In a position to scale

1Spatial 5 May 2016 Initiation

1Spatial

In a position to scale

Software & comp services

 

5 May 2016

Initiation of coverage

Price

5.28p

Market cap

£38m

Net cash (£m) at end January 2016

5.0

Shares in issue

712.0m

Free float

85%

Code

SPA

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.0

2.4

7.5

Rel (local)

3.3

3.7

20.7

52-week high/low

7.25p

4.00p

Business description

1Spatial’s core technology validates, rectifies and enhances customers’ geospatial data. The combination of its software and advisory services reduces the need for costly manual checking and correcting data.

Next event

AGM

July 2016

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Eric Opara

+44 (0)20 3681 2524

1Spatial is a research client of Edison Investment Research Limited

1Spatial has significant expertise and IP in the field of geospatial data, supplying some of the largest and sophisticated users of geospatial data globally. Historically, client engagements involved creating bespoke solutions, but management is now transitioning the business to drive repeatable product sales. Investment in executing this transformation significantly compresses earnings over our forecast period, but should create a platform to deliver scalable, operationally geared growth. Recent progress in the US and partnerships with leading mapping players Esri and HERE strengthen the company’s prospects for achieving this. We believe the current share price does not reflect this potential.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

EV/EBIT (x)

P/E (x)

01/15

19.6

1.8

0.27

0.0

15.1

19.7

01/16

20.7

2.5

0.29

0.0

11.3

18.0

01/17e

27.4

1.9

0.23

0.0

15.6

22.5

01/18e

28.1

2.3

0.29

0.0

12.4

18.3

Note: *PBT and EPS are normalised, excluding acquired intangible amortisation, exceptional items and share-based payments. EPS is fully diluted.

Modularising the product to leverage partner reach

1Spatial’s solutions enable customers to collect, manage, maintain, publish and interpret location-specific information. It has a particular strength in enabling the management and correlation of large volumes of data from different sources. The company’s core platform, 1Spatial Management Suite was launched in 2013 and provides a suite of GIS solutions sold directly to enterprises. More recently, the focus has been on modularising key applications so that they can be easily integrated into the offerings of major mapping software companies or enterprise database vendors to enable spatial databases to mesh with enterprise data sets.

GIS partners give significant potential to scale

1Spatial has signed strategic partnerships with two major mapping companies so far: Esri (with c 40% market share and over 350k enterprise/government customers) and HERE (previously Navteq). Forecasting the rate of growth is difficult, but the opportunity could be very significant. Our FY18 subscription estimate of £1m implies less than 0.2% penetration of Esri’s customer base. Additional investment in sales and marketing is being put in place to support partner sales but, once this is offset, subscription revenues should drop strongly through to earnings.

Valuation: Potential to scale not priced in

Our forecasts reflect the fact that investment in transforming the business model is negatively affecting FY17 EPS by at least 35%. Adjusting for this, we believe the valuation is substantially underpinned by the established businesses and that the company is establishing a strong platform to scale. Our DCF analysis suggests that penetrating a mere 0.22% of the global GIS user base would justify a 10p share price. We believe that positive newsflow regarding GIS partner customer uptake or new enterprise database partners are key catalysts for upside.

Investment summary
Company description: Big data for the geospatial industry

1Spatial’s core business is providing software and professional services for managing large-scale spatial data. Its customers include some of the largest and most sophisticated geospatial data users globally, including the US Census Bureau, Ordnance Survey Great Britain, United Utilities and many others. Over the past three years, management’s focus has been on migrating the company’s model from providing bespoke solutions to its customers to driving repeatable product sales, with a view to adding scalability to the business model and improving margins. The first component of this initiative involves productising the solution so that it can be sold on a more off-the-shelf basis, thus proportionately increasing the contribution from higher-margin licensing, support and maintenance sales. The second component is focused on developing ‘open technology’, ie modularising components of the platform so that they can be easily integrated with third-party GIS offerings. The company’s first two open technology partnerships are with Esri, the leading GIS platform supplier globally, and HERE (previously Navteq, which has also licensed 1Spatial’s technology). Both should start generating incremental revenues this year. Further partnerships with both GIS companies and enterprise database suppliers are being targeted and could further expand the opportunity.

Financials: Transitional period to drive scalable growth

1Spatial is still in a transitional phase, with the migration towards a product-centric subscription model suppressing growth and incurring significant investment costs. Our forecast of 6% EBITDA growth but a contraction in earnings in FY17 reflects a conservative stance on subscription revenue uptake, increased investment costs and rising R&D amortisation, with investment in transforming the business model negatively affecting FY17 EPS by at least 35%. However, strong licensing deal flow in H216 supported a strong recovery in financial performance following a weak H1, with H2 EBITDA of £2.8m up from £0.9m in H1. If such progress continues and the Esri partnership starts to gain good traction, we could see operationally geared upgrades. Looking longer term, successful execution on the shift to a standard product model should enable operating margins to expand to at least 15% from the 6.6% we forecast for FY17. Strong adoption of the company’s applications via its GIS partners could drive margins substantially north of 20%. Either scenario should result in sustained double digit earnings growth.

Valuation: Well underpinned, GIS partner uptake key to upside

We believe that 1Spatial’s valuation is substantially underpinned by its established businesses. If we strip out all associated revenues (£400k) and costs (£1m cash costs, £0.6m software amortisation) related to the open technology development from our FY17 estimates, our forecast EPS would be c 39% higher at 0.32p. On this basis, the company is rated at 16.5x its established businesses. A DCF stripping out all revenue and investment in open technology returns a fair value of 0.41p. This suggests the market is pricing in barely any value for the potential of GIS partner revenues which, given the size of the addressable market and 1Spatial’s strong partners, seems a very pessimistic scenario. Our DCF analysis suggests that penetrating a mere 0.22% of the global GIS user base by 2021 could drive a threefold increase in EPS and justify a share price of 10p.

Sensitivities: Licensee uptake, currency, investment

The key short-term sensitivity is the level of success of the Esri partnership, which is expected to start contributing this year and could transform earnings if adoption is widespread. Direct licensing sales of the core 1SMS platform can be significant in value but the timing is difficult to predict, which can add some volatility to the earning profile, as we saw in FY16.

Company description: Big data for mapping

1Spatial’s primary business is the provision of software and services for managing large-scale spatial data. The company’s client list includes users and creators of some of the largest geospatial databases on earth. These include national mapping agencies (eg the Ordnance Surveys of Great Britain and Ireland), utility companies (United Utilities), telecommunications companies (Vodafone), and government departments including emergency services (Metropolitan Police, ACT Emergency Services Agency), defence departments (Brazilian Army, Swedish Maritime Administration), government agencies (Environment Agency, US Census Bureau) and local governments (numerous UK county councils, Queensland Government).

The company’s engagement model traditionally involved carrying out significant amounts of bespoke work for clients. Management’s strategy is to drive the business around repeatable product sales, both to the company’s direct customers and to open up indirect channels through modularising key components of the technology so that they can be easily integrated into the solutions of leading GIS software and mapping companies.

GIS-related solutions account for around 80% of revenues with the cloud services accounting for the remaining 20%. Cloud services includes the legacy Avisen and Storage Fusion businesses, which provide IT services and storage solutions supplemented by Enables IT, a provider of cloud, managed and professional services, acquired in June 2015. The cloud services businesses operate independently from GIS, but also provide cross-selling opportunities and infrastructure/expertise to support GIS engagements.

The acquisition of Enables IT was made in June 2015 to support increasing demand for cloud based solutions and to strengthen the company’s IT capability support growth. The acquisition of a 73% share in Laser Scan provides 1Spatial with stronger distribution, relationships and certifications to support growth in the US.

A comprehensive, modular spatial data management suite
1Spatial Management Suite (1SMS)

1Spatial’s plans for migrating to a more product/IP-centric business model are based around its proprietary modular GIS software solutions. The core platform, 1SMS was launched in 2013 and provides a spatial data management solution that interfaces with the company’s broader suite of GIS applications to enable users to efficiently integrate, plan, maintain and publish large amounts of spatial data and to automate workflows.

“A single version of the truth”

A particular strength of the platform is its ability to correlate large amounts of data from a wide variety of sources to create and maintain a single accurate database that meets the client’s requirements. This capability is enabled by the company’s proprietary rules engine, which enables the identification of errors in the data (validation), the automatic resolution of errors (resolution) and optionally enhances the data with additional information from other sources.

A growing IP base of spatial data rule sets

The company’s rules engine is a core component of 1Spatial’s IP and one of the key attractions of its business from an investment standpoint. At its most basic level, the rules engine essentially digitises the rules that cartographers historically kept in their rule books to ensure the integrity of data. The set of rules is continually being expanded and enhanced as the company’s solutions are deployed more widely and used in more applications. This enables the company to translate its extensive expertise and market presence in spatial data management into a continually growing re-usable set of IP and a competitive advantage over consultancy-led competitors.

Validate, resolve and enhance

An example of how this might work is with the utilities industry. The positional data of each of the sewage and water pipes should obviously connect at the ends (‘nodes’), but the positional data in the database may have errors, which mean pipes appear disconnected. 1Spatial’s rule set can detect and correct most of these errors automatically, therefore removing the need for expensive and time-consuming manual verification.

1Spatial has developed rules engines for a number of verticals, which are a key part of its intellectual property and provide a sustainable competitive advantage. The rules can generally be extended to the desired level of accuracy to optimise the trade-off between time spent developing rules and the level of accuracy.

Exhibit 1: 1SMS product architecture

Source: 1Spatial, Edison Investment Research

Opening up the product portfolio

A typical engagement for 1Spatial will include a licence fees for the 1SMS software and whichever modules the client takes (typically perpetual), ongoing maintenance and support and revenue from consultancy services. These deals are typically sold directly and can be sizeable, worth £2m+ over a number of years. However, the scope of opportunity is limited by the fact that the market for core spatial data management systems is relatively saturated and existing systems (such as the market-leading Esri ArcGIS) are well embedded in their clients’ workflows. Rapidly scaling a business around a direct sales go-to market strategy also has significant cost implications.

For this reason, the key focus of investment has been in opening up the technology to enable the applications to be easily integrated with third-party GIS offerings, thus enabling customers to benefit from 1Spatial’s core strength in rectifying, validating and enhancing data without having to replace their underlying GIS platform. It also significantly expands 1Spatial’s addressable market and opens up potentially very scalable and profitable indirect sales channels.

This initiative started with the company’s 1Integrate product, an application built around some of the company’s core IP, which enables the management and correlation of large volumes of data from different sources. This is an area in which 1Spatial has a particular strength versus the large global GIS providers and an application that can generate very significant benefits in terms of productivity and accuracy of data. The company is now working on modularising other applications to broaden its open technology portfolio.

Exhibit 2: Business model transformation

Source: Edison Investment Research

Potential transformational contract with Esri

1Spatial announced its first and most significant open technology partnership with Esri in October 2014, with the first product 1Integrate for ArcGIS launched in H116. 1Spatial has been participating in Esri user conferences in the UK, Europe and the US over the course of FY16, and we expect the first sales to start coming through in FY17.

While it is clearly still early days in terms of gauging the potential impact of this partnership, it could be significant. Esri is the leading GIS supplier globally with an estimated 43% market share (source: ARC Advisory Group, March 2015) compared to just 11% for the next largest supplier. Esri has over 350k corporate customers globally (http://www.esri.com/about-esri#who-we-are), of which c10k customers are in the UK, which will be the initial focus for the 1Spatial partnership. Esri applications run on more than one million desktops.

We anticipate that 1Integrate will be charged at a rate of c £1,500 per user, per year. On this basis, 1Spatial would need to penetrate less than 0.2% of the estimated global customer base (with one seat per customer, whereas most are likely to license multiple seats) to generate £1m+ annual recurring revenue.

Technology licence and partnership with HERE

The company’s second open technology partnership with leading map provider HERE (previously Navteq, now owned by a consortium of German car manufacturers: VW Audi, BMW and Daimler) was announced in January 2016.

There were two elements to this relationship. HERE USA has become a direct customer for 1Spatial’s 1Integrate product in a deal worth US$1.1m. This will allow HERE to offer a more tailored version of its data through the use of the 1Spatial technology in an automated and repeatable process through change-only updates. The companies have also entered into a strategic partnership, similar to the one with Esri, whereby 1Spatial’s technology will be interfaced with HERE’s solutions to enable HERE’s clients to integrate their data with HERE’s maps.

Partnerships with enterprise database vendors could significantly expand the opportunity

Discussions are also underway with other potential partners. Importantly, these span both GIS-focused suppliers and established enterprise database/platform vendors to improve the integrity of spatial data in enterprise data sets and facilitate the integration of spatial data with the broader enterprise database. Success with the latter could potentially open up a much larger addressable market to 1Spatial. The integration of disparate data sets is a key focus of enterprise ERP, CRM or business intelligence vendors as they look to enhance efficiency and facilitate fast and informed decision-making. A successful partnership with a leading enterprise database or software supplier could open up a much larger, diverse customer base to 1Spatial, strengthening the company’s potential to drive strong scalable revenue and earnings growth.

Customer relationships with agenda setters could drive uptake elsewhere

1Spatial’s credentials are clearly supported by its client base, which includes some of the largest and most sophisticated users of geospatial databases on earth. In some cases, relationships with key agenda setters should also drive adoption by other companies in their ecosystem. The US Census Bureau is of particular note in this regard. 1Spatial has been engaged with the bureau, together with LSI (now consolidated) for some time, developing an automated conflation process to bring together geospatial data from varied sources. In January 2013 1Spatial announced that the group’s software and services were being used as part of an initiative to support the 2020 Decennial Census. We understand that c 4,000 third parties will be supplying data to the US Census Bureau including state government entities across the US. 1Spatial signed deals with two state US Department of Transport (DoT) agencies in February 2016 and has a number of others in the pipeline. While these relationships will take some time to mature, once they do so management estimates that each DoT could generate well in excess of $250k annualised revenue for 1Spatial. Consequently, the US Census Bureau has the potential to open up a very significant opportunity for 1Spatial by selling into multiple government agencies across all 50 states.

Acquisitions expand delivery capability and footprint

The company has made a number of acquisitions over the years (see Exhibit 3). In H116, the company completed two relatively small acquisitions – Enables IT and a strategic stake in Laser Scan to support the key strategic objectives of strengthening the company’s cloud delivery capability and building its presence in the US.

Exhibit 3: Acquisition history

Date

Acquisition

Consideration

Financial metrics

Description

Oct 2011

1Spatial

£4.7m (shares)

Revenue: £7.3m EBIT: £2.1m Net assets: £2.2m

1Spatial listed on AIM in October 2010. It was acquired by Avisen in October 2011. Shortly after, Avisen Group was rebranded as 1Spatial and GIS software and services became the core activity of the group.

May 2013

STAR-APIC

€5.0m (shares)

Revenue: €8m (€5.4m recurring) Net assets: €1.4m

Acquired to provide access to new markets including France and North Africa. STAR-APIC’s Elyx platform was built on the same core technology as 1Spatial’s, so can be integrated into 1Spatial’s management suite easily. The final 10% of STAR-APIC was acquired in January 2014 for €0.7m.

Jan 2015

Sitemap

£0.5m (cash)

N/A

Sitemap is an incubator-stage business that uses 1Spatial tools to provide data and services to customers across sectors. 1Spatial is currently investigating the sectors in which to launch products that will yield the best opportunity.

Feb 2015

Laser Scan (LSI)

$2.25m (cash)

Revenue: $3.4m Net profit: $0.9m

Laser Scan is the sole distributor of 1Spatial’s technology in the US. The acquisition therefore provided 1Spatial with stronger distribution, relationships and certifications to support growth in the US. 47% of Laser Scan was acquired in Feb 2015, but 1Spatial has the option to acquire the remaining 53% in two tranches in February 2016 (first one taken) and FY17 for a total deferred consideration of $2.55m, payable in cash or shares.

Jun 2015

Enables IT Group

£1.8m (shares)

(Six months to 31 March) Revenue: £2.8m EBIT: (£0.9m) Net assets: £1.8m

Enables IT is an IT solutions provider operating in the UK and US, which has developed its own proprietary cloud platform that operates from its US and UK data centres. The company’s data centres and managed service solutions will be used to provide cost-effective cloud services to 1Spatial’s group businesses as well as broadening its managed services and cloud services offering (see below for more detail).

Source: Edison Investment Research, Avisen, 1Spatial

Enables IT – enhancing cloud and managed services capability

Enables IT was acquired in June 2015 for £2.1m, specifically to enhance the company’s cloud and managed delivery capability. Enables IT is an IT consultancy operating in both the UK and US. It has developed its own proprietary, resilient cloud platform, HAVEN, running on two data centres – one in the US and the other in the UK. While Enables IT will continue to run as a cloud business in its own right, it also provides important support to the GIS business. Currently, most of 1Spatial’s deployments involve the software being installed on the client’s servers and infrastructure. This acquisition was made to support the provision of hosted managed services and cloud solutions. The capability is seen as being particularly important for supporting the open technology strategy whereby 1Spatial’s solutions work together with other GIS platforms.

Enables IT was listed on AIM before acquisition and had been struggling as a business in its own right, but now appears to be on a robust recovery path. Revenues for the six months to 31 March were £2.8m (of which 68% was recurring), down from £3.6m the year before, with an operating loss, pre-exceptionals, of £486k. For the seven and a half months to 31 January 2016, the business contributed £3.2m revenue and £0.6m to EBITDA. In January 2016, 1Spatial announced that Enables IT had secured a £3m contract with a large US healthcare provider, the bulk of which will be delivered in FY17.

Laser Scan: Platform for growth in the US

1Spatial has historically been underpenetrated in the Americas, but growing in the region, particularly the US, is a key strategic imperative. On 3 February 2015, 1Spatial acquired a 47% in Laser Scan (LSI) for £1.5m cash to support growth in the US. LSI was already the sole distributor for the group’s products and solutions across the Americas and the two companies have worked closely together on strategic accounts, including the US Census Bureau and the Brazilian Army.

Exhibit 4: 1Spatial’s FY16 revenue split by geography

Source: 1Spatial

The transaction secured 1Spatial’s presence in the US and, importantly, secures key relationships and certifications to enable the group to work directly with US government customers. Following the deal, the group announced a contract win of $1m to provide geospatial services to a US federal government agency.

With the transaction, 1Spatial secured a call option to acquire the remaining 53% of LSI in two tranches in February 2016 and February 2017, for the total sum of $2.6m. The first of these was taken up for a cash payment of $1.3m in February 2016, taking the stake to 73%. As a consequence, LSI is fully consolidated into our forecasts from that time on. It contributes £1.5m to our FY17 revenue forecasts with a small £210k operating profit contribution.

Geospatial market: Cross-sector applications

Geospatial data are data that relate to location; these data are growing in importance for a variety of different applications across sectors including defence, utilities, telecoms, national mapping, emergency services and government planning.

A large, growing addressable market

Estimates for the size of the overall GIS market vary significantly depending on what is included in the definition, although it is clear that this is a large and growing market. A 2013 report by Oxera estimated that the annual revenue generated by geospatial services globally totalled $150-270bn, although this includes manufacture of hardware such as satellite receivers and satellite navigation, as well as satellite imagery and electronic maps, so is a very broad definition. A 2012 Boston Consulting report estimated the US geospatial services industry at $75bn, growing at 10% annually and providing jobs for 500 000 people. Looking at the mapping/GIS platform market specifically, Esri co-founder Jack Dangermond stated in 2013 that revenues had reached $912m. Based on the company’s estimated c 40% market share, this implies a total market size of well over $2bn.

Developing an estimate for 1Spatial’s target market is equally difficult. However, it is very evident that the amount of GIS data to be managed is growing rapidly, for example the US Census Bureau has stated that the amount of data it needs to process is increasing by c 15% annually. As the volume of data grows, so does the need to integrate data from disparate sources to improve utility, enhance accuracy and open up new use cases. The integration of spatial data with enterprise and financial databases should further expand the market opportunity for integration solutions.

In conclusion, therefore, it seems evident that 1Spatial is not constrained by the size of market opportunity and does have the potential to scale significantly if it can maintain strong product differentiation and secure the right partners and channels. In Esri and HERE, we believe the company has already secured two of the most powerful potential partners available to the business.

Competition
USP: Focused spatial data management IP

1Spatial’s primary competition, when it comes to tendering for new business, is with IT service providers such as Wipro or Tata Consultancy Services. Whereas 1Spatial’s approach is to reduce manual labour through software automation, these players leverage their low-cost, offshore workforces to compete. 1Spatial maintains that its software-based/software-enhanced solutions can be more cost-effective and accurate than a more manual approach, both during the initial ‘heavy lifting’ phase of a project and particularly on an ongoing basis as data need to be managed.

Some of the leading mapping software companies do offer lighter-weight data validation tools to support their business, although they are not direct peers because their primary focus is GIS software rather than spatial data management. In other words, these companies focus on maps whereas 1Spatial’s focus is on data and validation. So, while suppliers such as Google Maps and Esri provide interfaces for users to add their custom information on top of the mapping base layer and software to help customers build applications from various data sources, these data very often need to be acquired from other third parties or collected internally. It is at this point that 1Spatial adds value, through providing software and services to efficiently and accurately manage the data collection, validation and correction, offering more advanced and flexible functionality, particularly when used in combination with the expertise and experience of 1Spatial consultancy services.

Exhibit 5: GIS software platforms and tools

Company name

Description

Esri

Esri’s core product is ArcGIS, which is the most dominant GIS software package globally with c 40% market share. It is a private company so detailed financials are not available, but its revenue is believed to be around $1.5bn. It provides data validation and analysis tools as part of its core software, but not the consultancy and advisory services that 1Spatial provides.

Hexagon Geospatial

Hexagon is a €12bn market cap, Stockholm-listed provider of geospatial and industrial enterprise applications, which acquired GIS software supplier, Intergraph in 2010 for $2.2bn. The geospatial enterprise solutions segment of the business was responsible for 50% of sales (€1.4bn) in FY14. It provides a suite of software tools that allow users to construct and manage maps and location data. It also provides hardware for collecting geospatial data.

Bentley

Bentley is a private US company that provides a comprehensive suite of software solutions for the infrastructure lifecycle. One of its software solutions is GIS and mapping software targeted at infrastructure professionals. As with other GIS software, it does include some data management functionality, but not in the same detail as 1Spatial’s solutions.

Safe Software

Safe Software provides software branded FME to manage the transformation of geospatial data to different formats. It also provides data validation and repair tools that will automatically repair data for simple scenarios. 1Spatial is a reseller of its FME software.

Fugro

Fugro provides geotechnical, survey, subsea and geosciences services. GIS data management is part of its offering, but is a small part of its overall business. It is listed in the Netherlands.

Autodesk

Autodesk’s core software package is AutoCAD. A Spatial Manager plug-in is available for managing spatial data. It has limited data validation and correction ability.

GE

GE offers a geospatial product called Smallworld, which offers much of the same functionality as Esri’s ArcGIS platform. It also offers a geospatial consulting arm called Smart Services, which provides services such as maintenance and support, implementation and training.

MapInfo

MapInfo is Pitney Bowes’s offering to the GIS market. It provides much of the same functionality as the solutions above. It also offers implementation and consultancy services for companies wanting to implement a geospatial system.

Company name

Esri

Hexagon Geospatial

Bentley

Safe Software

Fugro

Autodesk

GE

MapInfo

Description

Esri’s core product is ArcGIS, which is the most dominant GIS software package globally with c 40% market share. It is a private company so detailed financials are not available, but its revenue is believed to be around $1.5bn. It provides data validation and analysis tools as part of its core software, but not the consultancy and advisory services that 1Spatial provides.

Hexagon is a €12bn market cap, Stockholm-listed provider of geospatial and industrial enterprise applications, which acquired GIS software supplier, Intergraph in 2010 for $2.2bn. The geospatial enterprise solutions segment of the business was responsible for 50% of sales (€1.4bn) in FY14. It provides a suite of software tools that allow users to construct and manage maps and location data. It also provides hardware for collecting geospatial data.

Bentley is a private US company that provides a comprehensive suite of software solutions for the infrastructure lifecycle. One of its software solutions is GIS and mapping software targeted at infrastructure professionals. As with other GIS software, it does include some data management functionality, but not in the same detail as 1Spatial’s solutions.

Safe Software provides software branded FME to manage the transformation of geospatial data to different formats. It also provides data validation and repair tools that will automatically repair data for simple scenarios. 1Spatial is a reseller of its FME software.

Fugro provides geotechnical, survey, subsea and geosciences services. GIS data management is part of its offering, but is a small part of its overall business. It is listed in the Netherlands.

Autodesk’s core software package is AutoCAD. A Spatial Manager plug-in is available for managing spatial data. It has limited data validation and correction ability.

GE offers a geospatial product called Smallworld, which offers much of the same functionality as Esri’s ArcGIS platform. It also offers a geospatial consulting arm called Smart Services, which provides services such as maintenance and support, implementation and training.

MapInfo is Pitney Bowes’s offering to the GIS market. It provides much of the same functionality as the solutions above. It also offers implementation and consultancy services for companies wanting to implement a geospatial system.

Source: Edison Investment Research

Applicability across a range of vertical markets

The overall geospatial software industry covers numerous end-applications and vertical markets, with the main ones being utilities, telecoms, transportation and logistics. A summary of these opportunities is shown in Exhibit 6.

Exhibit 6: Target industries

Industry

Current customers

Description of application

National mapping

OS Ireland, OS Great Britain, Land Information New Zealand, Ministry of Lands and Housing (Botswana), Land and Property Services Agency (Northern Ireland)

National mapping is an important potential application for 1Spatial considering the volume and complexity of data that are collected at the national level. 1Spatial’s technology and services are clearly valued by OSGB, which has been a long-term customer, and this is likely to be a key selling point for other potential customers. The key growth driver in this sector will be building relationships with national mapping agencies globally. It has started to do this, as demonstrated by winning a contract in New Zealand.

Utilities

Northumbrian Water, Tecteo Group, KLIM-CICC, United Utilities, EDF

Utilities is a large potential sector as there are a large number of utility companies globally, which each control and manage a large volume of data that can change frequently. In mature utility networks the data are also not as reliable as one would expect, so there is substantial opportunity for 1Spatial to add value by reducing the amount of manual correction required.

Defence

Swedish Maritime Administration, Ministry of Defence (UK), Brazilian Army, United Kingdom Hydrographic Office

Accurate mapping is extremely important to the defence industry, particularly as the complexity and accuracy requirements of defence systems increase. They also use information from a variety of different sources and have complex spatial analysis requirements and therefore the expertise and validation and correction technology that 1Spatial can offer should be an attractive selling point.

Government

Staffordshire County Council, Environment Agency, US Census Bureau, Queensland Government, Barnsley Metropolitan Borough Council

There are many segments of governments that use spatial data such as housing and transportation planning authorities and therefore this could be another substantial sector for 1Spatial.

Telecoms

Verizon, Vodafone, Tecteo Group, Orange

Telecoms, like the utilities companies, have a broad range of assets that need to be monitored and maintained. Orange, for example, was looking for a tool that can be used by staff without any specific CAD skills that would enable the company to manage its building infrastructure. Although not specifically related to its telecoms assets, it does reflect the wide variety of applications for 1Spatial’s expertise and technology.

Emergency services

Australian Capital Territory, Metropolitan Police

The Australian emergency services agency contracted 1Spatial to implement a live incident mapping platform that updates every minute with incident information. The incident data were extracted from Oracle and transformed into spatial data that could be used by various mapping platforms including Google Maps. 1Spatial provides ongoing support.

Source: Edison Investment Research

Financials
Still in transition, but encouraging signs

1Spatial is still a business in transition, which is reflected in recent financial performance and our forecasts. In particular, growth, margins and cash generation are currently being negatively affected by the shift of technology teams from revenue-generating bespoke projects to product development and increased overall investment in product development. As we discuss later, we estimate that the net impact of the open technology initiative will be to dilute EPS by at least 35% in FY17.

Exhibit 7: H216 deal flow

Description

Value

Division

Date announced

Comment

Large US healthcare provider

£3m+

Cloud

27 January

Implementation completes 16 September and significantly boosts the Cloud division’s revenues this year. Followed by recurring managed cloud services.

HERE USA – open technology partnership

No fixed amount

GIS

11 January

Strategic open technology partnership.

Rolling contract with one of the UK's leading transport infrastructure operators

£0.5m

GIS

21 December

Bespoke solution. Transport/logistics is one of 1Spatial’s target verticals.

HERE USA licensing agreement – to supply to US federal government agency

$1.3m

GIS

8 December

1Integrate licence c <$0.3m recognised in FY16, then balance recognised over four years.

LSI contract with US federal government agency

$1m

GIS (LSI)

8 October

US$1m of which a significant proportion was delivered and recognised in FY16.

Source: 1Spatial, Edison Investment Research

However, we believe that there are signs that the benefits are now starting to come through. Following a quiet H1 for deal flow, momentum was much stronger in H2 (see Exhibit 7). Driven by strong licensing performance in H2, EBITDA for the six months was £2.8m vs £0.9m in H1. From a structural standpoint, the company enters FY17 with two open technology GIS partnerships in place, more developed cloud capability and a strengthened presence in the US.

Forecasts conservatively set, improving earnings quality

Our P&L model is shown in Exhibit 8. Group revenues declined by 11% organically in FY16, offset by the acquisition of Enables IT, which contributed £3.2m revenue and £0.6m to EBITDA over the seven and a half months from completion. The decline in geospatial revenues in FY16 reflects the currency headwind from sterling strength, some price pressure in France and Belgium, the exit from low-margin business in Australia, but also the redeployment of teams to focus on product development rather than revenue-generating bespoke customer developments. The latter factor continues to suppress our geospatial growth forecast in FY17, although we are forecasting the initial contribution from high-margin recurring subscription revenues by partners.

As we explore later, the rate of uptake by the customers of GIS partners is the greatest single factor influencing earnings growth and the valuation of the company. We believe our forecasts are conservative, but it is worth bearing in mind that, due to the annual subscription revenue model, the amount of revenue recognised in a year depends on the timing, as well as the number of new subscribers, as revenue is drawn down progressively over the course of the year.

GIS performance is boosted by the £3m healthcare contract in FY17e.

EBITDA growth offset by rising amortisation charges at operating profit level

We forecast 6% and 20% EBITDA growth for FY17 and FY18 respectively, driven by growth in higher-margin geospatial subscription, licence, support and maintenance revenues. This is despite increased investment in the central office and in sales and marketing to support GIS partner uptake. However, at the operating profit and EPS level, our earnings estimates reduce in FY17 before recovering in FY18. This reflects higher software amortisation and depreciation charges as the onset of initial subscription revenues triggers amortisation charges related to investment in the platform.

Exhibit 8: P&L model

Base case forecasts

2015

2016

2017e

2018e

Comments

Recurring subscription income from partners

400

1,050

FY17 estimate implies less than 0.07% share of Esri seats or equivalent.

Other geospatial

0

15,957

17,457

18,678.99

Consolidation of LSI (+£1.5m) benefit in FY17.

Total Geospatial revenue

17,934

15,957

17,857

19,729

Cloud Services

1,664

4,781

9,500

8,360

Boosted in FY17 by US healthcare provider contract.

Group revenue

19,598

20,738

27,357

28,088.99

Group Gross Profit

10,794

11,778

14,625

16,044

Group gross margin

55%

57%

53%

57%

Compression in HY17 due to contribution from lower margin healthcare contract.

Adjusted EBITDA

Geospatial

5,105

4,659

4,783

5,684

Cloud Services

453

1,123

1,535

1,470

Central

(2,506)

(2,105)

(2,421)

(2,469)

Group EBITDA adj

3,052.0

3,677.0

3,897.0

4,684.9

Group EBITDA margin

16%

18%

14%

17%

D&A

(1,195.0)

(1,192.0)

(2,100.0)

(2,421.3)

Rising depreciation and software amortisation charges.

Normalised operating income

1,857.0

2,485.0

1,797.0

2,263.6

Margin

9%

12%

7%

8%

Adjusted EPS Diluted (p)

0.27

0.29

0.23

0.29

Excludes exceptional costs, amortisation of acquired intangibles and share based payments.

Source: Edison Investment Research, Company data

Successful transition should drive substantial earnings growth

Given 1Spatial’s model is still in a transitional phase and demand via GIS partners is untested, we have set our estimates at what we believe to be a prudent level. However, successful execution of the transition to repeatable software sales should drive substantial margin expansion and earnings growth.

Established software businesses typically generate operating margins in the 15-20% range (see Exhibit 9) versus our estimates of 6.6% for FY17 and 8.1% FY18 for 1Spatial. Companies who successfully exploit indirect channels through embedding their software in third-party offerings can enjoy margins significantly higher than 25%, due to the scalability of this model (eg ARM with 50% operating margins). In reality, however, substantial reinvestment in technology is required to sustain these models, meaning that 25% should be considered a very successful outcome.

Open technology subscriptions offset related costs at £3m pa

The company plans to increase sales and marketing spend by c £1m pa to support sales through GIS partners, while it is currently investing c £2m in open technology product development. Consequently, subscription revenues need to grow above £3m to become cash flow accretive but, once this threshold is crossed, incremental revenues will drop strongly through to earnings and cash flow.

Exhibit 9: Sensitivity analysis – FY21e financial performance based on varying subscription revenue levels though GIS partners

Subscribers

2,000 (base case)

3,200

4,800

6,500

8,500

Est. share of global GIS users

0.09%

0.15%

0.22%

0.30%

0.39%

Subscription revenues from GIS partners

3,000

4,800

7,200

9,750

12,750

Group revenues

34,118

35,918

38,318

40,868

43,868

EBIT

3,270

5,056

7,438

9,969

12,949

EBIT margin

10%

14%

19%

24%

30%

EPS (p)

0.41

0.61

0.88

1.17

1.51

EPS CAGR FY16-21e

7%

16%

25%

32%

39%

Source: Edison Investment Research. Note: £000s unless stated otherwise.

We believe it will take at 4-5 years to fully implement the business model transformation. In Exhibit 8 we run a sensitivity analysis on how varying levels of uptake through GIS partners could affect revenues, margins and EPS by FY21. Even with a modicum of success, expansion of margins to the mid-teens level would result in EPS more than doubling between FY16 and FY21 with a high-teens CAGR, while achieving mid-20s margins would triple earnings over this time.

Balance sheet and cash flow

1Spatial had £5.0m of cash at the end of January 2016 with no debt. We are forecasting continued cash outflows in FY17 while the company transitions its model, invests significantly in product development and acquires the remaining stake in LSI, before turning marginally cash flow positive in FY18. We are forecasting £3.6m in total capex – £500k PPE and capitalised development of £3.1m in FY17. While capex is likely to drop back, we assume capitalised development costs will grow slowly over our forecast period. These costs are amortised over two to five years.

The company saw a £0.98m working capital outflow in FY16, largely because the surge in deal flow in December and January did not leave time for cash to be collected. Beyond this, we assume a broadly neutral working capital profile, although the shift towards subscription revenues, where cash is often paid annually in advance and revenue is drawn down over the year, may create a more positive cash-generation profile.

On the basis of these forecasts, the company consumes c £2.5m cash (including £930k paid for the LSI stake) in FY17, but returns to positive cash generation in FY18. However, it is worth noting that the combination of our conservative subscription forecasts and ongoing heavy investment in product development makes for an extremely cautious cash generation forecast. If the opportunity for subscription revenues is seen as being more muted than previously thought, the investment in product development may well be pared back, while very strong uptake could prompt more significant investment.

Sensitivities

Transitional status reduces visibility: 1Spatial’s business model is still in transition, which reduces the visibility over future financial performance. In particular, we highlight that the transition from bespoke projects to higher-margin licensing and recurring subscription, support and maintenance may come at the expense of headline top-line growth, but should ultimately result in a more scalable, higher-quality earnings profile.

Success of open technology strategy: while 1Spatial is currently investing in sales and marketing support for its partnerships with GIS software providers, once these are offset incremental revenues should drop strongly through to earnings. While we are aware of the dangers of building forecasts on small percentages of large numbers, the robust uptake by Esri clients (estimated one million individual users globally) could substantially enhance 1Spatial’s margins, earnings and cash flows.

Large direct customer engagements: outside the open technology strategy, 1Spatial’s direct engagements with clients can be sizeable and timing difficult to predict when deals close. The migration of the business towards software licensing could add volatility to the company’s earnings due to the higher component of high-margin licensing revenue being recognised upfront. The strong H2 weighting of operating profit earnings in FY16e is symptomatic of this.

Acquisition strategy: management has taken an acquisitive approach to growth and therefore the price paid for acquisitions and the level of success in integrating them are key to determining the value created for shareholders.

Currency: 1Spatial reports in sterling and its cost base is sterling weighted, but in FY15 only 39% of revenues came from the UK and this should reduce as the company builds its presence in the US with LSI. The strength of sterling versus the euro, Australian dollar and other currencies negatively affected revenues by £0.7m (7%) and EBITDA by £0.2m (10%) in H116.

Valuation
Little potential from GIS partnership subscriptions priced in

On a headline P/E basis, 1Spatial’s shares are rated at a slight premium to the company’s UK software and service peers, but at an 8% discount to GIS peers that operate primarily product-based business models and enjoy margins at the high-teens, low-20s level.

However, while this headline valuation metric might influence share price performance, we do not believe it is a good fundamental measure for valuing the business. 1Spatial’s forecast margins and earnings are significantly compressed by the transition process, and the company is currently capitalising substantially more development cost (£3.0m estimated for FY17) than the amortisation charge (£1.5m for FY17).

Established business underpins valuation

If we strip out all associated revenues (£400k) and costs (£1m cash costs, £0.6m software amortisation) related to the open technology development from our FY17 estimates, our forecast EPS would be c 39% higher at 0.32p. On this basis, the company is rated at 16.5x its established businesses. Given that the company’s peer group of UK software and managed service providers trades at 19x current and 17x one year forward earnings (see Exhibit 10), we believe that much of the current valuation is underpinned by the established businesses.

Exhibit 10: Peer group comparison

Company

 

Reporting currency

Share price (local)

Market cap (local m)

Current EV/Sales (x)

Next EV/Sales (x)

Current P/E (x)

Next P/E (x)

Current EBIT margin

Next EBIT margin

Spatial systems software

 

 

 

 

 

 

 

 

 

 

1Spatial

 

GBP

5.3

38

1.0x

1.0x

22.5x

18.3x

6.6%

8.1%

Hexagon

 

SEK

310.0

106,855

4.1x

3.9x

20.8x

18.9x

23.6%

24.4%

Trimble Navigation

 

USD

23.5

5,923

2.7x

2.6x

19.7x

16.8x

17.6%

20.4%

Nemetschek

 

EUR

47.0

1,810

5.6x

5.0x

36.2x

30.9x

19.6%

20.8%

Average

 

 

4.2x

3.8x

25.5x

22.2x

UK software, services and managed services

 

 

 

 

 

 

 

 

 

 

First Derivatives

 

GBP

1,755.0

425

3.9x

3.5x

35.4x

31.1x

13.7%

13.4%

IS Solutions

 

GBP

128.0

47

2.7x

2.4x

16.8x

14.4x

19.6%

20.1%

K3 Business Technology Group

GBP

352.0

355.0

128

1.6x

1.5x

15.0x

13.3x

11.6%

SDL

 

GBP

411.3

334

1.3x

1.2x

18.0x

15.4x

8.2%

9.3%

SCISYS

 

GBP

69.5

20

0.6x

0.5x

11.2x

9.9x

6.7%

7.0%

Iomart

GBP

275.0

294

4.0x

3.6x

19.4x

15.5x

26.4%

28.0%

Average 

 

 

2.3x

2.1x

19.3x

16.6x

Source: Bloomberg Consensus, Edison Investment Research. Note: Prices as at 4 May 2016.

This also suggests that the market is pricing in very little of the potential stemming from the company’s open technology development and platform. Given the size of the addressable market, the company’s two attractive partners and IP, we feel that this is very conservative, especially given that the company could pare back development costs and milk cash flows if it were to focus on near-term returns over longer-term prospects.

We believe that positive newsflow regarding GIS partner customer uptake, and the extension or addition of new GIS software providers could be catalysts for earnings and share price upside.

DCF scenarios: Upside from even relatively modest GIS partner uptake

Our DCF scenario analysis suggests that the market is pricing in that subscription-based revenue growth will drive margins to the high-teens level by 2021. As Exhibit 11 shows, this could be achieved by penetrating only a tiny fraction (c 0.2%) of the estimated global GIS user base. This analysis also assumes that 1Spatial continues to grow investment in developing GIS products, meaning that subscription revenues need to grow to £3m+ before positively contributing to earnings and cash flows. Reducing investment once the current phase is largely complete, or if demand remains relatively muted are both very creditable options. A DCF stripping out all revenue and investment in open technology returns a fair value of 0.42p (not illustrated in Exhibit 11), again suggesting that the current valuation is substantially underpinned by the established businesses.

Exhibit 11: DCF sensitivity analysis

Financial performance in 2021 (£000s unless stated otherwise)

Subscribers

2,000

3,200

4,800

6,500

8,500

Est share of global GIS users

0.09%

0.15%

0.22%

0.30%

0.39%

Subscription revenues through GIS partners

3,000

4,800

7,200

9,750

12,750

Total group revenues

34,118

35,918

38,318

40,868

43,868

EBIT

3,270

5,056

7,438

9,969

12,949

EBIT margin

10%

14%

19%

24%

30%

EPS (p)

0.41

0.61

0.88

1.17

1.51

EPS CAGR FY16-21e

7%

16%

25%

32%

39%

Fair Value at WACC (p)

8%

5.6

8.8

13.1

17.6

22.9

9%

5.0

7.8

11.5

15.5

20.2

10%

4.4

6.9

10.3

13.9

18.1

11%

4.0

6.3

9.3

12.6

16.4

12%

3.6

5.7

8.5

11.5

15.0

Source: Edison Investment Research

Exhibit 12: Financial summary

£'000s

2014

2015

2016

2017e

2018e

31-January

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

17,266

19,598

20,738

27,357

28,089

Delivery costs

(9,063)

(8,804)

(8,960)

(12,732)

(12,045)

Gross Profit

8,203

10,794

11,778

14,625

16,044

EBITDA

 

 

2,134

3,052

3,677

3,897

4,685

Operating Profit (before amort. and except.)

1,450

1,857

2,485

1,797

2,264

Acquired Intangible Amortisation

0

(255)

(709)

(900)

(900)

Exceptionals

(1,787)

(2,345)

(1,140)

(500)

0

Share based payments

(601)

(723)

(1,398)

(1,177)

(1,177)

Operating Profit

(938)

(1,466)

(762)

(780)

187

Net Interest

(29)

(56)

(31)

74

37

Profit Before Tax (norm)

 

 

1,421

1,801

2,454

1,871

2,301

Profit Before Tax (FRS 3)

 

 

(967)

(1,522)

(793)

(706)

224

Tax

10

5

805

141

(45)

Profit After Tax (norm)

1,421

1,801

2,033

1,671

2,056

Profit After Tax (FRS 3)

(957)

(1,517)

12

(565)

179

Average Number of Shares Outstanding (m)

541.9

650.4

691.3

712.0

712.0

EPS - normalised (p)

 

 

0.26

0.28

0.29

0.23

0.29

EPS - normalised and fully diluted (p)

 

0.25

0.27

0.29

0.23

0.29

EPS - (IFRS) (p)

 

 

(0.18)

(0.23)

0.00

(0.08)

0.03

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

47.5

55.1

56.8

53.5

57.1

EBITDA Margin (%)

12.4

15.6

17.7

14.2

16.7

Operating Margin (before GW and except.) (%)

8.4

9.5

12.0

6.6

8.1

BALANCE SHEET

Fixed Assets

 

 

15,731

15,781

22,074

24,503

25,034

Intangible Assets

14,019

14,729

18,859

21,488

23,796

Tangible Assets

1,712

552

1,638

1,438

1,238

Investments

0

500

1,577

1,577

0

Current Assets

 

 

18,083

16,831

16,202

13,699

13,547

Stocks

15

0

0

0

0

Debtors

6,861

7,453

10,815

10,815

10,500

Cash

11,165

8,250

4,996

2,493

2,656

Other

42

1,128

391

391

391

Current Liabilities

 

 

(9,664)

(9,716)

(11,030)

(10,144)

(10,544)

Creditors

(9,612)

(9,474)

(11,030)

(10,144)

(10,544)

Short term borrowings

(52)

(242)

0

0

0

Long Term Liabilities

 

 

(2,032)

(1,888)

(1,579)

(1,579)

(1,579)

Long term borrowings

(268)

(191)

0

0

0

Other long term liabilities

(1,764)

(1,697)

(1,579)

(1,579)

(1,579)

Net Assets

 

 

22,118

21,008

25,667

26,479

26,458

CASH FLOW

Operating Cash Flow

 

 

(2,231)

353

(771)

1,811

4,700

Net Interest

(29)

(56)

179

74

37

Tax

10

5

(105)

141

(45)

Capex

(2,292)

(2,621)

(3,800)

(3,601)

(3,601)

Acquisitions/disposals

(3,875)

(500)

(1,498)

(928)

(928)

Financing

16,095

(209)

3,092

0

(0)

Dividends

0

0

0

0

0

Net Cash Flow

7,678

(3,028)

(2,903)

(2,503)

163

Opening net debt/(cash)

 

 

(3,167)

(10,845)

(7,817)

(4,996)

(2,493)

HP finance leases initiated

0

0

0

0

0

Other

0

0

82

0

0

Closing net debt/(cash)

 

 

(10,845)

(7,817)

(4,996)

(2,493)

(2,656)

Source: Company accounts, Edison Investment Research

Contact details

Revenue by geography

Tennyson House Cambridge Business Park Cambridge CB4 0WZ UK +44 (0) 1223 420414 Website: 1spatial.com

Contact details

Tennyson House Cambridge Business Park Cambridge CB4 0WZ UK +44 (0) 1223 420414 Website: 1spatial.com

Revenue by geography

Management team

CEO: Marcus Hanke

CFO: Claire Milverton

Marcus Hanke has been 1Spatial’s and its predecessor Avisen’s CEO since 2006. He started his career at PwC and qualified as a chartered management accountant before working in consulting at KPMG and Deloitte. He also formed an independent performance management company, which was acquired by Cognos in 2004.

Claire Milverton joined the board in April 2010. Prior to this, she was the group financial controller at Xploite, a company acquired by 1Spatial in 2010. Claire joined Xploite, having previously been a senior manager at PwC. Claire has had a number of years of experience in the technology industry and is a chartered accountant and a Fellow of the Institute of Chartered Certified Accountants.

Interim chairman: David Richards

David Richards is CEO and co-founder of WANdisco, which he founded in Silicon Valley in 2005. He sits on a number of advisory and executive boards and has extensive experience in developing and growing a business

Management team

CEO: Marcus Hanke

Marcus Hanke has been 1Spatial’s and its predecessor Avisen’s CEO since 2006. He started his career at PwC and qualified as a chartered management accountant before working in consulting at KPMG and Deloitte. He also formed an independent performance management company, which was acquired by Cognos in 2004.

CFO: Claire Milverton

Claire Milverton joined the board in April 2010. Prior to this, she was the group financial controller at Xploite, a company acquired by 1Spatial in 2010. Claire joined Xploite, having previously been a senior manager at PwC. Claire has had a number of years of experience in the technology industry and is a chartered accountant and a Fellow of the Institute of Chartered Certified Accountants.

Interim chairman: David Richards

David Richards is CEO and co-founder of WANdisco, which he founded in Silicon Valley in 2005. He sits on a number of advisory and executive boards and has extensive experience in developing and growing a business

Principal shareholders

(%)

Hargreave Hale

18

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J O Hambro Capital Management

11

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Legal & General Investment Management

8

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Liontrust Asset Management

6

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Mike Sanderson

5

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Marcus Hanke

4

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M&G Investments

4

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Companies named in this report

Hexagon AB (HEXAB.SS), Fugro (FUR.NA), IS Solutions (ISL.LN), Computacenter (CCC.LN), K3 Business Tech (KBT.LN), Phoenix IT (PNX.LN), SCISYS (SSY.LN)

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As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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United Kingdom

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10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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