Good progress continues

WANdisco 24 April 2017 Update
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WANdisco

Good progress continues

Q1 trading update

Software & comp services

24 April 2017

Price

382.50p

Market cap

£136m

US$1.28/£

Net cash ($m) end March 2017

7.6

Shares in issue

37.1m

Free float

85%

Code

WAND

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(13.6)

3.4

106.8

Rel (local)

(10.8)

3.2

85.0

52-week high/low

534.0p

122.5p

122.5

Business description

WANdisco is a distributed computing company. The company has developed a suite of solutions based around proprietary replication technology, which solve critical data management challenges prevalent across cloud computing, big data and the ALM software markets.

Next events

AGM

24 May

Q2 trading update

Mid July

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Bridie Barrett

+44 (0)20 3077 5700

WANdisco is a research client of Edison Investment Research Limited

Encouraging progress looks to have continued in Q1 with WANdisco (WAND) securing a $4.1m deal with a multinational financial institution and with the business operating at cash flow break-even. The launch of Fusion V2.10 is significant in that it expands WANdisco’s replication to cover mainstream file storage, enlarges the company’s addressable market and strengthens the proposition General Purpose Replication Platform.

Year end

Revenue ($m)

EBITDA*
($m)

PBT*
($m)

EPS
(c)

Net cash
($m)

EV/sales
(x)

12/15

11.0

(16.0)

(26.4)

(87.7)

2.6

15.3

12/16

11.4

(7.5)

(16.4)

(46.9)

7.6

14.4

12/17e

15.7

(4.2)

(13.4)

(34.2)

4.2

10.7

12/18e

21.6

(0.6)

(10.2)

(25.4)

8.4

7.5

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

IBM brings in largest ever financial services deal

The highlight of a brief Q1 business update (24 April) was the announcement of a $4.1m deal with a multinational financial institution. The deal came in through the IBM relationship so cash will be collected in Q2. No further update on Q1 trading was provided as management believes the lumpy nature of bookings could lead to quarterly booking being misinterpreted. Nevertheless, the company did highlight that both the order book and pipeline are strong and with at least $4.1m booked already, WANdisco should be well on track to meet/beat our FY $20.5m bookings estimate. Encouragingly, the company did not burn cash over the quarter, with net cash steady at $7.6m supported by the collection of receivables from Q4, cost efficiencies and R&D tax credits.

Fusion 2.10: General purpose replication platform

The company continues to enhance its Fusion platform, moving it beyond Hadoop and Cloud to become a General Purpose Replication Platform (GPRP) capable of replicating data across multiple locations and storage types. Recent launch of Fusion 2.10 is significant in that it expands the Fusion’s capability to the mainstream file storage market – initially supporting Network File Storage (NFS) for NetApp devices with others to follow. This should significantly expand WANdisco’s addressable market and strengthen its proposition, enabling enterprises to fully utilise, optimise and migrate the data stored across their entire network

Valuation: Continued execution should deliver upside

We maintain our bookings estimates at $20.5m and $27.0m for FY17 and FY18 respectively, although with at least $4.1m brought in with one deal in Q1 we believe that the company is on track to beat our FY17 estimate. Our FY17 revenues and EBITDA forecasts are upgraded by $0.9m to reflect the faster revenue recognition cycle for IBM royalties and year end net cash is nudged up slightly to reflect the good cash performance in H1. WANdisco’s FY17 EV/sales rating of 10.7x implies the market is pricing in an acceleration in momentum from here and we believe that there are some encouraging signs of this in the Q1 update. The company’s strategic attractiveness should also factor in the valuation equation.

General Purpose Replication Platform

Adding general file storage capability

The company released the latest version of Fusion 2.10 in March 2017. The key new feature of the release is the extension of the platform’s capability to replicate data on Network File System (NFS) servers, thus extending the company’s capability to the mainstream file storage market.

This extension is important because, despite the rapid growth in cloud storage, at present more data reside on non-cloud infrastructures than not. Most of this data is stored on file servers – and considerably more than in Hadoop clusters, the market that WANdisco initially targeted with its big data offering. While cloud storage is expected to overtake non-cloud in the next couple of years the volume of data stored on on-premise systems is still expected to increase significantly and enterprises will continue to store data across multiple locations in multiple formats.

Exhibit 1: Share of IT environment by storage type

Source: IDG Enterprise: Survey (November 2016) – what percent of your organization’s total IT environment (data, applications, infrastructure etc) presently resides in each of the following and will in 18 months?

Consequently, the addition of this capability significantly enlarges WANdisco’s addressable market. WANdisco estimates that the addition of NFS extends its addressable market by over $1bn to $4bn at present. Initially, Fusion will only support NFS devices from NetApp (NTAP; MC $10.9bn; FY16 revenues: $5.5bn), a market leader in this area. Due to Fusion’s Application Programming Interface (API) based architecture, extending the capability to other NFS vendors (Oracle, HP, Terradata, EMC etc) is expected to be a relatively simple process, predominantly involving testing/certification. Longer term, the company is also likely to add support for other file storage systems such CIFS/SMB to further extend coverage of the enterprise data ecosystem.

Exhibit 2: Estimated addressable market for WANdisco’s product

Source: WANdisco

Proposition strengthens as more storage formats are covered

More importantly, we believe that Fusion’s value proposition is strengthened considerably by the ability to apply its replication technology across more of a corporate’s data infrastructure. Whereas WANdisco’s big data offering was originally focused around Big Data/Hadoop and then Cloud, with the addition of mainstream file storage, WANdisco in effect becomes a general purpose replication platform expanding both the data and the range of use cases to which the company’s unique replication technology can be applied.

Exhibit 3: Data can be stored and moved across multiple clouds and locations

Source: NetApp

Expanding the range of data which can be analysed. The ability to replicate data from file servers and other sources to the cloud for analytics without downtime can make it much easier to analyse data in these sources. While significant proportions of most enterprises data will continue to be stored on-premise, the majority of analytics workloads are expected to be processed by cloud data centres. Fusion enables enterprises to “burst” specific data to the cloud for analytics, for example.

Accelerating data access. As Fusion replicates data as it streams in, files do not have to be fully written and closed before transferring data. Data can be uploaded at one server but queried at another more convenient one.

Eliminating downtime while replicating. All nodes can be in production while replicating data between different locations and storage types.

Resilience/disaster recovery through replicating data across the cloud and customer-premise.

Reduced capex/more efficient data network implementation by reducing the use of “standby” servers for disaster recovery etc.

Reducing vendor lock-in. The example explicitly cited by IBM was the ability to replicate data between different Hadoop vendor’s distributions – Cloudera CDH, Hortonworks HDP, MapR, Apache native etc – without downtime. The company is also developing a solution to enable replication between competing cloud storage platforms eg Amazon S3, Microsoft Azure, Google Cloud. A recent study by Microsoft and 451 Research found that nearly a third of organisations work with four or more cloud vendors.

IBM: No update but positive indicators elsewhere

The company did not give an update on IBM other than the one deal, but it did highlight that IBM’s marketing collateral suggests that the product is gaining good traction. We recently met with IBM representatives at the CeBIT conference who had implemented Fusion at a major German bank. Their feedback on the product and working with WANdisco was positive and it was clear that they saw a broad range of benefits from deploying the technology. Specific benefits highlighted include the substantially speed up and reduce downtime required to migrate data to the cloud; the ability to upload data at one server and query at another; and the ability to replicate data across Hadoop clusters using different vendors distributions, effectively reducing customer lock-in to any one vendor.

Financials

The Q1 trading update was brief, detailing only the $4.1m deal made through IBM with a multinational financial institution and flagging that the company operated at cash flow break-even in Q1. We understand that management has decided not to return to announcing quarterly bookings as it believes that six monthly reporting is a more appropriate timescale to gauge trends as large deals (or lack of them) can significantly sway quarterly results.

Nevertheless, the $4.1m deal alone accounts for one fifth of our FY17 bookings estimate of $20.5m and thus we believe that the company is well on course to at least meet our full year estimate with the potential for doing better.

Our bookings estimate is unchanged but we have upgraded our FY17 revenues and EBITDA by $0.9m to reflect the faster revenue recognition cycle for IBM royalties. (A royalty report is received 60 days after the end of the quarter together with the cash payment. Revenues are recognised in the quarter in which the cash is received.)

Reflecting the strong cash performance in Q1 our year end net cash is nudged up slightly.

Exhibit 4: Estimate changes

$'000s

2015

2016

2017e

2017e

Change

2018e

2018e

Change

31 December

Actual

Actual

Old

New

 

Old

New

 

PROFIT & LOSS

 

 

 

 

 

 

 

 

Bookings SCM

6500

8400

9500

9500

0%

11000

11000

0%

Bookings Big Data

2500

7100

11000

11000

0%

16000

16000

0%

Total Bookings

9000

15500

20,500

20,500

0%

27,000

27,000

0%

Revenue

10,994

11,379

14,752

15,674

6%

21,722

21,616

0%

Cost of Sales

(749)

(1,349)

(1,784)

(1,784)

0%

(2,349)

(2,349)

0%

Gross Profit

10,245

10,030

12,968

13,891

7%

19,373

19,267

-1%

EBITDA

(15,988)

(7,464)

(5,133)

(4,211)

-18%

(538)

(644)

20%

Capitalised development cost

(8,369)

(5,860)

(6,497)

(6,497)

0%

(6,952)

(6,952)

0%

EBITDAC (adjusted for capitalised development)

(24,357)

(13,324)

(11,630)

(10,707)

-8%

(7,490)

(7,595)

1%

Operating Profit (before amort and except)

(25,858)

(16,104)

(14,073)

(13,151)

-7%

(9,778)

(9,884)

1%

Exceptionals

(614)

(32)

0

0

 

0

0

 

Share based payments

(4,057)

(1,787)

(1,787)

(1,787)

0%

(1,787)

(1,787)

0%

Operating Profit

(30,529)

(17,923)

(15,860)

(14,938)

-6%

(11,565)

(11,671)

1%

Net Interest

(506)

(268)

(268)

(268)

0%

(268)

(268)

0%

Profit Before Tax (norm)

(26,364)

(16,372)

(14,341)

(13,419)

-6%

(10,046)

(10,152)

1%

EPS - (IFRS) (c)

(103.9)

(27.9)

(41.9)

(39.5)

-6%

(30.6)

(30.9)

1%

Closing net debt/(cash)

(2,555)

(7,558)

(3,761)

(4,156)

11%

(8,494)

(8,389)

-1%

Source: Company Data, Edison Investment Research

Valuation

WANdisco’s EV/sales ratio of 10.7x remains a premium to its big data and cloud software peer group, which has a diverse range from 1.9x (Attunity) to 6.0x (Splunk). WANdisco’s FY17 forecast growth rate is towards the upper end of this peer group, but equally we believe that there is scope for upside in terms of bookings revenues and for cost estimates to reduce. The Q1 update gives us some evidence that the company is on track to deliver these. Strong performance through IBM and the deepening of relationships with other major partners could be catalysts to forecast stronger growth further out.

A DCF scenario analysis supports this view, suggesting that a 375p share price requires the company to deliver sustained bookings growth in the mid to high 30s with EBITDAC (EBITDA + capitalised R&D) margins expanding to c 30%. While this may seem ambitious, it is worth highlighting that cloud service providers are currently sustaining similar margins on much higher revenue growth rates. Success with the indirect model should enable the business to scale very quickly and the market opportunity leaves plenty of headroom for the company to exceed these estimates.

Exhibit 5: DCF scenario analysis

Bookings growth FY17

25%

44%

50%

60%

70%

Bookings CAGR FY16/25

20%

36%

41%

49%

57%

Revenues 2020 ($000s)

31,220

42,676

46,815

54,309

62,581

Implied share price pence (excluding dilution)

Matured EBITDAC margin

15%

(51)

170

293

596

1,087

20%

(26)

239

385

755

1,330

25%

(1)

307

482

904

1,579

30%

22

378

571

1,059

1,817

35%

45

449

667

1,214

2,062

Source: Edison Investment Research


Exhibit 6: Financial summary

$'000s

2014

2015

2016

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

11,218

10,994

11,379

15,674

21,616

Cost of Sales

(2,165)

(749)

(1,349)

(1,784)

(2,349)

Gross Profit

9,053

10,245

10,030

13,891

19,267

EBITDA

 

 

(17,874)

(15,988)

(7,464)

(4,211)

(644)

Operating Profit (before amort and except)

 

 

(26,424)

(25,858)

(16,104)

(13,151)

(9,884)

Acquired Intangible Amortisation

0

0

0

0

0

Exceptionals

(1,586)

(614)

(32)

0

0

Share based payments

(11,907)

(4,057)

(1,787)

(1,787)

(1,787)

Operating Profit

(39,917)

(30,529)

(17,923)

(14,938)

(11,671)

Net Interest

557

(506)

(268)

(268)

(268)

Profit Before Tax (norm)

 

 

(25,867)

(26,364)

(16,372)

(13,419)

(10,152)

Profit Before Tax (FRS 3)

 

 

(39,360)

(31,035)

(10,047)

(15,206)

(11,939)

Tax

1,053

1,129

772

553

434

Profit After Tax (norm)

(24,814)

(25,235)

(15,600)

(12,866)

(9,718)

Profit After Tax (FRS 3)

(38,307)

(29,906)

(9,275)

(14,653)

(11,505)

Average Number of Shares Outstanding (m)

24.0

28.8

33.3

37.1

37.3

EPS - normalised (c)

 

 

(103.3)

(87.7)

(46.9)

(34.7)

(26.1)

EPS - normalised fully diluted (c)

 

 

(103.3)

(87.7)

(46.9)

(34.2)

(25.4)

EPS - (IFRS) (c)

 

 

(159.5)

(103.9)

(27.9)

(39.5)

(30.9)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

80.7

93.2

88.1

88.6

89.1

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

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

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

10,224

8,813

6,253

4,110

2,121

Intangible Assets

9,814

8,583

5,977

3,708

1,593

Tangible Assets

410

230

276

402

528

Investments

0

0

0

0

0

Current Assets

 

 

16,933

9,283

13,703

12,467

18,766

Stocks

0

0

0

0

0

Debtors

14,452

6,728

6,145

8,311

10,377

Cash

2,481

2,555

7,558

4,156

8,389

Other

0

0

0

0

0

Current Liabilities

 

 

(8,474)

(6,439)

(9,409)

(10,347)

(12,165)

Creditors & Deferred Income

(8,474)

(6,439)

(9,409)

(10,347)

(12,165)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

(6,067)

(6,060)

(6,980)

(11,643)

(14,804)

Long term borrowings

0

0

0

0

0

Deferred Income

(6,067)

(6,060)

(6,980)

(11,643)

(14,804)

Net Assets

 

 

12,616

5,597

3,567

(5,413)

(6,081)

CASH FLOW

Operating Cash Flow

 

 

(13,509)

(18,138)

(2,955)

3,110

11,318

Net Interest

58

59

(161)

(268)

(268)

Tax

(3)

552

690

553

434

Capex (inc capitalised R&D)

(9,515)

(8,464)

(5,924)

(6,797)

(7,252)

Acquisitions/disposals

0

0

0

0

0

Financing (net)

465

26,175

13,523

0

0

Dividends

0

0

0

0

0

Net Cash Flow

(22,504)

184

5,173

(3,402)

4,233

Opening net debt/(cash)

 

 

(25,673)

(2,481)

(2,555)

(7,558)

(4,156)

HP finance leases initiated

0

0

0

0

0

Other

(661)

(43)

(175)

0

0

Closing net debt/(cash)

 

 

(2,481)

(2,555)

(7,558)

(4,156)

(8,389)

Source: WANdisco, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by WANdisco and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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.
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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 8249 8342

Level 12, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by WANdisco and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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.
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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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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