Shore Capital Group — Diversified business model

Shore Capital Group — Diversified business model

Since its flotation in 2000, Shore Capital has navigated a number of market cycles, generating operating profits throughout this period. More recently, it has continued to grow its franchise, adding further corporate clients and increasing assets under management in the first half of the current year, helped by investment to support client service. Equity market conditions have become more difficult but this has already been reflected in a weaker share price, which now stands below book value, suggesting significant potential upside on a longer-term view.

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Shore Capital Group

Diversified business model

H118 results

Financial services

14 December 2018

Price

225p

Market cap

£49m

Net cash (£m) end-June 2018

18.7

Shares in issue

21.6m

Free float

40.8%

Code

SGR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(8.2)

(11.8)

8.4

Rel (local)

(5.2)

(5.4)

18.8

52-week high/low

285p

205p

Business description

Shore Capital Group is an independent investment group with three main areas of business: Capital Markets, Asset Management and Principal Finance (on-balance sheet investments). It has offices in Guernsey, London, Liverpool, Edinburgh and Berlin, and has over 160 staff serving 75 retained corporate broking and advisory clients.

Next events

AGM

December 2018

FY18 results

March 2019

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

Shore Capital Group is a research client of Edison Investment Research Limited

Since its flotation in 2000, Shore Capital has navigated a number of market cycles, generating operating profits throughout this period. More recently, it has continued to grow its franchise, adding further corporate clients and increasing assets under management in the first half of the current year, helped by investment to support client service. Equity market conditions have become more difficult but this has already been reflected in a weaker share price, which now stands below book value, suggesting significant potential upside on a longer-term view.

Year end

Revenue (£m)

PBT
(£m)

EPS**
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15*

42.0

11.7

26.1

0.0***

8.6

0.0

12/16

39.4

2.4

5.8

5.0

39.0

2.2

12/17

41.9

4.6

12.8

10.0

17.6

4.4

12/18e

42.2

4.1

11.5

10.0

19.6

4.4

Note: *2015 figures include radio spectrum sale. **Fully diluted. ***There was a £10m share buyback in 2015.

Recent trading: Diversification a positive factor

Shore Capital reported interim figures in mid-September. Group revenue and pre-tax profits were up 6.5% and 2.8%, respectively. Capital Markets generated lower revenue and profit, however, corporate clients were added, research coverage increased and a high level of institutional take-up for the research and sales service achieved. Since the period end, Shore Capital’s appointment as joint broker to FTSE 100 constituent, Marks & Spencer, is a notable client win. Growth in AUM, revenue and profit in Asset Management were sufficient to generate the overall increase at the group level. The next phase in the strategy for growth here is to leverage the track record established in private client tax-efficient products for institutional investors. A step in this direction has been reported this month with the commitment of £200m of institutional funding for property development finance.

Background and outlook

The recent fall in equity markets and increased volatility creates a more challenging background for Shore Capital and particularly for Capital Markets as corporate decisions on equity issuance and M&A activity may be delayed. Nevertheless, activity continues and a resolution of some of the macro uncertainties could prompt a sharp bounce-back in corporate activity. Asset Management appears well positioned to grow further and is itself diversified with both property and equity related streams of income.

Valuation: Below book

As noted, the share price currently trades below book. Our ROE/COE model suggests that, on one set of assumptions, the current share price is discounting a return on equity of c 7% (see page 7). While this is above the H118 level of 5.5%, it is not dissimilar to historical average levels and on a longer view could be surpassed, given a more favourable market background and further growth in Asset Management.

Entrepreneurial investment group

Shore Capital describes itself as an independent investment group. Its two main operating activities are the Capital Markets and Asset Management businesses, while the Principal Finance activity makes opportunistic on-balance sheet investments on a highly selective basis. Over the five years to end-2017, the businesses have contributed 68%, 24% and 8% to revenues, respectively (Exhibit 1).

Exhibit 2 shows how the diversification of the group has supported the overall level of revenue generated, the strong growth in asset management revenues (from £7.3m to £12.9m) and the potential for Principal Finance to make a significant episodic contribution (over £9m in 2015 related to the profit on sale of radio spectrum licences by an investee company).

Exhibit 1: Revenue analysis – average 2013-17

Exhibit 2: Five-year revenue evolution

Source: Shore Capital Group, Edison Investment Research

Source: Shore Capital Group, Edison Investment Research

Exhibit 1: Revenue analysis – average 2013-17

Source: Shore Capital Group, Edison Investment Research

Exhibit 2: Five-year revenue evolution

Source: Shore Capital Group, Edison Investment Research

Background

Founded by chairman, Howard Shore, in 1985.

Management indicates the operating companies have been profitable since the group listed in 2000.

The company has offices in Guernsey, London, Liverpool, Edinburgh and Berlin.

In 2017, the average number of employees was 163, split roughly 60/40 between Capital Markets and Asset Management, with the latter seeing greater growth to support the expansion of the activity.

Howard Shore and Graham Shore together own 54% of the company. In total, 59.2% of the ordinary shares are reported as not being in public hands. (All figures as at 28 September 2018.)

Most members of the senior management team have been with the company for a significant period. Co-chief executives Simon Fine and David Kaye joined the group in 2002 and 2006, respectively, and assumed their roles in 2017, at which point Howard Shore, as chairman, stepped back from operational duties to focus on the group’s strategy, developing new client relationships and investment opportunities.

Senior executives have bought minority shareholdings in subsidiaries engaged in the capital markets and asset management activities, providing incentive and alignment with external shareholders in the group. In the years since 2013, excluding 2015 in which there was a large item relating to the radio-spectrum sale, the non-controlling interests’ share of post-tax profits averaged 23%.

H118 results demonstrate diversification

The first-half results announced in mid-September highlighted the benefit of the diversity in the group’s activities. Normal fluctuation in activity levels for Capital Markets, together with the initial effects of implementation of MiFID II, meant a lower revenue and profit contribution from this division. However, a strong performance from Asset Management (and lower central costs) more than made up the shortfall, allowing both revenues and profits to move ahead at the group level (see Exhibit 3). Key features of the results included the following points (comparisons are with H117 unless stated).

Overall revenues increased by 6.5%, with Capital Markets down by 8.5%, but Asset Management 48.7% ahead as period-end assets under management increased from £810m to £915m (+13%).

These revenue movements were reflected in the divisional pre-tax profit contributions with Capital Markets £0.66m lower and Asset Management £0.88m higher. While the loss for Principal Finance was £0.27m higher versus H117, it was markedly lower compared with H217, a period that included a significant impairment charge (c £1.9m). Central costs were nearly 12% lower and stable compared with H217.

The tax charge was lower at 18% versus 23%, allowing growth of c 11% for basic and diluted earnings per share.

The interim dividend payment of 5p was maintained.

The balance sheet remained strong, with cash of £24.8m and investments in gilts, Puma funds, quoted equities and unquoted holdings totalling £15.1m. There is an undrawn £20m working capital facility. With debt of £6.1m, net cash stood at £18.7m.

Exhibit 3: H118 P&L summary with segmental analysis

£000s except where stated

H117

H217

H118

% change H118/H117

Revenue

Capital Markets

14,756

12,474

13,507

-8.5

Asset Management

4,904

8,002

7,290

48.7

Principal Finance

669

1,091

844

26.2

Group

20,329

21,567

21,641

6.5

Profit before tax

Capital Markets

3,387

1,806

2,742

-19.0

Asset Management

408

2,593

1,292

216.7

Principal Finance

(424)

(1,542)

(698)

64.6

Central/other

(876)

(775)

(772)

-11.9

Group

2,495

2,082

2,564

2.8

Pre-tax profit margin (%)

Capital Markets

23.0

14.5

20.3

Asset Management

8.3

32.4

17.7

Earnings per share

EPS basic (p)

6.7

6.3

7.4

11.1

EPS diluted (p)

6.6

6.2

7.3

10.8

Source: Shore Capital Group

Looking more closely at Capital Markets, the company reported that the retained corporate client base increased (in the 2017 annual report this was shown as over 70) with the addition of five new clients during the period (Sirius Minerals, Produce Investments, Savannah Petroleum, Cake Box and Echo Energy).

Since the results announcement, Shore Capital has been appointed as joint broker to Marks & Spencer. The first half saw the completion of a number of significant transactions including: joint bookrunner roles in a £198m placing of GVC shares on behalf of Playtech and a £70m placing for Dairy Crest; lead managing the readmission to AIM of Savannah Petroleum; acting as bookrunner, nomad and broker to the IPO of Cake Box Holdings, raising £16.5m; and acting as nomad, global coordinator and bookrunner in Applegreen’s acquisition of a majority stake in Welcome Break, including a placing raising €175m.

The group emphasises that it has continued to invest in servicing clients and has added to its corporate broking capabilities and research resources, including the addition of industrials to its core consumer and financial sector research coverage. Shore Capital is pleased with the take-up of institutional investors of its research services in the post-MiFID II period while noting, in line with other commentators, that all participants are still adjusting to the new environment for research and institutional sales services. Revenue in this area is not broken out separately but Cenkos in its half-year report covering the same period showed research revenue down 12% versus H117. The Shore Capital market-making activity continued to perform well in the first half, with revenues only slightly down on the prior-year period. It is one of the three largest market-makers on the London Stock Exchange.

For Asset Management, the 13% increase in AUM highlighted above arose from fund-raising in its private client business (Puma Investments) and valuation gains in the institutional portfolios. Assets under management have grown from £680m to £915m from the end of 2014 to the end of the first half, compound annual growth of 9%. The division provides a diversifying source of profits for the group and itself has a range of products with a range of asset class exposures; equity assets account for a minority of AUM.

Within the private client, tax-efficient investments area (Puma Investments) the Puma VCTs have raised cumulative funds of over £230m since 2005 and the latest fund, Puma VCT 13 remains open for investment. Puma enterprise investment scheme funds (managed by the same team as the VCTs) now have total assets of £70m, with the number of investments made standing at 13. The Puma Heritage company gives investors access to the property finance and construction team’s expertise in the provision of secured, first charge, prudent LTV loans made across commercial , residential and specialist areas within the property sector. The fund seeks to counter long-term inflationary pressures and is intended to provide investors with 100% relief from inheritance tax after two years. The AIM IHT service, which reached its fourth anniversary at the end of the period, also seeks to mitigate inheritance tax through investment in selected AIM stocks.

Shore Capital has many years of experience in providing finance for social care property. This has provided a network of contacts in the area and enabled it to partner with external funds investing in supported living accommodation and to offer a full service sourcing, structuring and negotiating acquisitions. Last year, Shore Capital made an investment in a supported living property portfolio (Puma Social Care Investments) alongside two US family offices. The portfolio was sold opportunistically later in the year, generating an IRR of 27%. In the first half of this year, a 75% stake in a company (EA Capital) investing in supported living accommodation was purchased for a cash consideration of £0.892m, in line with the net assets acquired.

Institutional asset management includes the management of Brandenburg Realty (focused on high-quality property in Germany), Puma Brandenburg (a diversified portfolio of properties in Germany) and St Peter Port Capital (a pre-IPO fund now in the process of realising its remaining investments). Activity for Brandenburg Realty included steps to obtain condominium title for three assets acquired at the end of 2017 and investment with Puma Brandenburg in Mixer Global (operator of co-working spaces founded in Tel Aviv, which is expanding geographically). For Puma Brandenburg, additional actions included work to add restaurants at one hotel investment and apartment conversions to provide further furnished accommodation. At St Peter Port Capital, the manager reported that investee companies had a more positive outlook but, on a prudential basis, two investments were written down to reflect illiquidity. The company’s life has been extended to July 2019 to allow further time to realise the remaining assets (net assets at end-March £12.1m).

The Principal Finance division reported that DBD, a company where it holds an investment and which holds 32 licences for radio spectrum in Germany, intends to challenge the German telecoms regulator's recent decision to withdraw the licences and offer licences for an alternative frequency band (albeit with fewer restrictions). The gross carrying value of the investment was unchanged at £2.2m.

Market background and outlook

In response to an uncertain global geopolitical and macroeconomic background, equity markets have seen a rise in volatility and a marked correction during October (UK equity market indices shown in Exhibits 4 and 5). The FTSE All-Share and FTSE Small cap indices were down 10% and 9%, respectively, over six months (at 3 December) while the FTSE AIM All-Share was down 14%. This creates a more challenging background for capital markets activities, potentially dampening new and further issuance activity.

Exhibit 4: FTSE 100 volatility index

Exhibit 5: FTSE AIM, All-Share and Small Cap indices

Source: Thomson Datastream

Source: Thomson Datastream

Exhibit 4: FTSE 100 volatility index

Source: Thomson Datastream

Exhibit 5: FTSE AIM, All-Share and Small Cap indices

Source: Thomson Datastream

While this is likely to be having an impact, it has yet to become clear in overall London Stock Exchange issuance figures, given that significant monthly variations are a normal feature of the market. For the year-to-date to end-October, the value of Main Market issuance was ahead of the prior-year period by 14%, while AIM was up a more modest 4%. For the month of October alone, Main Market issuance was up 4%, while AIM issuance did experience a substantial 47% fall versus October 2017.

Exhibit 6: LSE Main Market issuance

Exhibit 7: LSE AIM issuance

Source: LSE

Source: LSE

Exhibit 6: LSE Main Market issuance

Source: LSE

Exhibit 7: LSE AIM issuance

Source: LSE

More volatile markets could have a similar influence on the level and timing of M&A activity as corporates defer decisions on transactions. Conversely, an easing of uncertainty and stabilisation of markets could generate a bounce-back in activity. In this context, the continued growth in Shore Capital’s corporate client base and investment in servicing institutional clients should provide the basis for longer-term growth through market fluctuations.

On the Asset Management side of the group, the equity-exposed part of the business is clearly sensitive to market levels although this is only a small part of the business and the division has continued to accumulate assets under management, benefiting from strengthened distribution of tax efficient products in the IFA market. Looking ahead, the strategy is to make use of management expertise and the track record that has been established within the private client area to market to institutional investors, focusing initially on the property lending part of the business.

To this end, the group has announced (on 4 December) a new institutional funding commitment of up to £200m with funds advised by RoundShield Partners. Loans will be sourced and arranged by a newly incorporated company (Puma Property Finance), in which RoundShield is entitled to acquire a stake of up to 25% as funds are deployed. RoundShield may also be entitled to payments on exit. The funding will be used by the property finance teams to meet significant demand in existing areas of expertise, including residential developments, hotels, retirement living, student accomodation and care homes.

Financials

Our estimate for FY18 is detailed in the financial summary (page 8). We have assumed a marginal overall revenue increase (+0.8%) compared with FY17, with capital markets lower and asset management ahead, in line with the pattern seen in the first half. After a 5% increase in administrative costs, this results in a 9% reduction in pre-tax profits versus FY17 or 10% at the diluted earnings per share level (11.5p).

As noted above, the balance sheet remains strong with end-June net cash of £18.7m compared with £25.9m at the end of 2017, with the cash outflow primarily reflecting a £4m working capital outflow in the period (well within the historical range of half-yearly variation) and dividend payments to ordinary and minority shareholders.

Valuation

Our updated peer valuation is shown in Exhibit 8, which should be seen in the context of the significant differences between the companies as well as the potentially volatile and lumpy nature of earnings across the sector. While the Shore Capital P/E ratio is above the average, this is based on reported earnings and current market conditions are likely to put capital markets earnings under pressure. In these circumstances, Shore Capital is likely to benefit relative to peers from the earnings contribution from its asset management activity. The price to book ratio at 0.8x is below the peer average (1.4x) and its historical average level of 1.1x since end-2011.

Exhibit 8: Quoted UK broker comparison

Price
(p)

Market cap
(£m)

Last reported P/E ratio (x)

Price to book (x)

Yield
(%)

ROE
(%)

Shore Capital

225

48.5

17.6

0.8

4.4

4.8

Arden

30.5

9.4

9.2

1.0

0.0

N/A

Cenkos

61.5

34.0

4.7

1.3

14.6

15.6

Numis

269

289.2

10.7

2.0

4.5

19.3

WH Ireland

62.5

19.9

Loss

1.7

0.0

N/A

Average

10.6

1.4

4.7

13.2

Source: Bloomberg, Edison Investment Research. Note: prices as at 13 December 2018.

The strength of Shore Capital’s balance sheet has tended to depress the return on equity, which was 5.5% (annualised) at the interim stage. A catalyst for a move to a higher price-to-book valuation would be the expectation of a higher return on equity, potentially prompted by continued growth in the asset management business and more favourable conditions for capital markets activities. The output of a ROE/COE model shown in Exhibit 9 indicates the sensitivity of the valuation to different assumptions for cost of equity and return on equity. Other assumptions used here include growth of 3% and a book value per share of 270.5p. To match the current share price (225p at the time of writing) at a cost of equity of 8% would require an assumed return of equity of 7.2%, arguably a cautious assumption on a longer view and similar to the 2014–17 average (6.8%).

Exhibit 9: ROE/COE valuation output variations (value per share, p)

Cost of equity

7.0%

7.5%

8.0%

8.5%

10.0%

Return on equity

6.0%

203

180

162

148

116

7.0%

271

240

216

197

155

8.0%

338

301

271

246

193

9.0%

406

361

325

295

232

10.0%

473

421

379

344

271

Source: Edison Investment Research

Finally, in this section we show the recent share price performance for Shore Capital and the comparator stocks. Here, Shore Capital has demonstrated significantly greater resilience than the average, albeit standing 24% below its 12-month high following recent market weakness.

Exhibit 10: Share price performance comparison (%)

1 month

3 months

1 year

Year-to-date

From 12m high

Shore Capital

-8.2

-11.8

8.4

8.4

-23.7

Arden

0.0

-14.1

-43.0

-43.0

-46.0

Cenkos

-17.4

-36.9

-43.1

-42.8

-48.8

Numis

-8.8

-35.2

-13.6

-19.7

-40.1

WH Ireland

-18.3

-36.9

-49.0

-47.9

-59.4

Average

-10.5

-27.0

-28.0

-29.0

-43.6

Source: Bloomberg, Edison Investment Research. Note: prices as at 13 December 2018.

Exhibit 11: Financial summary

Year-end 31 December (£000s except where shown)

2012

2013

2014

2015

2016

2017

2018e

PROFIT & LOSS

Year to 31-Dec

Capital Markets

22,653

25,796

30,129

23,350

28,286

27,230

25,600

Asset Management

6,331

7,334

8,478

9,500

10,446

12,906

14,945

Principal Finance

3,837

2,635

1,968

9,102

676

1,760

1,690

Total revenue

32,821

35,765

40,575

41,952

39,408

41,896

42,235

Costs

(28,805)

(29,262)

(31,117)

(29,086)

(33,130)

(35,006)

(37,006)

EBITDA

4,016

6,503

9,458

12,866

6,278

6,890

5,228

Depreciation and amortisation

(1,114)

(1,102)

(1,064)

(1,039)

(1,046)

(892)

(814)

Share-based payments

(54)

0

(17)

(4)

(11)

(8)

(8)

Balance sheet impairments

(2,664)

(1,883)

0

Share of associates' results

0

805

0

Operating profit

2,848

5,401

8,377

11,823

2,557

4,912

4,406

Net interest

(321)

8

(68)

(126)

(152)

(335)

(260)

Other

0

0

0

0

0

0

0

Profit before tax

2,527

5,409

8,309

11,697

2,405

4,577

4,146

Tax

(494)

(1,100)

(1,804)

(1,002)

(554)

(912)

(761)

Non-controlling interests

(46)

(911)

(1,297)

(4,250)

(549)

(839)

(860)

Profit after tax (FRS 3)

1,987

3,398

5,208

6,445

1,302

2,826

2,525

Average number of shares outstanding (m)

24.2

24.2

24.2

23.8

21.8

21.7

21.6

Average, fully diluted no. of shares (m)

24.3

24.5

25.1

24.7

22.6

22.1

22.0

EPS (p)

8.2

14.1

21.6

27.1

6.0

13.0

11.7

EPS (p) fully diluted

8.2

13.9

20.8

26.1

5.8

12.8

11.5

Dividend per share (p)

5.0

8.0

10.0

0.0

5.0

10.0

10.0

EBITDA margin (%)

12.2

18.2

23.3

30.7

15.9

16.4

12.4

Operating margin (%)

8.7

15.1

20.6

28.2

6.5

11.7

10.4

NAV per share (p)

247.4

253.5

265.6

268.7

269.5

270.0

269.5

ROE (%)

3.4

5.6

8.3

9.2

2.2

4.8

4.4

BALANCE SHEET

Non-current assets

20,210

19,901

19,100

19,555

23,045

16,933

20,138

Intangibles and goodwill

4,436

4,406

4,002

2,222

2,516

2,610

2,613

Property, plant and equipment

11,669

10,897

10,969

10,864

9,423

7,699

7,428

Investments and other

4,105

4,598

4,129

6,469

11,106

6,624

10,097

Current assets

100,435

111,185

95,406

103,250

88,124

96,626

105,624

Bull positions

4,058

4,557

4,636

9,344

12,290

8,154

8,326

Cash

30,443

41,395

30,658

22,113

23,937

35,673

27,228

Debtors and other

65,934

65,233

60,112

71,793

51,897

52,799

70,070

Current liabilities

(43,441)

(52,883)

(32,445)

(45,972)

(33,316)

(46,323)

(55,646)

Bear positions

(1,395)

(1,033)

(846)

(946)

(765)

(1,017)

(564)

Short-term borrowings

(327)

(321)

(341)

(360)

(431)

(9,726)

(4,191)

Other current liabilities

(41,719)

(51,529)

(31,258)

(44,666)

(32,120)

(35,580)

(50,891)

Long-term liabilities

(10,817)

(9,241)

(9,640)

(9,791)

(10,768)

(66)

(2,060)

Long-term borrowings

(10,549)

(8,892)

(9,105)

(9,256)

(10,649)

0

(1,862)

Other long-term liabilities

(268)

(349)

(535)

(535)

(119)

(66)

(198)

Net assets

66,387

68,962

72,421

67,042

67,085

67,170

68,056

CASH FLOW

Net cash from operations

846

15,123

(7,181)

774

8,312

12,635

1,684

Fixed asset investment

(614)

(340)

(412)

(363)

(517)

(601)

(392)

Acquisitions/disposals

0

(1,731)

0

0

0

0

(826)

Other investing activities

93

297

211

7,121

(4,313)

4,099

(752)

Share issuance

0

0

0

0

0

1,530

0

Share purchases

0

0

0

(10,047)

0

(2,248)

0

Ordinary dividends

(604)

(2,175)

(2,175)

(1,208)

0

(2,167)

(2,158)

Other financing

(514)

230

(1,070)

(4,914)

(1,719)

(1,228)

(815)

Other

654

1,342

(574)

(530)

(1,894)

961

(1,958)

Net cash flow

(139)

12,746

(11,201)

(9,167)

(131)

12,981

(5,217)

Opening net (debt)/cash

19,696

19,567

32,182

21,212

12,497

12,857

25,947

FX

10

(131)

231

452

491

109

445

Closing net (debt)/cash

19,567

32,182

21,212

12,497

12,857

25,947

21,175

Source: Shore Capital accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Shore Capital Group and prepared and issued by Edison, in consideration of a fee payable by Shore Capital Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

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Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “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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New Zealand

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. 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 (i.e. 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.

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Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Shore Capital Group and prepared and issued by Edison, in consideration of a fee payable by Shore Capital Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Industrials

China Water Affairs Group — Strong performance delivers growth

Interim results confirmed that China Water Affairs Group (CWA) continues to grow rapidly. We remain optimistic about CWA’s capacity to extend this growth trajectory and see the 50% increase in the interim dividend payment as evidence of management’s confidence in the outlook. In our view, the rating of the shares does not reflect the growth prospects.

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