A company that’s 60 per cent owned by Schneider Electric is buying a company that’s 44.7 per cent owned by Softbank. That’s all we have to work with today. Perhaps we can take a scenic route into the story.

OSIsoft got its first mainstream press mention in August 2003, when the then 24-year-old Dan Knights was crowned World Champion in Rubik’s Cube speed solving. “The first thing one notices about Knights is his good looks,” reported the San Francisco Chronicle. “He looks like a young David Duchovny, dresses neatly and has a good job doing tech support at OSIsoft of San Leandro, a company that helps other businesses improve performance by analyzing data.” Mr Knights is now a professor at University of Minnesota’s BioTechnology Institute and co-founded its Diversigen spinout, a microbiome sequencing company that was bought last year by Nasdaq-listed Orasure Technologies for $12m upfront. (He still speed cubes.) OSIsoft, meanwhile, is being bought by Aveva for $5bn and Aveva’s Houston office is half an hour on the Number 25 bus from Diversigen’s office. In coincidences we can hear the language of the stars.

Bloomberg had reported OSIsoft’s likely purchase and price tag a few weeks ago so nothing here is too surprising. A cost towards the low end of possibilities, a guide for accretion by full-year 2022 before synergies and an OSIsoft’s margin in excess of Aveva’s at 31 per cent are all positives so Aveva’s up about 4 per cent at pixel. Here’s UBS (neutral) to talk terms:

Despite a high equity element in the consideration with $3.5bn being raised through a rights issue and $0.6bn issued directly to the OSIsoft founder’s family, as Aveva is paying a similar multiple to itself, we calculate negligible (c2-5%) dilution on pro forma 2020 earnings at a 1.5-2.0% interest rate, even as the share count increases by c72m and net debt to 1.9x pro forma. Schneider Electric has committed to retaining its 60% control of Aveva through its participation in the rights issue.

And Goldman (neutral) to say everything looks fine:

Strategically, we believe this deal adds data capabilities to Aveva’s already strong, existing product set, resulting in Aveva being able to provide a platform for the industrial process software market. This could allow Aveva to generate revenue synergies through cross-sell and upsell into its significant installed base. We expect investors to view the proposed acquisition as a strategic positive. . . . 

We note that OSIsoft’s oil and gas mix is less than Aveva’s, which in our view suggests that the acquisition should result in faster diversification of Aveva’s revenues. According to Aveva, the combined company’s exposure to Oil & Gas will reduce to c.35% from c.40% for Aveva currently.

While OSIsoft is to be established as a business unit, we note that its technology could be leveraged across all of Aveva’s business units. We see the proposed OSIsoft acquisition as strengthening Aveva’s existing products, such as the Digital Twin, HMI/SCADA, Manufacturing Execution System and Asset Performance. Further, the Aveva OSIsoft combined IIoT solution will be platform and hardware agnostic, which we view as a key positive.

We also see the acquisition as augmenting Aveva’s cloud ambitions, as Aveva highlighted that it intends to accelerate the market adoption and expansion of OSIsoft Cloud Services (OCS) and other cloud-based offerings. Although OSIsoft’s offerings are at a nascent stage, this could provide another avenue of growth.

Financial implications

In the twelve months ended 30 June 2020, OSIsoft had revenue of $488.5mn and Adjusted EBIT of $152.2 mn. In the six months ended 30 June 2020, revenues grew at 10% yoy. OSIsoft also exhibited solid growth previously, with a revenue CAGR of 9.7% and an Adjusted EBIT CAGR of 18.5% over 2016-19. For the combined company, Aveva expects a PF revenue of c.£1.2 bn and Adjusted EBIT of c.£330 mn (c.28% margin). Aveva also expects the acquisition to be earnings accretive in FY22, even before synergies. About 60% of OSIsoft’s revenues are recurring, although this is mostly in maintenance revenues. The shift to subscription should add another layer of growth in our view.

And Numis (restricted), which is shop broker to Aveva so can’t do forecasts, except it can if it’s tricky about it:

OSIsoft had 61% of its CY19 billings from recurring contracts, very closely in line with AVEVA at 62% recurring revenue in FY20. Americas was 57% of OSIsoft FY19 billings, EMEA 29%, APAC 14% (AVV FY20 revenues 33% / 39% / 27%). The intangible assets created by the acquisition can be amortised for tax purposes in the US, which is expected to result in material cash tax savings.

Business logic: Management anticipates that the deal will “combine the complementary product offerings of AVEVA and OSIsoft bringing together industrial software and data management capitalising on the technological megatrends that are driving digital transformation of the industrial world.” Management expects “material revenue and cost synergies”. Management sees OSIsoft’s PI System as a scaleable and robust enterprise level data historian platform which will be a key enabler of a number of AVEVA solutions, The combined group’s solutions are anticipated to combine to create a leading Industrial Internet of Things portfolio.

Financials of the enlarged group: While Numis is restricted from providing forecasts, we can show the arithmetic effect of the deal dependent on certain projections. These projections show FY22 EPS of 124.7p, compared to our previously published forecasts of 116.7p (i.e. 6.8% EPS accretion).

And Jefferies to cover Schneider (hold).

Strong industrial logic for the deal: We believe the combination of AVEVA’s asset performance and planning & operations software together with OSIsoft’s strength around data acquisition and structuring by visualising and combining real-time sensor, actuator and control data has excellent industrial merit. . . . 

Valuation looks pricey and mgmt puts share buyback on hold: AVEVA pays 10.2x LTM EV/Sales or 32.9x EV/adjusted EBIT for the deal, which certainly looks expensive from an industrial point of view. Using a multiple of EV/recurring Sales AVEVA pays 16.8x. Our software peer group that we use to gauge the value of Siemens’ software business trades on 9.3x EV/Sales (12m fw) or 29.0x EV/EBIT. OSIsoft’s revenue CAGR between 2016-19 has only been 10%, which initially looks a bit disappointing. Its adjusted EBIT margin reached 25.8% in FY19. Schneider announced that the deal will be 30bps margin accretive to its adjusted EBITA based on LTM. In order to digest the effects of the proposed transaction and in light of economic uncertainties, Schneider puts its current share buyback on hold.

We should probably check the scoreboards.

Marine engineer James Fisher & Sons is leading the FTSE 250 fallers after middling interim results trigger smallish forecast downgrades. Here’s Peel Hunt:

Underlying operating profit (UOP) was £19.5m and PBT £15.1m, in line with our estimates. The final dividend from FY19 was cancelled, but an interim reinstated at 8.0p, slightly ahead of our 7.5p estimate. Offshore Oil was the stand-out performer, with revenue growth of 4% and UOP growth of 23% to £5.4m with the momentum from H2 2019 continuing for subsidiary RMSpumptools’ well life extension products, Renewables and decommissioning. Marine Support reported a 28% decline in UOP as sub-sea Renewables and Oil and Gas work was cancelled or deferred. However, the early beach landing project in Mozambique progressed well, as did FY19 acquisitions Martek and Continental, and ship-to-ship services delivered 20% revenue growth. A £1.5m restructuring charge has been taken to reduce headcount in the division. Specialist Technical’s supply chain was affected by travel restrictions and this limited progress on the saturation diving systems for Shanghai Salvage, but good progress was made on the two submarine rescue projects. Tankships’ UOP fell 39% to £3.6m as demand for clean petroleum products fell significantly due to the lockdown, but have improved in June and July.

Outlook. Assuming no material deterioration in the Covid-19 situation, trading is expected to improve in H2, although we trim our FY20E UOP estimates by 8% as we were anticipating a steeper recovery than now seems likely as the oil price remains around US$45/bbl and travel restrictions have not been fully lifted. Valuation. As we have trimmed estimates, we cut our target price from 1,800p to 1,700p. However, this still provides 45% upside from the current share price and we therefore reiterate our Buy recommendation.

And Jefferies:

In general, the results are a touch better than JEFe and are resilient, against what was a tough market backdrop (COVID-19 and a weak oil price), with the group delivering a good cost/cash performance. Importantly, all divisions remained profitable every month during 2Q20. 1H20 sales were -10% yoy (-£29m to £258m), but 1H20 EBITA of £19.5m was only -£5m/-20% yoy, with operational gearing of 17%. 1H20 PBT/EPS of £15.1m/23.6p were ahead of JEFe (£14.5m/23.3p) and the group has paid a 1H20 dividend of 8.0p (1H19: 11.3p). Cash flow was very strong and Net Debt (pre-IFRS16) of £173m was c£30m lower yoy and largely as expected. . . . 

Progress has been made on the group’s strategic review, initiated post the appointment of CEO O’Lionaird. COVID-19 has delayed the update/ publication of mgmt’s findings (expected in FY21F) and although we do not expect revolution, we expect mgmt to revisit, retest and create a plan for future growth (building on past successes), focusing on the group’s operations (where and how to play, capital allocation etc) as well as its purpose/values & behaviour.

Outlook: As with most of our UK Industrials coverage, there is uncertainty going into 2H20F and this influences the outlook commentary. Mgmt expects 2H20F trading to remain “challenging”, but also looks for improvement, and there will also be the benefits of 1H20 cost actions. We share mgmt’s view that the group is well positioned to benefit from improving markets over the medium/long term.

Consensus Forecasts: On the back of this update, we would expect consensus PBT/ EPS forecasts to slip a touch (possibly by mid single-digits), which we argue is already being priced into the shares.

Settee shop DFS has a surprise update covering the first six weeks of the new financial year. So far so good, they say, which gifts hacks an easy pun. Here’s Shore Capital (no coverage) to summarise the main points:

In the intervening period since its last update, trading at DFS is said to have been strong both from its showrooms and online; 6W order intake is equivalent to an additional c£70m of sales, trading that is said to be ‘significantly ahead of our initial expectations and is in addition to our previously announced strong opening order book that will generate a further in year revenue benefit of c£100m’.

DFS seeks to explain the strong trading in a balanced manner to our minds, suggesting a number of moving parts, including:

• British people expending more on their homes, not least with many of them spending a lot more time in them, particularly with major levels of working from home

• Latent demand caused by the nationwide lockdown, albeit one would be expecting this force to be working its way through the system perhaps?

• What DFS calls the ‘strengthening advantage from our hybrid digital and physical offering’.

Against these positive forces, the Group is keeping its feet on the ground, sensibly again, in our view, given prevailing uncertainty, nay apprehension on behalf of many about what is going to pan out in a macro-economic sense in the UK, particularly with the potential ending of furlough in the autumn, whilst DFS also mentions Brexit as a source of fog for the future. Within these contexts, the Group also suggests that some consumers maybe ‘bringing forward spending decisions and this may impact trading later in the year’. . . . 

Time will tell how this all pans out but against a pretty gloomy macro-economic narrative on the UK economy, and the consumer segments in particular, noting July GfK NOP consumer confidence stuck at the minus 27 level. Whilst so, it would be a mistake to us to suggest that all categories and segments are experiencing a tough time at present.

Non-discretionary, for example the grocers, are experiencing strong trading, as are the domestic motor dealers, noting the strength of the Motorpoint+ (MOTR, HOUSE STOCK at 279p) update yesterday (24th August 2020). DFS, therefore, underscores the increased current expenditure on the home, and gardens we would suggest, alongside robust online activity. These are the positive forces emerging from the Coronavirus impacted consumer economy

Over in non-results sellside, UBS likes Carlsberg:

We upgrade Carlsberg to Buy based upon (i) a better appreciation of the mid-term sales growth and margin opportunity in Asia (based on country level modelling), (ii) medium term mix opportunities in W Europe, despite short term headwinds, (iii) signs of stabilisation in Russia, and (iv) optionality from its strong balance. We also note that Carlsberg screens increasingly well on our inflation adjusted growth framework. We hence view the 7% share price pull back over the past week as an attractive entry point. Our updated price target of DKK1000 offers 20% upside potential.

‘Real’ growth underappreciated, diverse range of sales growth drivers

Carlsberg has traditionally been seen as one of the slower top-line stories in Staples; indeed we forecast average organic sales growth ~4% 2022 -26, vs. the Staples average of 4-6%. However, Staples growth is often illusionary and simply the pass through of EM inflation which is then lost in FX depreciation; using our inflation adjusted growth framework Carlsberg screens increasingly well; we estimate that Carlsberg grew sales c.140bps organically above inflation 2017-19 vs the Staple average of 80bps. We view this as sustainable given its diverse range of growth drivers, namely; (i) China driven by premiumisation but also local brands, (ii) further mix improvement in W Europe, and (iii) stabilisation in the two traditionally challenged markets of Russia (share stabilizing at 28-29%) and the UK (recent growth in off-premise, upcoming JV with Marston’s).

Scope for further margin expansion beyond near term cost savings

Carlsberg achieved H1 organic margin expansion of +47bps (UBSe) despite top-line challenges thanks to a rigorous focus on cost. While some savings will reverse as demand recovers we believe other OPEX savings will be more structural benefiting 2021 and beyond. Furthermore we have re-worked our model to better capture country level margin drivers across the Asia and now see a more compelling margin opportunity. The recent improvement in Russia also suggests no further need for a margin reset in the market. We forecast avg margin expansion +35 bps pa 2021-25E.

Valuation: Discount to Staples not justified in our view

Carlsberg trades on a 2021 PE of 20.5x, a 14% discount to Staples (ex-Tob) and a FCF yield of 6.2%, above the sector average of +4.5%. Our DCF-based PT is raised to DKK1000 based on our revised mid-term estimates (WACC 7% & TG 2.5 unchanged). This puts Carlsberg on a 12mth forward PE of 23x, broadly in line with Stapes which we view as conservative given its strong balance sheet

Jefferies can’t see much to like about AA ahead of Panel’s PUSU on September 1:

Significant equity needed. To enhance the long-term viability of the business, the company is assessing a range of potential refinancing options, including the possibility of raising new equity. The “group needs a more stable and sustainable capital structure and this requires a significant amount of additional new capital in order to reduce the Group’s indebtedness and to fund future growth.” We have long held the view that in the context of our estimated c£81m of FCF in FY21F, net debt of £2.65bn is too high. The most pressing of the £913m due for repayment in 2022 is the £570m of 5.50% B notes.

Refinancing challenges. The B notes were previously trading at levels that suggested refinancing with a LFL instrument would be close to impossible. Since the improvement in markets and bid interest, the implied yield is c8% – something that is re-financeable and likely a rate acceptable to the AA. That said, already slim FCF (relative to debt) will then be eroded. FCF could be maintained if the AA were to raise capital. Raising £300-900m, based on FY21F consensus EBITDA of £340m, would take 0.9x-2.6x off leverage and reduce the current level from 7.7x to 6.8x-5.0x. With a market cap of £240m, even the bottom end of the range requires a large raise and subsequent discount.

Bidders but for debt or equity? The initial consortium of bidders was: 1) Centerbridge and TowerBrook, 2) Platinum Equity Advisors, and 3) Warburg Pincus. It was then reported by Sky News that Apollo was also interested in making an approach, although this has not been confirmed by the company. These firms invest across asset classes and, in some cases, with a bias to credit. In our view, we see involvement with the debt over equity as more likely. The B notes and RCF have a change of control clause.

40p equity value in a bid scenario. In a non-competitive process we would expect an interested party to avoid paying anything for the equity. With 3 or 4 possible bidders the competitive tension may drive the price up. Our valuation sees only option value in the equity. The 5p PT implies an unlevered FCF yield of 8-9% and EV/EBITDA of 7-8x. The 4 August Times article mooted the bid at 40p. A challenge to overcome for any bid is that the top 5 shareholders own c50%, with c20% retail and c8% inside ownership.

Risk reward looks unappealing. At the worst end of the outcomes, all bidders could walk away, in which case the share price could halve and bond yields rise. Beyond that, if the B notes could no longer be refinanced then the equity has no value. A 40p equity take out (vs undisturbed price of c25p) offers minimal upside. In that context we see risk/reward as unappealing.

Siltronic, the German silicon wafer maker, gets un upgrade from Credit Suisse that’s in combo with a sector review:

Upgrade to Outperform from Neutral; Raise TP to €100 from €90. For Siltronic, we keep our 2020 estimates unchanged, but raise 2021 sales/EBITDA slightly by 1%/2% to reflect some price stabilisation partly offset by FX headwinds, and also introduce 2022 estimates. Given our view that wafer prices are likely to stabilise during 2H20 along with attractive valuation (4.4x adjusted EV/EBITDA on 2022E), we upgrade our rating to Outperform and raise our TP to €100 implying 30%+ potential upside from current levels. Our 2020/21 sales and EBITDA estimates are 1%/3% and 6%/7% above street.

Still in oversupply mode, but reaching close to equilibrium during 2H21. While wafer oversupply is set to continue over the next 12 months, Smartphone recovery (5G cycle) and continued Memory strength (Cloud, rise of Artificial Intelligence/Machine Learning and higher content in 5G devices) should result in a more balanced situation from 2H21. Further, slowing bit density for both DRAM/NAND as future nodes get more complex means that 8% oversupply for 300mm wafers in 2020 may decline to only 1% in 2021. This is also supported by aggregate capex at wafer makers having peaked in 2019 and likely to fall 10% in 2020/21 suggesting material slowdown in new capacity additions.

Some early signs of price stabilisation. Despite the excess capacity situation currently, we are already starting to see stabilisation in wafer prices (after mild correction seen since mid-2019) helped by rational pricing behavior, longer term agreements and secular trends around increasing silicon content per device. As such, we model industry pricing of $0.92 per sq. inch in 2H20/2021, down only slightly from a peak of $0.95 in 1H19.

Catalysts and Risks. Catalysts will be updates on memory demand/pricing trends along with monthly sales at Taiwan peers followed by Q3 earnings on 29 October. Risks include slowdown in demand causing rise in wafer inventory, excess supply situation continuing for longer (beyond 2H21) causing pricing pressures, and FX headwinds (strong EUR/USD).

Valuation in attractive territory. Our TP of €100 is based on 2022E EV/EBITDA of 6.0x (previously we used 6.1x EV/EBITDA on 2021E). For EV, we adjust current net cash position (€511mn) for unfunded portion of pension deficit (€203mn). Trading at 4.4x adjusted EV/EBITDA and 9.5x P/E on our 2022 estimates, shares look attractive given: i) FY3 average of 5.2x and 10.9x respectively since 2017, and ii) 18% and 13% discount to peers (SUMCO & GWC). Siltronic also screens as attractive in CS HOLT® with current valuation implying flat sales with steep decline in margins over the 2023-29 window.

Belgium’s busted-flush drugs developer Galapagos slips further following the FDA knockback last week for its big hope. Jefferies is the latest to downgrade:

The FDA has requested data from the MANTA/MANTA-RAy male toxicity studies in order to complete the regulatory review of filgotinib in rheumatoid arthritis (RA). These data are expected early-21E for potential resubmission by 2Q21E and likely 2022E US launch. Even if data reassure FDA on male testicular safety, this delay will nevertheless allow other competing JAK inhibitors, notably AbbVie’s Rinvoq, to become more firmly established, for a more challenging launch by partner Gilead who is already a new entrant in immunology markets.

Furthermore, the FDA also expressed broader concern on the overall risk:benefit profile of the filgotinib high dose (200mg), which could be allayed by longer-term follow-up data available at the time of re-filing. Whilst both doses recently received an EU CHMP positive recommendation in RA, to date FDA has only approved low doses for competitor JAK inhibitors in RA.

Uncertainties and US delay drive lower peak filgotinib sales: Whilst we expect MANTA/RAy to support US re-filing, we have concerns that FDA may continue to take a cautious stance on the higher 200mg dose, even with additional data. Concerns over the high dose arguably have more read across to the ulcerative colitis (UC) filing, since only the high dose met the induction co-primary endpoint in the Phase III trial, but both doses achieved the maintenance co-primary endpoint. However, we understand 200mg high dose approval for RA is viewed as important by Gilead, likely needed as a differentiating factor as the fourth JAKi to market, hence the partner’s commitment to the drug may falter.

We now expect US RA launch 2022E (from 2H20) and we reduce peak filgotinib sales to $4bn (from $6bn) given lower $1.1bn in RA (from $3bn). We also trim the probability to 65% (from 95%) given high-dose uncertainties. US sales contribute $2bn including a modest $400m in RA. We continue to expect EU and Japan RA approvals 2H20E, albeit these are not entirely without risk given the US concerns.

Downgrade to Hold with PT to €133/$157: Filgotinib is now worth €21/share (c.16% of NPVs), from €95/share (c.45% of NPVs), based on our lower peak sales and probability. Pipeline assumptions are unchanged.

Near-term pipeline catalysts are high-risk: Upcoming catalysts include (1) ziritaxestat (GLPG1690) Phase IIa NOVESA systemic sclerosis data in 3Q20E; (2) GLPG1205 Phase IIa PINTA lung fibrosis (IPF) data 4Q20E; (3) GLPG1972 Phase IIb ROCCELLA data in osteoarthritis 4Q20E; and (4) ziritaxestat interim analysis of the Phase III ISABELA trial in IPF expected 1H21E. Near-term we do not see these shifting focus from filogotinib.

And JP Morgan Cazenove has a thing out on the ever-exciting Nordic telecoms market:

The Nordic telcos have had a solid Q2 reporting season: all have beaten consensus on EBITDA and revenues were mostly in line or ahead of consensus. The results were dominated by very similar themes for all stocks: 1) strong cost performance with a meaningful proportion of the efficiency gains driven by structural and therefore sustainable improvements; and 2) all management teams have provided on the whole a conservative outlook for the remainder of the year. COVID-19 has ultimately created a lot of volatility around performance, and given the similarity of the themes dominating the results, it makes it hard to discern winners from losers. In this report, we analyse who is better positioned for a +ve surprise in H2, how much of the cost reductions were structural, and also who is better positioned for a spring back in 2021. We upgrade Telia to Neutral. Our order of preference for H2 is: Tele2 (OW, SEK163 PT), Telia (N, SEK35), Telenor (N, NOK173) and Elisa (UW, €51).

 Tele2: set up for a beat in 2H20 and a strong rebound in 2021. We believe Tele2 has scope for a positive surprise in 2H20, supported by excellent cost execution and growth in the Baltics (see our recent Baltics deep dive). We also believe Tele2 is set to deliver impressive 7% EBITDA growth in 2021, as the headwinds of 2020 reverse.

 Telia: u/g to Neutral – cash flows, dividends have bottomed. We believe the bear arguments on Telia no longer apply as cash flows have reached the bottom and we do not anticipate further dividend cuts. The kitchen-sinking of guidance by the new CEO at the upcoming CMD also no longer applies, as the pandemic has already reset the expectations for Telia. PT raised to SEK35 from SEK33.

 Telenor: cost upside balanced by FX headwinds. Telenor has demonstrated an impressive cost-cutting performance in Q2 (~8% underlying opex reduction), most of which should carry over into Q3 and Q4. At the same time, TNOR faces a major FX headwind, with the NOK recently appreciating by ~6% vs. the TNOR basket of currencies, many of which are pegged to the weakening USD.

 Elisa: remain UW on weak mobile growth. We see Q3 as another weak quarter for mobile service revenues, as the roaming drag will likely increase further. We believe Elisa continues to underperform into Q3 as a result.

• Updates might follow, influenced or otherwise by requests and complaints in the comment box.