FinnCap ADC Therapeutics - avacta.com

Morning Note

10 October 2019

This research cannot be classified as objective under finnCap research policy. Please visit www.finncap.com or the Research Library .

Avacta (AVCT): Corp New therapeutics collaboration and option agreement Avacta announced a collaboration and option agreement with ADC Therapeutics to develop drug conjugates combining Avacta’s Affimer technology with ADCT’s PBD-based warhead and linker technology. This is Avacta’s fourth therapeutics partnership and follows the $310m collaboration with LG Chem (December 2018), Tufts University Medical School (July 2018) and the long-term collaboration with Moderna Therapeutics (2015), demonstrating further the interest in the Affimer platform and the incremental value being created. Avacta remains on track to start a Phase I study for its TMAC linker with doxorubicin (pro doxorubicin) in patients with selected solid tumours. The linker is a critical element of the novel Affimer TMAC platform being developed with Tufts University Medical School, which we expect to lead to a potential licensing deal as early as 2020 as well as create other effective chemotherapeutic pro-drugs. We reiterate our target price.

Castleton Technology (CTP): Corp Interim trading update Castleton has released an interim trading update to September detailing a challenging 1H20 for one-off revenue and continuing strength in recurring revenue, which grew in absolute terms. While 2H20 is expected to deliver a material improvement in group performance, we review FY20 forecasts to accommodate the pressure on product and professional services revenue, moving revenue and EBITDA (pre IFRS16) -15% in FY20, and -13% in FY21. Even as recurring revenue demonstrates its strengths and opportunities, in the near term the contemplation of moving to the cloud has changed customer buying habits and slowed decision making – meaning the long-term growth opportunities from recurring revenue growth are stronger than ever, but the instant fillip of one-off revenue, which boosted prior years, is not yet offset. As a growing and focused one stop shop for public sector Housing, and having reorganised to drive greater focus, Castleton’s main risk is now being acquired in moments of share price performance weakness. Target 130p (140p) a 5% free cash flow yield target for FY21.

discoverIE (DSCV): Corp Q2 stronger than Q1 In a positive H1 update, discoverIE has confirmed it is on track to meet its full-year expectations following +9% sales growth in H1 (+5% organic) and gross margin consistent with the prior year. Organic growth was +4% in Q1 and +6% in Q2. The order book has increased by +15% (+11% organically) to £153m, of which 80% is for delivery over the next 12 months. Despite the wider economic caution, discoverIE continues to make strong progress, providing further evidence of the success of its strategy of focusing on structurally growing markets. We reiterate our 535p target price.

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10 October 2019

This research cannot be classified as objective under finnCap research policy. Please visit www.finncap.com or the Research Library.

Morning Note

Europa Oil & Gas (EOG): Corp Headwinds driving diversification efforts Europa is reacting positively to changes in the business environment in Ireland and is diversifying its portfolio. It has delivered a new exploration licence in Morocco and its strategy is to seek more new ventures in the appraisal/development space. The more restrictive regulatory/operating environment in Ireland is not helping Europa’s farm-out ambitions and is also expected to delay drilling time frames. As a result, we are raising our commercial risking on the farm-out licences, which sees our risked-NAV and price target cut from 45p to 32p. There is still major upside from a successful deal, but cash gets tight next year without a successful Wressle planning appeal and the cash flow boost this would deliver in 2020.

Morses Club (MCL): Corp Strong earnings support transformation Morses Club’s result for the six months to 31 August confirmed the group’s strong position to both build on its strength in the Home Collect Credit (HCC) market and ultimately benefit from the changes in customer behaviour by broadening the product range and acquiring further HCC loan books. The results showed strong progress in the digital offering, with close to 14% of HCC customers now signed up for the customer portal launched earlier this year, but also indicated that the level of investment needed to follow the changes in customer behaviour is significant, and will have a near-term negative impact on profitability. The level of investment needed in the industry is, however, also likely to result in more acquisition opportunities as other HCC lenders are unable to make the needed investment. We retain our 190p target price.



10 October 2019

This research cannot be classified as objective under finnCap research policy. Please visit www.finncap.com or the Research Library

Morning Note

Corp

Share price performance

Mark Brewer

Director of Research

[email protected]

020 7220 0556

Sales desk 020 7220 0522

Trading desk 020 7220 0533

* denotes corporate client of finnCap

Avacta*

New therapeutics collaboration and option agreement Avacta announced a collaboration and option agreement with ADC Therapeutics

to develop drug conjugates combining Avacta’s Affimer technology with ADCT’s

PBD-based warhead and linker technology. This is Avacta’s fourth therapeutics

partnership and follows the $310m collaboration with LG Chem (December 2018),

Tufts University Medical School (July 2018) and the long-term collaboration with

Moderna Therapeutics (2015), demonstrating further the interest in the Affimer

platform and the incremental value being created. Avacta remains on track to

start a Phase I study for its TMAC linker with doxorubicin (pro doxorubicin) in

patients with selected solid tumours. The linker is a critical element of the novel

Affimer TMAC platform being developed with Tufts University Medical School,

which we expect to lead to a potential licensing deal as early as 2020 as well as

create other effective chemotherapeutic pro-drugs. We reiterate our target price.

Newsflow – a collaboration and option agreement with ADC Therapeutics to develop

drug conjugates combining Avacta’s Affimer technology with ADC’s

pyrrolobenzodiazepine (PBD)-based warhead and linker technology. Avacta will

generate and provide ADC with Affimers against three undisclosed cancer targets,

which will be evaluated by ADC with a view to generating clinical candidates. Terms of agreement. Avacta’s costs will be covered by ADC during the

collaboration. Avacta confirmed that it will receive option fees, development and

commercialisation milestones, as well as a single-digit royalty on sales. Given that

the LG Chem $310m “bio-dollar” deal covered up to six targets, we would suggest

that this collaboration could fall in the $100-150m range. ADC Therapeutics is a clinical-stage oncology drug discovery and development

company, focused on targeted antibody drug conjugates (ADCs) for the treatment of

haematological cancers and solid tumours using ADC’s proprietary latest-generation

PBD dimer technology. Founded in 2011 and well funded ($531m raised to date),

with AstraZeneca having board representation, it has three molecules in clinical trials. Outlook. Prodrug doxorubicin animal data is due in Q4 2019 with Phase I studies

due to start in H1 2020, after which it intends to licence. Given that doxorubicin is a

c.$1bn drug, but with dose-limiting systemic side effects, the potential for such a deal

is high, for which we would expect a substantial upfront milestone payment. Forecasts and valuation. No change to forecasts and we reiterate our target value

for the company of c.£125m (125p). This excludes the prospect of earlier licensing

deals for the TMAC platform and potentially from pro-drug licensing strategies, which

could attract significant upfront milestones.

19.75 000 200 000 0




10 October 2019


Morning Note

Corp


Andrew Darley


[email protected]

020 7220 0547

Sales desk 020 7220 0522



Castleton Technology*

Interim trading update Castleton has released an interim trading update to September detailing a

challenging 1H20 for one-off revenue and continuing strength in recurring revenue,

which grew in absolute terms. While 2H20 is expected to deliver a material

improvement in group performance, we review FY20 forecasts to accommodate the

pressure on product and professional services revenue, moving revenue and

EBITDA (pre IFRS16) -15% in FY20, and -13% in FY21. Even as recurring revenue

demonstrates its strengths and opportunities, in the near term the contemplation of

moving to the cloud has changed customer buying habits and slowed decision

making – meaning the long-term growth opportunities from recurring revenue

growth are stronger than ever, but the instant fillip of one-off revenue, which

boosted prior years, is not yet offset. As a growing and focused one stop shop for

public sector Housing, and having reorganised to drive greater focus, Castleton’s

main risk is now being acquired in moments of share price performance weakness.

Target 130p (140p) a 5% free cash flow yield target for FY21.

Castleton’s trading update indicates EBITDA (pre IFRS 16) of £2.7m (1H19:

£3.0m) from revenue of £11.6m (£12.9m). Recurring revenue is at 65% (1H19: 55%),

and has grown on an absolute basis. We look forward to further detail at interims,

expected 5 November, at which point we will have visibility to adjust forecasts to

include IFRS16 adjustments.

Figure 1: Changes to forecasts FY20E

was

FY20E

is

delta FY21

was

FY21E

is

delta

Turnover £m 28.5 24.3 -15% 30.5 26.4 -13%

EBITDA (adj) £m 7.4 6.3 -15% 8.1 7.0 -13%

PBT (adj) £m 6.4 5.3 -17% 6.9 5.8 -16%

Adj. dil. EPS p 7.0 5.9 -17% 7.2 6.1 -16%

Dps £m 1.1 1.1 0% 1.2 1.2 0%

Capex £m -1.0 -1.0 0% -1.2 -1.2 0%

Free cashflow £m 5.8 4.5 -24% 6.7 5.8 -13%

Net cash /(debt) £m -0.2 -1.6 831% 5.4 3.2 -41%

Source: finnCap

93.00 000 000 000 0




10 October 2019


Morning Note

Corp


Guy Hewett


[email protected]

020 7220 0549

Sales desk 020 7220 0522



discoverIE*

Q2 stronger than Q1 In a positive H1 update, discoverIE has confirmed it is on track to meet its full-

year expectations following +9% sales growth in H1 (+5% organic) and gross

margin consistent with the prior year. Organic growth was +4% in Q1 and +6% in

Q2. The order book has increased by +15% (+11% organically) to £153m, of which

80% is for delivery over the next 12 months. Despite the wider economic caution,

discoverIE continues to make strong progress, providing further evidence of the

success of its strategy of focusing on structurally growing markets. We reiterate

our 535p target price.

Improving rate of progress. Group sales increased by +11% in Q2 up from +8% in

Q1 generating +9% for H1 (on a reported and CER basis). Organically sales grew by

+6% in Q2 up from +4% in Q1, generating +5% for H1.

Driven by Design & Manufacturing. Q2 organic sales growth in Design &

Manufacturing (D&M) was +12% up from +4% in Q1, leading to +7% in H1. The

strongest parts were renewables (wind and solar) and Asia. D&M accounted for 64%

of H1 group sales up from 61% at the year end and we forecast this division to

account for 80% of FY 2020E group profits.

Strong orders. Group orders for Q2 grew by 7% organically, up from 3% in Q1.

Orders were similarly driven by strong growth in the D&M division, with Custom

Supply division orders being down slightly. The Group order book at 30 September

2019, of which over 80% is for delivery over the next twelve months, was £153m, an

increase of 15% at CER and 11% organically over last year.

Supported by acquisitions. The two most recent acquisitions (acquired in April) are

settling in well, with integration progressing as expected. Both businesses are high

quality, high margin custom design businesses, selling into international markets.

Firepower for further acquisitions. Post the year end, a £28m fund raise was

completed and two acquisitions completed at an initial cost of £21m. We forecast net

debt/EBITDA of 1.1x in FY 2020.

No change to target price of 535p. The continuing success of discoverIE’s strategy

drove a 17% CAGR in EPS over the past three years. We don’t forecast acquisitions

as their scale and timing are variable, but in essence we see no major reason for

above-average growth not to continue, given the successful focus on structurally

growing markets. In this context, the FY 2020 P/E of 13.9x is not demanding against

small/mid cap 14.7x.

406.0 000 000 000 00




10 October 2019


Morning Note

Corp


Jonathan Wright


[email protected]

020 7220 0543

Sales desk 020 7220 0522



Europa Oil & Gas*

Headwinds driving diversification efforts Europa is reacting positively to changes in the business environment in Ireland and

is diversifying its portfolio. It has delivered a new exploration licence in Morocco

and its strategy is to seek more new ventures in the appraisal/development space.

The more restrictive regulatory/operating environment in Ireland is not helping

Europa’s farm-out ambitions and is also expected to delay drilling time frames. As

a result, we are raising our commercial risking on the farm-out licences, which sees

our risked-NAV and price target cut from 45p to 32p. There is still major upside

from a successful deal, but cash gets tight next year without a successful Wressle

planning appeal and the cash flow boost this would deliver in 2020.

In-line results. No surprises in the FY 2019 financials to end-July. Production was

stable and Revenue rose 6% to £1.7m, in line with our forecast. Lower exploration

write-offs helped deliver a positive Gross Profit of £301k vs. last year’s £1.2m loss. A

continued keen focus on costs saw Admin expenses fall again, helping pre- and post-

tax losses narrow to £0.7m from £2.3m last year. Cash at end-July stood at £2.9m,

helped by the £4.0m net proceeds from last December’s placing and open offer.

Wressle appeal. Europa continues to pursue the Wressle development in the UK,

where a planning appeal is scheduled for 5 November. The recent withdrawal of North

Lincolnshire Council from the inquiry is a very positive signal. A successful appeal will

pave the way for a material increase in production. Cash flow from this development is

important in ensuring Europa is funded for its 2020 work programme.

Irish headwinds. Europa warns that the regulatory approvals process in Ireland for

licence renewals/conversions and operational activities has slowed significantly. This

affects the pace of activity and the farm-out market, making it difficult to conclude its

current farm-out in its original form and pushing drilling out to 2021 at the earliest.

Price target cut. Increased uncertainty surrounding its Irish farm-outs leads us to raise

the commercial risking on these three licences. Combined with slower drilling

expectations, this results in our risked-NAV and price target being cut from 45p to

32p/sh. This still represents multiples of the current share price, reflecting the significant

intrinsic value within Europa’s large, high-impact exploration portfolio.

Diversification drive. With a tough operating environment in Ireland and the UK,

management is keen to diversify the portfolio. It was recently awarded a licence

offshore Morocco, where entry costs are low. On top of that, management is seeking a

third ‘appraisal/development/production’ leg to round out its business, creating a full-

cycle company with a more diverse and balanced portfolio.

2.000 000 000 000




10 October 2019


Morning Note

Corp


Kim Bergoe


[email protected]

020 7220 0550

Nik Lysiuk

Research Analyst

[email protected]

020 7220 0546

Sales desk 020 7220 0522



Morses Club*

Strong earnings support transformation Morses Club’s result for the six months to 31 August confirmed the group’s

strong position to both build on its strength in the Home Collect Credit (HCC)

market and ultimately benefit from the changes in customer behaviour by

broadening the product range and acquiring further HCC loan books. The results

showed strong progress in the digital offering, with close to 14% of HCC

customers now signed up for the customer portal launched earlier this year, but

also indicated that the level of investment needed to follow the changes in

customer behaviour is significant, and will have a near-term negative impact on

profitability. The level of investment needed in the industry is, however, also

likely to result in more acquisition opportunities as other HCC lenders are unable

to make the needed investment. We retain our 190p target price.

Interim results. Revenue came in at 66.3m, up 15.3% YoY. The total loan book

increased 6.2% to 72.2m. Impairments/ revenue fell from 21.9% to 19.0%. The cost/

income ratio increased from 58.5% to 63.9%. Adjusted PBT fell 8.6% to £9.6m. Statutory

ROE fell from 25.4% to 22.6%, with adjusted ROE increasing from 25.2% to 28.4%.

Estimates. We keep our revenue estimates unchanged, but reduce our average FY

2020/ 2021 ROE estimates from 22.5% to 21.7% due to higher cost estimates from

the acquired CURO Transatlantic and U Holdings operations during the rest of the

current year and the coming year. We leave our dividend estimates unchanged for

the current year and FY 2021, and lift the expected DPS slightly for FY 2022E.

Valuation. Our valuation is based on underlying profitability excluding the investment

made to move from a pure HCC lender to a wider online credit and current account

offering. Our estimates for underlying earnings remain unchanged and we therefore

maintain our 190p price target, despite the investment in new products causing us to

increase the temporary negative impact for the rest of the current year and the

following year.

What’s interesting? As the P&L drag from the CURO Transatlantic and U Holdings

investments reduce and turn into positive contributions, and it becomes increasingly

apparent that the current strong position in the HCC market is a great spring-board

into the more than 5x larger HCST credit market, we see a positive valuation impact.

ROE is set to improve as investments turn to revenue drivers, the group gains scale

in the new operations and digitalisation offers efficacy gains. Growth improves as

new revenue streams grow in importance relative to HCC and, finally, risk reduces

with a more diversified product base, all pointing to a higher valuation.

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Morning Note 10 October 2019

Research Kim Bergoe 020 7220 0550 [email protected] Michael Hill 020 7220 0554 [email protected]

Mark Brewer 020 7220 0556 [email protected] Nik Lysiuk 020 7220 0546 [email protected]

David Buxton 020 7220 0542 [email protected] Mark Paddon 020 7220 0541 [email protected]

Michael Clifton 020 3772 4682 [email protected] Hayley Palmer 020 3772 4681 [email protected]

Lorne Daniel 020 7220 0545 [email protected] Martin Potts 020 7220 0544 [email protected]

Andrew Darley 020 7220 0547 [email protected] Peter Smedley 020 7220 0548 [email protected]

Raymond Greaves 020 7220 0553 [email protected] Jonathan Wright 020 7220 0543 [email protected]

Guy Hewett 020 7220 0549 [email protected]

Equity Capital Markets

Andrew Burdis 020 7220 0524 [email protected] Alice Lane 020 7220 0523 [email protected]

Richard Chambers 020 7220 0514 [email protected] Manasa Patil 020 7220 0512 [email protected]

Camille Gochez 020 7220 0518 [email protected] Tim Redfern 020 7220 0515 [email protected]

Tim Harper 020 7220 0525 [email protected] Sunila de Silva 020 7220 0521 [email protected]

Sales

Stephen Joseph 020 7220 0520 [email protected] Malar Velaigam 020 7220 0526 [email protected]

Isobel Stubbs 020 7220 0513 [email protected] Jonathon Webb 020 7220 0511 [email protected]

Louise Talbot 020 3772 4651 [email protected] Rhys Williams 020 7220 0522 [email protected]

Investor Relations

Brittany Lambert 020 7220 0592 [email protected] Lisa Welch 020 7220 0519 [email protected]

Lucy Nicholls 020 7220 0528 [email protected]

Sales Trading

Kai Buckle 020 7220 0529 [email protected] Danny Smith 020 7220 0533 [email protected]

Mark Fidgen 020 7220 0536 [email protected] Oliver Toleman 020 7220 0531 [email protected]

Market Makers

Steve Asfour 020 7220 0539 [email protected] Shane Watters 020 7220 0535 [email protected]

James Revell 020 7220 0532 [email protected]

Investment Companies

Johnny Hewitson 020 7720 0558 [email protected] Pauline Tribe 020 7220 0517 [email protected]

Monica Tepes 020 3772 4698 [email protected] Mark Whitfeld 020 3772 4697 [email protected]

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FinnCap ADC Therapeutics - avacta.com