Findel — Extraordinary growth continues in peak period

Findel — Extraordinary growth continues in peak period

Product revenue growth of 12% in the last 10 comparable weeks is extraordinary in today’s retail climate and it underpins our reiterated 7% earnings growth forecast. With Education responding to turnaround measures, unencumbered by leases, and with the balance sheet strengthening further, Findel should logically be rated as one of the stronger retailers in the sector.

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Written by

Findel

Extraordinary growth continues in peak period

Interim results

Retail

29 November 2018

Price

222.00p

Market cap

£192m

Core net debt (£m) at 30 September 2018

81

Shares in issue

86.4m

Free float

69%

Code

FDL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.3)

(14.7)

44.3

Rel (local)

(12.3)

(7.5)

52.5

52-week high/low

302.00p

153.00p

Business description

Findel is a multi-channel retailer operating across the business-to-consumer and business-to-business market places. It is a market leader in the home shopping and educational supplies sectors in the UK.

Next events

Trading statement

Late January

Analysts

Paul Hickman

+44 (0)20 3681 2501

Kate Heseltine

+44 (0)20 3077 5700

Findel is a research client of Edison Investment Research Limited

Product revenue growth of 12% in the last 10 comparable weeks is extraordinary in today’s retail climate and it underpins our reiterated 7% earnings growth forecast. With Education responding to turnaround measures, unencumbered by leases, and with the balance sheet strengthening further, Findel should logically be rated as one of the stronger retailers in the sector.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

P/E
(x)

EV/EBITDA
(x)

03/17**

457.0

40.8

22.2

20.4

10.9

6.5

03/18

479.0

46.6

26.8

25.9

8.6

5.7

03/19e

506.6

51.3

28.5

27.7

8.0

5.2

03/20e

536.4

55.5

30.9

29.8

7.4

4.8

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. **53 weeks, restated.

Underlying progress strong in Express Gifts

Express Gifts’ product sales growth in the 10 weeks to Black Friday (23 Nov) was 12%, an outstanding performance in this retail climate, bringing ytd total revenue growth to 7.7%, which we expect to increase. The Studio platform offers unrivalled value, growing its customer base, from 1.8m to 1.9m y-o-y. However, because of timing, this progress is not apparent from H119 results. Neither is product gross margin progression, but we are confident that FY19 guidance of 125–175bp uplift will be met. H1 financial services revenues grew 8.7% y-o-y, with the number of customers rolling forward a balance up from 52.5% to 58%, demonstrating the attractiveness of the responsibly controlled consumer credit package.

Findel Education responds to turnaround measures

Following FY17’s repositioning, the customer base grew by 5% in the 12 months to September, with online order levels increasing from c 20% at September 2017 to c 55% at September 2018. Underlying revenue grew 0.8% y-o-y, although that was obscured by the known loss of Sainsbury’s ‘Active Kids’ and was achieved despite significant investment in price reductions to incentivise online customers.

Balance sheet: Continues to strengthen

Core net debt, close to peak, was down £9.1m y-o-y to £80.9m, despite expansion in credit receivables. During the first half the term of bank and securitisation facilities relating to credit receivables were extended to December 2020, and the securitisation facility limit raised £15m to £185m supporting future planned growth.

Valuation: 62% share price headroom

We make no significant change to forecasts, and therefore in principle our DCF valuation is unchanged at 401p. However, the other metric we consider is against sector ratings in relation to earnings growth. Here we must inevitably recognise that the sector has de-rated in recent months. As a result we value Findel on a peer-comparison basis at 319p, making a blended valuation of average of 360p (previously 428p). This is still a 62% premium to the current share price.

Interim results: Underlying growth masked by one-offs

H118 pre-tax profit was slightly higher at £11.6m against £11.4m in H117.

Exhibit 1: Summary of interim results

£m

H118*

H119

Growth

Express

174.8

180.7

3.4%

Education

49.7

47.5

-4.4%

Total revenue

224.5

228.2

1.7%

Operating profit

Express

15.7

14.7

-6.4%

Express operating margin

9.0%

8.1%

-9.5%

Education

3.3

2.2

-33.9%

Central costs

-3.2

-0.5

-83.1%

Total

15.8

16.3

3.3%

Operating margin

7.0%

7.1%

1.6%

Interest

-4.4

-4.7

5.9%

PBT

11.4

11.6

2.3%

Source: Findel. Note: *Restated.

Express Gifts and Findel Education both posted lower first half profit, which was compensated by lower central costs. However, all three were affected by non-comparable elements, and in particular Express Gifts lower result masks significant underlying growth:

Express Gifts: Product sales growth of 12% in last 10 weeks

Exhibit 2: Express results summary

£m

H118*

H119

Growth

Product

123.5

125.0

1.2%

Financial Services

51.2

55.7

8.7%

Overseas sourcing

0.1

0.0

-74.1%

Total revenue

174.8

180.7

3.4%

Product cost of sales

(82.1)

(83.7)

1.9%

FS cost of sales (bad debts)

(10.0)

(13.9)

39.7%

Sourcing cost of sales

(0.1)

(0.0)

-84.8%

Total cost of sales

(92.3)

(97.7)

5.9%

Gross profit

82.6

83.0

0.5%

Product margin

33.5%

33.0%

-1.4%

Gross profit margin

47.2%

45.9%

-2.7%

Marketing costs

(23.4)

(20.2)

-13.9%

Distribution costs

(17.5)

(17.5)

0.1%

Administration costs

(22.6)

(26.7)

17.7%

EBITDA

19.0

18.7

-1.7%

Depreciation and amortisation

(3.3)

(4.0)

20.5%

Operating profit

15.7

14.7

-6.4%

Source: Findel. Note: *Adjusted.

The H1 results of Express Gifts were affected as expected by the timing of the pre-Christmas marketing campaign compared with last year. In FY17 the campaign was skewed into September but in FY18 reverted to its normal phasing across the half year point. The FY17 timing, which had been adopted to accommodate the introduction of the Financier financial services platform, had accelerated product revenue growth in H117 to 15.8% (full year 9.6%). In H118 growth was 1.2%, but in the comparable 10 weeks leading up to Black Friday, which includes the start of the marketing campaign in both years, growth was 12%. Year-to-date total revenue growth is now 7.7% and we expect it to accelerate further in H2.

Active customers have increased from 1.8 million at H117 to 1.9 million at H118, and online ordering from 66% to 72% on a rolling 12-month basis showing further progress towards the company’s stated aim of becoming a digital-first retailer.

Product gross margin reduced 50bp as a result of the known termination in August 2017 of a shared services arrangement with Kleeneze, the former Findel subsidiary. Management still expects a margin improvement for the full year. Marketing costs reduced by £3.2m mainly as a result of the campaign timing differences described above.

Financial services revenues grew year-on-year by 8.7%, with an increase in the number of customers rolling forward a balance increasing from 52.5% to 58%, demonstrating the attractiveness of the personal credit facility. Naturally, accounts are closely controlled, with detailed credit management information having improved through the use of Financier. This greater capability, as well as further products under test, should mean the company is prepared for tightening regulation on the management of personal credit business.

Bad debt costs increased by £4.0m, which included the non-recurrence of a £2.5m benefit in FY17 from a change in strategy to sell on non-performing receivables at an earlier point, as well as a £0.8m current-year impact of IFRS 9, the International Financial Reporting Standard on financial instruments effective 1 January 2018.

After adjusting for the non-comparable items within marketing and administrative costs, total underlying cost increases were 1%, modest compared with total revenue up 3.4% and even more so against the underlying growth.

Findel Education: Growth in customers and underlying sales

Exhibit 3: Education results summary

£m

H118*

H119

Growth

Total revenue

49.7

47.5

-4.4%

Total cost of sales

(31.7)

(31.5)

-0.6%

Gross profit

18.0

16.0

-11.0%

Gross profit margin

36.2%

33.7%

-6.9%

Marketing costs

(2.0)

(1.6)

-18.6%

Distribution costs

(5.2)

(4.8)

-7.8%

Administration costs

(6.8)

(6.6)

-3.0%

EBITDA

4.0

3.0

-25.2%

Depreciation and amortisation

-0.7

-0.8

14.3%

Operating profit

3.3

2.2

-33.9%

Source: Findel. Note: *Adjusted.

There has been no slackening of the very tight conditions affecting schools’ budgets and in that context the measures adopted in FY17 have proved vital to reversing the previous business decline. In summary these are:

Digital: increasing online ordering to ease schools’ administration and aid customer loyalty.

Value: reducing prices to improve competitiveness.

Product: increasing direct sourcing from the Far East.

Profitability: simplifying the business and reducing costs to target a 10% operating margin.

Underlying revenue grew by 0.8% y-o-y, although that was obscured by previously announced cancellation of Sainsbury’s ‘Active Kids’ lines, and was achieved despite significant investment in price reductions to incentivise online customers

The UK customer base grew by 5% in the 12 months to September, with online ordering levels increasing from c 20% at September 2017 to over 55% at September 2018.

Gross margin slipped 250bp in H1 to 33.7%, although we expected this will narrow by the end of the year as a result of supply chain renegotiations and further range rationalisation. Operating cost savings were achieved in all categories and totalled £0.9m.

Management believes its plans for the division are on track. Although the trading effects of the initiatives will be more clearly seen as the school year progresses, these results are very promising, showing a 100% improvement in operating profit, of which only c 30% is the result of overhead cost savings.

Central costs: Reduction on non-recurrence of exchange loss

Central costs reduced from £3.2m in H117 to £0.5m as a result of the non-recurrence of unrealised foreign exchange losses relating to revaluation of Far East operations.

Balance sheet: Core bank debt eliminated

Core net debt, close to its seasonal peak, was £80.9m at end September, down by £9.1m year-on-year, despite the expansion in Express Gifts’ credit receivables.

Findel’s revolving bank facility and securitisation facility term were both extended during H1 to December 2020. The securitisation facility limit has also been increased by £15m to £185m to support anticipated growth.

The recent High Court decision on Guaranteed Minimum Pension liabilities is likely to mean an additional liability recognised in H219, which management estimates at 2–3% of total scheme liabilities (£104m at March 2018).

Forecast: No change

Guidance for the full year is unchanged and we make no material change to our forecasts.

The growth in Express Gifts’ customer base, as well as the current double-digit revenue growth supports our 8% product sales target. In addition, with the improvement in its credit information, the company is able to selectively service and incentivise its more sustainable credit customers while reducing the risk of compromising quality. One measure of this is that returns, once around 40%, have progressively fallen to single digits. In terms of margin, management is confident of at least achieving its product gross margin guidance for the year of 125–175bp improvement, helped by US dollar cover rates for its purchases that have improved to close to US$1.25/£1 for early 2019 compared with c US$1.40/£1 in the early months of 2018.

Valuation: Blend of DCF and peer comparison

We use a DCF projection to place a value on the longer-term income stream available to investors. We combine this with a peer group comparison of retail companies to take account of market valuations of earnings growth. These metrics identify significant valuation headroom.

DCF valuation of 401p: Quantifying future cash flows

As we make no significant change to our forecast assumptions, our DCF projection does not change. We assume a weighted cost of capital of 6.6% (risk-free rate 3%, risk premium 6%, beta 0.75, cost of debt 3.6% net), resulting in a valuation of 401p/share. We explained our approach in more detail in our June 2018 note Outstanding success with online-led strategy.

Peer comparison valuation of 319p: We reflect sector de-rating

While the recent problems of the retail sector quite largely reflect a residual over-dependence on bricks and mortar, which Findel does not participate in, and while we do not change our forecasts for Findel, we have to reflect the resulting de-rating in terms of a sector comparison.

In this metric we take the common-sense position that higher earnings growth merits a higher P/E ratio than the FY19e 8x on which the shares trade. We compare P/E with two-year compound earnings growth forecasts (CAGR). Based on the chart below, we would expect Findel’s 7% two-year compound EPS growth to command a year 1 P/E of 12x.

Exhibit 4: Retail stocks: P/E vs two-year EPS CAGR (2017–19e)

Source: Bloomberg, Edison Investment Research. Note: Trend line on a linear basis. Includes all stocks in FTSE General Retail and AIM retail indices, negative growth excluded. Valuation at 26 November 2018.

We adjust for the sector yield (weighted between the FTSE General Retail and AIM Supersector retail indices) of 3.95%. This produces a P/E of 11.5x and a comparative share valuation of 319p:

Exhibit 5: Findel comparative share valuation

Findel Yr 1 (2019e) EPS (p)

27.7

Multiple implied by chart (x)

12.0

Sector yield

3.95%

Adjusted multiple (x)

11.5

Implied share price (p)

319

Source: Edison Investment Research

As a result our valuation is a blend of DCF 401p and peer comparison 319p, an average of 360p (previously 428p). This is still, however, a 62% premium to the current share price.

Exhibit 6: Financial summary

£'000s

2017

2018

2019e

2020e

Mar

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

457,030

478,959

506,606

536,415

Cost of Sales

(269,182)

(280,230)

(301,615)

(318,370)

Gross Profit

187,848

198,729

204,991

218,045

EBITDA

 

 

40,786

46,569

51,287

55,538

Operating Profit (before amort. and except.)

 

33,300

38,146

42,426

46,577

Intangible Amortisation

(1,959)

(1,996)

(2,552)

(2,387)

Operating profit pre exc post intang amortisation

31,341

36,150

39,874

44,190

Exceptionals

(82,152)

0

0

0

Other/share based payments

(191)

(199)

(1,000)

(1,000)

Operating Profit

(51,002)

35,951

38,874

43,190

Net Interest

(8,920)

(9,130)

(10,345)

(12,244)

Derviatives, other

556

(4,701)

0

0

Profit Before Tax (norm)

 

 

22,230

26,821

28,528

30,946

Profit Before Tax (FRS 3)

 

 

(59,366)

22,120

28,528

30,946

Tax

1,659

2,081

(5,633)

(6,189)

Profit After Tax (norm)

17,617

22,397

23,895

25,757

Profit After Tax (FRS 3)

(57,707)

24,201

22,895

24,757

Average Number of Shares Outstanding (m)

86.3

86.3

86.3

86.3

EPS - normalised (p)

 

 

20.4

25.9

27.7

29.8

EPS - normalised and fully diluted (p)

 

20.4

25.9

27.7

29.8

EPS - (IFRS) (p)

 

 

(66.8)

28.0

26.5

28.7

Dividend per share (p)

0.0

0.0

0.0

0.0

Gross Margin (%)

41.1

41.5

40.5

40.6

EBITDA Margin (%)

8.9

9.7

10.1

10.4

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

7.3

8.0

8.4

8.7

BALANCE SHEET

Fixed Assets

 

 

79,012

81,687

84,288

84,940

Intangible Assets

26,185

25,175

28,947

28,560

Tangible Assets

44,417

47,596

46,489

47,528

Investments

8,410

8,916

8,852

8,852

Current Assets

 

 

301,265

311,918

340,599

366,809

Stocks

57,108

54,180

57,209

70,076

Debtors

212,648

231,037

246,609

258,384

Cash

29,173

26,244

36,459

38,027

Other

2,336

457

322

322

Current Liabilities

 

 

(91,789)

(81,190)

(85,158)

(91,249)

Creditors

(91,244)

(80,618)

(84,640)

(90,731)

Short term borrowings

(545)

(572)

(518)

(518)

Long Term Liabilities

 

 

(271,785)

(273,170)

(276,172)

(273,672)

Long term borrowings

(253,603)

(258,001)

(264,192)

(264,192)

Other long term liabilities

(18,182)

(15,169)

(11,980)

(9,480)

Net Assets

 

 

16,703

39,245

63,557

86,827

CASH FLOW

Operating Cash Flow

 

 

12,281

11,439

29,713

32,181

Net Interest

(9,103)

(8,365)

(10,716)

(12,424)

Tax

148

581

(2,279)

(6,189)

Capex

(11,724)

(10,595)

(12,357)

(12,000)

Acquisitions/disposals

1,168

(450)

0

0

Financing

0

0

0

0

Dividends

0

0

0

0

Net Cash Flow

(7,230)

(7,390)

4,361

1,568

Opening net debt/(cash)

 

 

216,682

224,974

232,329

228,251

HP finance leases initiated

0

0

(283)

0

Other

(1,062)

35

0

0

Closing net debt/(cash)

 

 

224,974

232,329

228,251

226,683

Source: Findel, Edison Investment Research. Note: *53 weeks. Forecasts not adjusted for IFRS 9.

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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

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

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 Tyman and prepared and issued by Edison, in consideration of a fee payable by Tyman. 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

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

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 Findel and prepared and issued by Edison, in consideration of a fee payable by Findel. 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

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

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

MagneGas Applied Technology Solutions — Extending retail platform in Greater Texas

MagneGas’s Q318 results show the beneficial impact of the three acquisitions made earlier this year, with revenues trebling to $2.6m. Management continues to pursue this ‘buy-and-build’ strategy, recently completing three small acquisitions that strengthen its retail network in the key Greater Texas region. As management held back on sales recruitment in anticipation of these transactions, organic growth was muted over the summer so we leave our estimates broadly unchanged.

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