Raven Russia — Growing into an improving market

Raven Property Group (LSE: RAV)

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Research: Real Estate

Raven Russia — Growing into an improving market

Raven has announced a second significant acquisition for the current year, a large, modern Grade A warehouse complex north of Moscow. The acquisition (maximum consideration c $120m) is initially funded from Raven’s existing strong cash position and immediately enhances earnings with the potential for further upside from lettings and higher rents. With the Russian economy continuing to improve, and occupier demand running well in excess of falling new warehouse supply, management comments that it feels increasingly like the bottom of the market. The company remains well positioned for additional accretive acquisitions.

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Written by

Real Estate

Raven Russia

Growing into an improving market

Property acquisition

Real estate

7 November 2017

Price

52.0p

Market cap

£344m

US$1.31/£, RUB59/$

Net debt ($m) at 30 June 2017

883.5

Shares in issue

660.6m

Free float

91%

Code

RUS

Primary exchange

LSE

Secondary exchange

TISEA

Share price performance

%

1m

3m

12m

Abs

9.5

6.7

33.3

Rel (local)

8.7

5.6

16.8

52-week high/low

55.0p

37.0p

Business description

Raven Russia (RUS) invests mainly in Class A warehouses in Russia let to large Russian and international companies. It also owns three office buildings in St Petersburg, a third-party logistics company in Russia (RosLogistics) and a residential development company in the UK (Raven Mount).

Next events

FY17 year end

31 December 2017

Publication of FY17 results

March 2018

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Raven Russia is a research client of Edison Investment Research Limited

Raven has announced a second significant acquisition for the current year, a large, modern Grade A warehouse complex north of Moscow. The acquisition (maximum consideration c $120m) is initially funded from Raven’s existing strong cash position and immediately enhances earnings with the potential for further upside from lettings and higher rents. With the Russian economy continuing to improve, and occupier demand running well in excess of falling new warehouse supply, management comments that it feels increasingly like the bottom of the market. The company remains well positioned for additional accretive acquisitions.

Year end

NOI*
($m)

PAT**
($m)

EPS**
(c)

DPS
(p)

Adj NAV***/
share (p)

Yield
(%)

P/adj NAV
(x)

12/15

174.1

54.6

7.94

2.0

55

3.8

0.95

12/16

151.7

47.1

6.81

2.5

52

4.8

1.00

12/17e

145.3

32.0

4.69

2.0

57

3.8

0.92

12/18e

158.6

39.5

5.50

2.0

59

3.8

0.88

Note: *NOI is net operating income. **PAT and EPS (fully diluted) are underlying, excluding valuation movements, depreciation, share-based payments and exceptional items. ***NAV is underlying and fully diluted, excluding goodwill, deferred tax on valuation gains, fair value movements on derivative contracts and cumulative FX movements on preference shares. EPS and NAV assume convertible preference share conversion.

Accretive expansion

With c 195ksqm of lettable space, constructed in stages over 2014-17, the agreed acquisition adds another large, modern warehouse facility to Raven’s portfolio. It is being acquired at below replacement cost and at the current 73% occupancy has annualised income of RUB616m ($10.4m). It immediately enhances our fully diluted adjusted EPS by c 8% on a full-year basis. Completion is expected in early December. The consideration includes an initial payment of c $87m with deferred consideration, dependent on letting progress, taking the total to c $112-120m. The full occupancy yield is 11.38% and the reversionary yield is 12.51%.

Significant further acquisition potential

We estimate that current cash resources, geared at a 60% LTV, could potentially fund more than $300m in additional asset acquisitions. At an 11% yield, this aggregate investment, on a full-year basis, could increase our revised FY18 base case estimate for earnings and free cash flow by a further one-third. This provides a useful offset to pressure on existing portfolio income should the market recovery stall and rents fail to recover over the medium term.

Valuation: Improving prospects for ordinary shares

The ordinary shares offer a prospective 3.8% yield, with the potential for distributions to increase materially with acquisitions as well as a market recovery. The ordinary shares would also benefit fully from any NAV growth or narrowing of the 8% discount to FY17e NAV/share. The preference (RUSP) and convertible preference (RUSC) shares yield 8.1% and 5.2%, respectively.

Company background

Raven was founded and admitted to AIM in 2005, with the intention of building a portfolio of Class A Russian warehouse assets through acquisition and development. It became self-managed in 2008. The ordinary shares (RUS) and warrants (RUSW) issued in 2009 moved to the main market of the LSE in 2010, followed by the preference shares (RUSP) in 2011. In 2016, Raven issued a first tranche (109m) of convertible preference shares, followed by a second tranche (90m shares) in July 2017. These shares trade on the official list of the International Stock Exchange Authority Limited (TISEA). At 30 June 2017, the investment portfolio comprised c 1.6m sqm of predominantly logistics warehouse property (c 70% in the Moscow region), let 79% to mainly large Russian or international companies, providing strong tenant covenants. Group subsidiaries include Raven Mount, a UK residential development company, and RosLogistics, a third-party logistics business in Russia.

Russia has a low density of warehouse space, which suggests plenty of room for growth. However, the Russian recession through 2015-16 coincided with cyclical pick-up in new building and saw vacancies increase and rents fall. Market conditions have since improved, with the US$/rouble rate relatively stable, oil prices improving, inflation and interest rates declining, and economic recovery taking hold. Against this background, demand/supply conditions in the warehouse are improving, with declining new supply and good levels of occupier demand for logistics warehouse space. Raven has a strongly liquid balance sheet, ending H117 with a cash balance of $108m, to which it added $102m with the July issue of convertible preference shares, and seeks acquisitions to take advantage of market recovery.

Earnings-enhancing acquisition

Following on from the April 2017 acquisition of a three-asset portfolio (a warehouse and two offices in St Petersburg) for $86.6m, management indicated with the interim results that it hoped to complete a second significant acquisition in the Moscow region before year-end, continuing the investment of proceeds from recent convertible preference share issues. Through one of its operating subsidiaries, it has now conditionally agreed the acquisition of a logistics park in the Moscow region. The property consists of a modern Grade A warehouse complex, built in stages between 2014 and 2017, to the north of Moscow centre. The property is large, with a gross lettable floor area (GLA) of 195,132sqm, similar to Raven’s existing properties at Pushkino (c 214,000sqm), Noginsk (204,000sqm) and Istra (206,000sqm), and adds c 18% to Raven’s Moscow warehouse GLA and c 12% to overall portfolio GLA. It is currently 73% let to a number of local and international tenants including OBI (Germany-based international DIY retailer), O’KEY Retail Group (large Russian food retailer), Major Logistics Group (Moscow-based logistics services provider), Miratorg (leading Russian meat producer and supplier) and R-Pharm (one of Russia’s largest pharmaceuticals producers). Leases are denominated in roubles and the current annualised income is RUB616m ($10.4m) with a current weighted average lease term of four years. Rental income rises to RUB886m ($15.0m) on a fully let ERV basis.

The property is to be acquired from a Russian incorporated company (Industrialniy Park “Sever” Limited Liability Company) for an initial consideration of RUB5.119bn (or a US dollar equivalent of $86.58m using the RUB59.1/$ exchange rate implied in the announcement). Additionally, deferred consideration of between RUB1.51bn ($25.5m) and RUB1.97bn ($33.3m) is due within 18 months of completion, with payments dependent upon and triggered by progress in letting vacant space. The total consideration is equivalent to RUB34,000-36,300 ($600-625) per sqm, which we believe is below replacement cost, including build costs at RUB25,000-30,000 ($400-500) per sqm and land costs at RUB2,000-4,000 ($35-70) per sqm. Raven expects a full occupancy yield of 11.38% on the maximum consideration, with a reversionary yield of 12.51%.

Raven is acquiring the property with cash, although discussions over partial debt funding have commenced. This would boost the return on equity from the acquisition and free up resources for additional investment. Given the increasing share of rouble-denominated rents within Raven’s portfolio, we would expect Raven to diversify its existing US dollar-denominated debt funding into roubles as Russian inflation and interest rates reduce. Official lending rates were reduced by a further 25bp on 27 October to 8.25%, but with the central bank forecasting inflation at c 3.0% by year-end there is scope for further reductions.

The acquisition agreement is expected to complete in early December, conditional upon the satisfaction of certain escrow arrangements.

Financials

We have adjusted our estimates, assuming that the agreed transaction completes as planned. The spread between the immediate yield on the assets to be acquired and the loss of interest on the cash invested has a positive impact on our forecast for adjusted earnings. Adjusted earnings after tax increases by just over 11% on a full-year basis in 2018, while the increase in fully diluted adjusted EPS, from a higher base, is c 8%. For now, we have made no changes to our forecast distributions per share, which we raised following the interim results.

Exhibit 1: Estimate revisions

NOI
($m)

Adj net profit
($m)*

Adj fully diluted EPS
($c)*

Distributions/share
(p)

Adj fully diluted NAV/share (p)**

Old

New

% change

Old

New

% change

Old

New

% change

Old

New

% change

Old

New

% change

2017e

144.4

145.3

0.6%

31.6

32.0

1.2%

4.63

4.69

1.3%

2.0

2.0

0.0%

56

57

0.9%

2018e

148.0

158.6

7.1%

35.6

39.5

11.1%

5.09

5.50

8.1%

2.0

2.0

0.0%

58

59

1.4%

Source: Edison Investment Research. Note: adjusted net profit and EPS are underlying, excluding valuation movements, depreciation, share-based payments and exceptional items. **NAV is underlying and fully diluted, excluding goodwill, deferred tax on valuation gains, fair value movements on derivative contracts and cumulative FX movements on preference shares. EPS and NAV assume convertible preference share conversion.

We have conservatively assumed only the current annualised rental income on the newly acquired assets at this stage, making no assumptions about the potential for occupancy improvement or rent reversion and will reassess this, along with the existing portfolio, with future earnings releases. We do not anticipate any impact on recurring administrative costs and only an insignificant one-off expense in relation to transaction-related professional fees. Our existing forecasts assume a c 5% rouble-based return on cash assets and our interest income forecast is reduced accordingly. We have allowed for an $87.78m initial payment at completion (assumed 1 December, with a one-month impact on the current year) and have assumed payment of the minimum deferred consideration in three equal instalments over the following 18 months (with the effect that c $105m of the minimum total consideration of c $112m is reflected in our published forecasts to end-2018). If letting progress is made, then our income forecasts are likely to rise to more than compensate for the additional deferred consideration that may be triggered.

We have not assumed any new debt funding in our forecasts, but even without this our forecast end-2018 cash balance, adjusted to take account of deferred consideration, remains a little above $100m.

Significant additional acquisition upside remains

In the note that we published after the interim results, we explored in depth the potential upside to our base case forecasts from the deployment of cash balances in the acquisition of yielding investment properties. We update that analysis below, taking account of the Sever acquisition and its impact on our forecasts.

Our starting point remains our revised estimate for end-2018 cash, adjusted for the remaining deferred consideration on the Sever acquisition at that time, and assumes a gearing of both the Sever acquisition and the cash acquisitions made in April 2017. We would not expect management to commit all of the available cash resources to investment and assume that it will continue to prudently hold c $100m. Allowing for this, we estimated that post-completion of the Sever acquisition Raven will still have capacity to invest c $128m over the next 18 months, most likely in further initially un-geared acquisitions, which are then geared to recycle equity into further projects. Assuming a 60% LTV again this implies a remaining potential for cash-generating asset additions of more than $300m.

Exhibit 2: Potential for asset acquisition

FY18e

FY18 forecast cash and equivalents

109,214

Remaining deferred consideration (Sever)

(8,600)

Add cash released from re-gearing April acquisitions/Sever acquisition

128.000

Adjusted FY18 cash

228,614

Assumed cash reserve

100,000

Cash available for investment

128,614

Assumed gearing/LTV

60%

Potential asset purchases

321,535

FY18 forecast cash and equivalents

Remaining deferred consideration (Sever)

Add cash released from re-gearing April acquisitions/Sever acquisition

Adjusted FY18 cash

Assumed cash reserve

Cash available for investment

Assumed gearing/LTV

Potential asset purchases

FY18e

109,214

(8,600)

128.000

228,614

100,000

128,614

60%

321,535

Source: Edison Investment Research

The additional potential upside to our base case forecasts remains substantial as we show in Exhibit 3. Noting that JLL recently put prime yields in the Moscow warehouse market at 11-12.5% (Russian Warehouse Markets, dated 26 July 2017), we show the outcome based on a range of property yields. We assume no significant acquisition or additional administrative costs and have applied a 7.8% interest cost to additional borrowings, similar to the existing average cost of secured debt – although management hopes to be able to lower this.

Exhibit 3: Potential accretion from asset acquisitions

Forecast earnings

2018e

Underlying earnings – basic

39,491

Underlying earnings (fully diluted basis)

55,805

Total net operating income after interest

38,967

Add back convertible preference dividend

16,314

Total net operating income after interest (adj. for conv. pref. div.)

55,281

Potential acquisition impact (full year basis)

2018e

Potential asset investment

321,535

321,535

321,535

Assumed net initial yield

10%

11%

12%

Additional NOI

32,153

35,369

38,584

Interest income adjustment

-16,545

-16,545

-16,545

Net earnings uplift

15,608

18,823

22,039

Tax

25%

25%

25%

Net earnings uplift

11,706

14,118

16,529

Adjusted earnings

Underlying earnings – basic

51,197

53,608

56,020

Underlying earnings (fully diluted basis)

67,511

69,922

72,334

Total net operating income after interest

50,673

53,084

55,496

Total net operating income after interest (adj. for conv. pref. div.)

66,987

69,398

71,810

Potential accretion to base case forecast

 

 

 

Underlying earnings – basic

30%

36%

42%

Underlying earnings (fully diluted basis)

21%

25%

30%

Total net operating income after interest

30%

36%

42%

Total net operating income after interest (adj. for conv. pref. div.)

21%

26%

30%

Source: Edison Investment Research

On this basis, full deployment of resources in the way described (at an 11% net initial yield) has the potential to lift underlying earnings and net operating income after interest costs by an additional 36%, compared with our revised FY18 base case forecast. On a fully diluted basis (allowing for preference share conversion) the increases, from a higher base, are 25% and 26%, respectively. In both cases, the percentages are the same in per-share terms. To the extent that market conditions continue to improve, as management anticipates, this would be a strong contributor to earnings growth. Alternatively, should market conditions remain weak for an extended period, it is a useful offset to medium-term NOI attrition, which is likely on the current portfolio as rents gradually revert to the lower levels recently established. Full reversion of warehouse portfolio rents to current market levels would require several years with no market improvement, which seems an unlikely scenario but would represent an eventual reduction in NOI of $35-40m pa.

Valuation

With the company well placed to benefit from a stabilising economy, the potential for cash flow and distributions will continue to be the underlying driver of investment in Raven. Over the longer term we believe there is room for valuation yields (c 11-12.5%) in the Russian market to decline, but there is no immediate prospect of any material shift.

Based on our distribution per share forecast of 2p, the prospective yield on the ordinary shares is 3.8%. The Sever acquisition is accretive to earnings and cash flow without assuming the occupancy and rental income improvements that management expects. Although we have not revised our distribution forecast at this stage, earnings cover is improved and the positive potential from further acquisitions is material. As noted above, a full deployment of cash resources on cash-generative acquisitions has the potential to further lift cash flow (net operating income after interest) substantially above the revised forecast levels. At an 11% net initial yield on acquisitions, net operating income after interest and after a full deduction for annual debt amortisation (estimated $30m) would still leave distributable cash per share of more than 3p pa. This would represent a potential yield on the ordinary shares in excess of 6%, with the ability to benefit fully from any growth in NAV or discount narrowing.

Giving up some of the potential for upside benefit in return for a higher yield, an investment in Raven may also be made through non-convertible or convertible preferred shares.

The convertible preference shares (RUSC) rank ahead of other share classes in terms of dividend payments and receive a cumulative 6.5% preferential dividend on the subscription amount of 100p; a yield of 5.2% on the current price of 124p. The convertible preference shares can be converted into ordinary shares at any time up to July 2026, currently at a rate of 1.759 (equivalent to 70.5p per ordinary share at the current price). The (non-convertible) preference shares (RUSP) earn a cumulative 12% dividend on the fixed issue amount per share of 100p, ranking ahead of the ordinary shares. At a current price of 148p, the yield is 8.1%.

Exhibit 4: Financial summary

Key financial data (US$000s)

PROFIT & LOSS

2014

2015

2016

2017e

2018e

Gross revenue

257,596

219,704

195,294

195,172

210,032

Property operating expenditure & cost of sales

(65,288)

(45,581)

(43,553)

(49,914)

(51,454)

Net rental and related income

192,308

174,123

151,741

145,258

158,578

Administrative expenses

(34,630)

(30,494)

(25,344)

(26,781)

(27,178)

Share based payments and other long term incentives

(2,354)

(3,594)

(9,077)

(3,726)

(3,000)

FX losses

(15,471)

1,223

18,079

4,911

0

Share of profit of joint ventures

955

2,518

1,780

785

1,000

Operating profit/(loss) before realised/unrealised property gains (EBIT)

140,808

143,776

137,179

120,447

129,400

Realised/unrealised gains on investment property

(145,404)

(256,548)

(39,517)

11,613

0

Operating profit

(4,596)

(112,772)

97,662

132,060

129,400

Net finance expense

(93,448)

(92,284)

(75,416)

(93,449)

(95,448)

Charge on preference share conversion

0

0

0

0

0

Profit before tax

(98,044)

(205,056)

22,246

38,611

33,952

Tax

9,855

12,697

(14,527)

(22,281)

(13,164)

Profit after tax

(88,189)

(192,359)

7,719

16,330

20,789

Company underlying earnings

66,652

54,559

47,122

32,000

39,491

Reported EPS - fully diluted (c)

(11.83)

(27.99)

1.16

2.38

3.08

Company underlying EPS - fully diluted (c)

8.94

7.94

6.81

4.69

5.50

Distributions per ordinary share (p)

6.00

2.00

2.50

2.00

2.00

Period end number of shares exc own held (m)

688.5

644.1

661.5

654.8

654.8

Average number of shares (m) - basic

715.0

666.8

657.3

665.8

654.8

Average number of shares (m) - fully diluted

745.5

687.2

667.7

685.7

675.5

BALANCE SHEET

Investment property

1,593,684

1,333,987

1,300,643

1,521,034

1,524,034

Other non-current assets

151,840

96,735

92,097

95,932

95,932

Total non-current assets

1,745,524

1,430,722

1,392,740

1,616,966

1,619,966

Cash & equivalents

171,383

202,291

198,621

137,743

109,214

Other current assets

54,444

51,878

53,798

59,498

59,498

Total current assets

225,827

254,169

252,419

197,241

168,712

Total assets

1,971,351

1,684,891

1,645,159

1,814,207

1,788,678

Interest bearing loans & borrowings

55,252

104,724

40,787

50,000

50,000

Other current liabilities

86,215

55,481

66,351

103,567

86,367

Total current liabilities

141,467

160,205

107,138

153,567

136,367

Interest bearing loans & borrowings

837,429

814,021

699,038

657,476

627,476

Preference shares

164,300

156,556

131,703

139,181

139,181

Convertible preference shares

0

0

119,859

270,016

284,016

Other non-current liabilities

130,866

89,066

87,195

96,162

96,162

Total non-current liabilities

1,132,595

1,059,643

1,037,795

1,162,835

1,146,835

Total liabilities

1,274,062

1,219,848

1,144,933

1,316,402

1,283,202

Net assets (and shareholders' equity)

697,289

465,043

500,226

497,806

505,476

NAV adjustments

Goodwill

(7,806)

(5,134)

(6,187)

(6,504)

(6,504)

Deferred tax on revaluation gains

55,250

0

0

0

0

Cumulative FX loss on preference shares

13,955

4,956

(20,362)

(13,606)

(13,606)

Fair value of derivatives

(5,322)

(5,159)

(5,041)

(3,941)

(3,941)

Adjusted NAV

753,366

459,706

468,636

473,755

481,425

Fully diluted NAV per share (c)

110

72

71

72

74

Adjusted fully diluted NAV (c)

106

70

68

74

77

Fully diluted NAV per share (p)

85

55

55

56

57

Adjusted fully diluted NAV (p)

81

54

52

57

59

CASH FLOW

Net cash generated from operating activity

168,794

136,151

118,012

131,955

103,215

Payments for investment property under construction

(105,582)

(20,028)

(9,163)

(121,745)

(3,000)

Acquisition of subsidiary undertakings, net of cash acquired

(12,873)

0

0

(84,214)

0

Other investing activity

19,561

32,895

8,171

4,962

4,988

Net cash generated from investing activity

(98,894)

12,867

(992)

(200,997)

1,988

Bank borrowing costs paid

(70,979)

(69,465)

(66,808)

(61,155)

(54,598)

Ordinary dividends paid in cash

0

0

0

0

(16,118)

Preference/convertible preference share dividends paid

(18,225)

(17,156)

(19,437)

(28,128)

(33,016)

Net own shares (acquired)/disposed

(68,928)

(41,906)

6,624

(14,512)

0

Issue of preference/convertible preference shares

0

0

128,327

133,049

0

Debt drawn/(repaid)

89,447

23,157

(164,493)

(32,343)

(30,000)

Other investing activity

(3,086)

(4,930)

(4,972)

3,734

0

Cash flow from financing activity

(71,771)

(110,300)

(120,759)

645

(133,732)

Change in cash

(1,871)

38,718

(3,739)

(68,397)

(28,529)

Opening cash

201,324

171,383

202,291

198,621

137,744

FX/other

(28,073)

(7,812)

69

7,520

0

Closing cash

171,383

202,291

198,621

137,744

109,215

Debt

(1,056,981)

(1,075,301)

(991,387)

(1,116,673)

(1,100,673)

Net (debt)/cash

(885,598)

(873,010)

(792,766)

(978,928)

(991,458)

Source: Company data, Edison Investment Research

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Raven Russia 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.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Raven Russia 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.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Mesoblast — Waiting for readouts

Mesoblast is entering a period of top-line readouts. This note focuses on two possible value events in 2018 in graft vs host disease and in Class IV heart failure. In addition, the critical Phase III heart failure (HF) trial could complete enrolment in H218; the trial readout depends on the number and timing of clinical events but will probably not be before H219. The lower back pain trial plans to complete enrolment by the end of 2017 with a two-year endpoint. Mesoblast had effective cash of US$84.0m on 30 June.

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