plc


Concepta (LON:CPT)

CyanConnode Holdings (LON:CYAN)

ValiRx (LON:VAL)

National Grid (LON:NG)

Smith (DS) (LON:SMDS)

"The ECB surprised market traders yesterday by tapering its huge bond-buying program from next April. Extending asset purchases, that were due to end in March 2017, out to December but cutting from €80bn down to €60bn each month while leaving benchmark rates unchanged, met a mixed reaction from investors. Any reduction in asset buying must be seen to risk the Eurozone's own 'taper tantrum' that was witnessed in the US back in 2013. ECB members nevertheless clearly remain sensitive to potential economic and political instability across its 19-nations following Italian voter's recent rejection of constitutional reforms and key elections that are looming in 2017. As these various outcomes becomes more predictable, the ECB will likely provide greater guidance regarding the prospective duration and trajectory of its QE, which suggests the next round of tapering will likely be seen either at the September or December meetings next year. The immediate outcome of the action, however, was for the Euro to spike upward hitting a 1-month high against the US$, although it quickly gave most of these gains back, while bond yields pushed higher, with Italy and Spain not surprisingly leading the sell off, although long-dated German bund yields also reached their highest level in almost 12 months. Much of this background noise went virtually unnoticed in the US, where the Dollar continued its unabated rise, Treasuries fell and equities gained, albeit modestly, across all principal indices, with traders now taking a hike in short-term rates at next week's FOMC meeting virtually for granted. The Nikkei was the principal mover in Asia, rising more than 1% as asset managers celebrated the ECB's decision to extend its asset purchases along with relative Yen weakness; equity markets elsewhere in the region put on minor gains, despite Chinese consumer inflation figures reportedly rising for a third straight month in November, leaving only the Hang Seng falling back into the red, primarily due to a sharp sell-off of casino and gambling-related shares after the South China Post reported a prospective halving of ATM withdrawal limits in Macau for Unionpay bank card holders, presumably as part of the mainland's effort to rein-in this run-away activity in its provinces. The UK this morning is expected to release its Trade Balance figures and Construction Output data along with the Bank of England's Attitudes Survey, while this afternoon the US releases Consumer Sentiment and Wholesale Trade numbers. UK corporates expected to release earnings or trading updates include Abbey (ABBY.L), John Laing (JLG.L), Photo-Me (PHTM.L), Plant Impact (PIM.L) and SThree (STHR.L). Mixed sentiment accordingly pervades London equities this morning, with the FTSE-100 seen opening just fractionally firmer with a rise of perhaps 5 points in early trade."

- Barry Gibb, Research Analyst



The FTSE-100 finished yesterday's session 0.42% higher at 6,931.55, whilst the FTSE AIM All-Share index closed 0.03% down at 813.19. In continental Europe, the CAC-40 finished 0.87% up at 4,735.48 whilst the DAX was 1.75% better-off at 11,179.42.

Wall Street

In New York last night, the Dow Jones rose 0.33% to 19,614.81, the S&P-500 gained 0.22% to 2,246.19 and the Nasdaq advanced 0.44% to stand at 5,417.36.


In Asian markets this morning, the Nikkei 225 had gained 1.23% to 18,996.37, while the Hang Seng fell 0.54% to 22,738.97.


In early trade today, WTI crude was up 0.69% to $51.19/bbl and Brent was up 0.39% to $54.10/bbl.


Food industry warns of higher prices without EU workers

The UK faces higher food prices without continued access to EU workers, 30 food and drink associations have warned. In a letter published in the Guardian, they argue that EU workers play an important role in the supply chain and some are already starting to leave. It called on the government to offer "unambiguous reassurance" about their right to remain. Nearly four million people are employed in everything from harvesting to production to selling food and drink. In food manufacturing just under a third of workers are from the EU. "Workers from the EU, some of whom are already leaving the UK, play a significant role in delivering affordable and high-quality food and drink," the letter said. "The government should offer unambiguous reassurance to EU workers throughout our supply chain about their right to remain. For the longer term, it is important to recognise that these workers are highly flexible and provide an essential reservoir of skilled, semi-skilled and unskilled labour."

Company news

Concepta (LON:CPT, 17.25p) – Speculative Buy

The UK healthcare company targeting the personalised mobile health market with a primary focus on women's fertility, yesterday announced that it has appointed Kevin Su Wei as its China Country Manager, based in Shanghai, with immediate effect. This appointment is in line with the Group's strategy of launching its myLotus product, targeted at women with unexplained infertility into its first international market, China, early 2017. Mr Su Wei has over 10 years' sales, distribution and opinion leader management experience in healthcare and specifically women's health. He has held management positions at Merck Millipore, the life sciences division of global healthcare player Millipore Corporation and at Inverness Medical (now Alere Medical), a leading innovative global diagnostics company.

Our view: The new China Country Manager will build Concepta's distributor network and lead the set-up of its Chinese subsidiary in line with the Group's growth projections. His past experience in China and with fertility products ideally positions him to build Concepta's brand and product presence. The wealth of experience he brings both in healthcare and specifically the women's healthcare market in China, that will be invaluable as Concepta launches its myLotus fertility product in the country early 2017. Beyond this, the Group's on-going development focus is on the UK and Europe, as it targets the product launch into its second international market towards the end of 2017. The market opportunity is large, with China alone expected to be worth £250m per annum, while gaining regulatory approval to address the EU is estimated to be even larger at around £350m. Within this, the global opportunity addressed by Concepta product offering is estimated to be worth as much as US$2 billion. Further out, its technology platform also opens a much wider opportunity for personalised monitoring and self-diagnosis. Beaufort reiterates its Speculative Buy rating on the shares, with a price target of 26p.

CyanConnode Holdings (LON:CYAN, 0.20p) – Speculative Buy

CyanConnode, the world leader in narrowband RF networks for Omni Internet of Things ('IoT') communications, yesterday announced a purchase order for a Panmesh smart metering pilot project in Sweden from E.ON, as well as a new order worth EUR230,000 from Landis+Gyr for a project in Finland. The order is comprised of CyanConnode gateways to enable its IPv6 6LoWPAN Panmesh solution in Hyllie, a new sustainable city district of Malmö, Sweden. CyanConnode's standards-based solution will support the initial pilot implementation of 400 smart electricity meters across the district. Panmesh is designed to support single and multi-application networks, delivering a versatile solution for current and future customer needs. As part of the Hyllie project, E.ON plans to add other smart city services to the pilot implementation, for example smart lighting control, environmental sensors and waste management solutions to become a full IoT implementation. E.ON is responsible for the distribution of power, gas and heat, serving about 1 million customers in Sweden.

Our view: Traction continues to grow internationally for smart metering! CyanConnode has been working with giant utility E.ON in Sweden since 2006, delivering a robust communication solution, based on the legacy C3 product, capable of meeting all Service Level Agreements. This Panmesh pilot project is the first one where the customer will deploy the full CyanConnode IPv6-based Panmesh solution as an evolution of their existing C3 deployment. Sweden is a leader in sustainability, with focus on supporting customers and communities to regulate their own energy consumption. This implementation is further evidence of the suitability of CyanConnode's offering for the European and global markets, with potential for a significant customer roll-out. In 2011, the City of Malmo and E.ON signed a Climate Contract for Hyllie under which they will jointly undertake to lay the foundation for Hyllie to become the Oresund region's most climate-smart city district and a global benchmark for sustainable urban development. When Hyllie is fully developed around 2030, the area is intended to comprise around 9,000 homes and nearly as many workplaces. CyanConnode's narrowband RF mesh technology provides E.ON with a complementary solution to support cellular networks as well as a city-wide network to connect multi-application devices at a low cost of ownership. Beyond this, the new order from Landis+Gry is for a legacy C3 solution, which has already been rolled out in volume at a large utility company in Finland since 2009. The order will commence delivery in early 2017, with all completed by the end of the first half of 2017. Recognising the global need for a rapid deployment of smart meters, CyanConnode has positioned itself to offer its benchmark solution to a very large number of large, long-term, truly international and exceptionally sticky customers. Recent equity issuance has built-up working capital that will be called upon by the Group in the coming months as it captures and facilitates larger contracts, such as the £10m initial order from Iran. Beaufort's assessment of the enlarged, post-raise, post-acquisition Group now suggests a valuation of some £125.3m. Accordingly, it keeps the shares on a Speculative Buy recommendation with a price target of 0.6p/share.

ValiRx (LON:VAL, 6.38p) – 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 announced that a patent ("Anti-Androgen Peptides and Uses Thereof in Cancer Therapy") covering its lead therapeutic compound VAL201 has been granted by the European Patent Office. The compound is currently in a "Phase I/II dose escalation study to assess safety and tolerability of VAL201 in the treatment of prostate cancer and other solid tumours", undergoing dose escalation and pharmacokinetic studies to assess its safety and tolerability in patients with advanced stage prostate cancer. The original patent and technology covering VAL201 is licensed by ValiRx from Cancer Research Technology for use in androgen resistant cancer. ValiRx has all rights to perform pre-clinical and clinical developments and obtaining regulatory approvals in all territories. ValiRx also has full, worldwide rights, control and benefits over the commercialisation and development of potential treatments.

Our view: The grant of this latest patent to the Group means that it now has patent protection for VAL201 in Japan, Europe and Australia, with further patents pending for the compound in significant markets across the rest of the world, alongside other granted and patents pending for the Group's therapeutic technologies world-wide. It supports the potential value of the compound and solidifies the opportunity for ValiRx's ongoing discussions with potential partners. Meanwhile, trial progress is proceeding successfully. To date, no dose limiting toxicity (DLT) has been observed, nor have any therapeutically related serious adverse events (SAE). Further, VAL201 has met and exceeds the predicted safety and tolerability criteria set for the trial and most of the patients who have completed the study showed stable disease on imaging following treatment, with more subjects still being followed. In addition, subjects on a realistic dose have shown significant changes in PSA levels related to their treatment with VAL201. Initial observations are that the clinical results correlate with the pre-clinical studies, which showed efficacy in prostate, breast and ovarian cancer models as well as addressing endometriosis or hormone induced abnormal cell growth in women. In anticipation of continuing progress with the Group's clinical trials for both VAL201 and VAL401, Beaufort retains its Speculative Buy recommendation on ValiRx.

National Grid (LON:NG, 916.60p) – Buy

National Grid, a UK and US based international electricity and gas group, yesterday announced that it has entered into an agreement to sell 61% equity stake in its National Grid Gas Distribution ('NGGD'), the UK's largest gas distributor servicing nearly 11 million households and businesses, to a consortium of long-term infrastructure investors ('consortium'), for a consideration of £3.6bn in cash and will also receive £1.8bn from additional debt financing. Upon completion of the transaction, National Grid said it intends to return £4bn of net proceeds to shareholders through the combination of a special dividend (together with a share consolidation) and share buybacks, of which at least £3bn are expected to be returned as a special dividend in Q2 calendar year 2017. The terms of the transaction values NGGD to approximately £13.8bn, and National Grid will own a 39% minority equity stake in a new holding company for NGGD ('GasD HoldCo'). Completion of the transaction is subject to merger clearance from the European Commission, and National Grid expects that the transaction will complete on or prior to 31 March 2017. The Group said it will announce nature and timing of the capital return in due course. National Grid's CEO, John Pettigrew, commented "Today's announcement follows a highly competitive sale process. The Consortium, has a long-term commitment to the UK with significant experience in owning infrastructure assets, and we look forward to working with them as the gas distribution business continues to deliver a safe and reliable service."

Our view: The agreement was structured to benefit shareholders. The Group declared its intention to return £4bn via special dividend and share buybacks (in addition to recently announced £155m buyback programme), while the Board also agreed a voluntary distribution of £150m for the benefit of energy consumers. Further to this, National Grid and the consortium have also expressed an interest to sell additional 14% of equity in GasD HoldCo on broadly equivalent financial terms to the transaction, for which the details will be announced when agreement is reached. The Group's interim results announced early last month, detailed adjusted operating profit of £1,851m, up +1%, adjusted pre-tax profit of £1,359m, down -1%, flat adjusted earnings per share and dividend of 15.17p per share, in line with last year. It also noted that performance is anticipated to remain in line with the expectations set out at the full year results in May 2016. The sale of NGGD will rebalance the diversity of National Grid's portfolio of businesses towards higher growth assets, whilst maintaining a strong balance sheet that supports its investment programme and a commitment to a progressive dividend policy of at least in line with the rate of RPI inflation each year for the "foreseeable future". The shares are valued at FY2017E and FY2018E P/E multiple of 14.4x and 14.0x along with dividend yield of 4.8% and 5.0%, respectively. Beaufort reiterates its Buy rating on the shares.

Smith (DS) (LON:SMDS, 419.10p) – Buy

DS Smith Plc, the leading supplier of recycled packaging for consumer goods, yesterday announced its half year results for the 6 months ended 31 October 2016 ('H1 FY2017'). During the period, on a reported basis, revenue advanced by +21% to £2,357m, adjusted operating profit rose +23% to £226m, pre-tax profit grew +60% to £146m leading adjusted earnings per share to improve by +21% to 16.4p, against the comparable period (H1 FY2016). On a constant currency basis, revenue was up +7%, adjusted operating profit rose +9%, pre-tax profit grew +32% and adjusted earnings per share therefore improved by +9%. Return on sales and ROACE both improved by +0.1% to 9.6% and 15.1%, respectively on a constant currency basis. Free cash flow stood at £182m (H1 FY2016: £143m), while net debt increased by £56m to £1,155m, reflecting £127m currency translation impact, with net debt to EBITDA reduced to 1.9x from 2.0x since end-FY2016. On the operational front, the Group acquired Creo (UK) and Deku-Pack (Denmark), both specialising in point of sale and display packaging. DS Smith's CEO, Miles Roberts, "the business has continued to demonstrate momentum and has performed well despite the challenging market, which is a demonstration of the strength of our business model." The Group declared an interim dividend of 4.6p per share, up +15%, to be paid on 2 May 2017.

Our view: DS Smith delivered strong financial growth during the H1 supported by a mixture of organic growth and favourable currency translation effect (+£243m), together with significant contribution from acquired businesses. All regions reported good constant currency growth, with 'Western Europe' enjoying revenues +10% and operating profit +33%, while 'Central Europe and Italy' saw revenues +12% and operating profit +24%. Organic corrugated box volumes grew +2.9%, ahead of Group's 'GDP+1%' target, reflecting continued success with pan-European FMCG and e-commerce customers. Return on sales remained at the upper end of its 8-10% target range. The Plastics business delivered positively with revenue growth of +4% and operating profit of +6%. Post the period, the Group has completed two Portuguese acquisitions, Gopaca, a corrugated packaging business, and P&I Display, a specialist display business. Additionally, the Group announced a proposed acquisition of Parish Manufacturing Inc., a US manufacturer and supplier of bag-in-box plastics packaging. The Group's ongoing investments continue to expand its geographical reach into fast-growing markets and strengthens its position. The result demonstrated Group's resilience against the challenging wider marketplace and, given its excellent track record of organic growth and successful M&A, we believe the shares deserves its premium rating. The shares are valued at FY2017E and FY2018E P/E multiples of 16.2x and 15.0x along with dividend yield of 3.0% and 3.2%, respectively. Beaufort reiterates its Buy rating on the shares.

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