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K3 Business Technology — Update 14 September 2016

K3 Business Technology — Update 14 September 2016

K3 Business Technology

Katherine Thompson

Written by

Katherine Thompson

Director

K3 Business Technology

Retail provides the growth engine

FY16 results

Software & comp services

14 September 2016

Price

348.0p

Market cap

£125m

€1.17:£1

Net debt (£m) at end FY16

8.9

Shares in issue

36.0m

Free float

78%

Code

KBT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.3

(2.7)

25.4

Rel (local)

15.9

(11.1)

16.1

52-week high/low

373.50p

277.50p

Business description

K3 Business Technology provides Microsoft- and Sage-based ERP solutions and managed services to SMEs in the retail, distribution and manufacturing sectors.

Next event

AGM

24 November 2016

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

K3 Business Technology is a research client of Edison Investment Research Limited

K3’s FY16 results confirmed that the Retail business continues to make good progress with strong order intake at year-end despite the Brexit vote. Performance in certain parts of the Manufacturing & Distribution business was disappointing; action has been taken to reinvigorate sales in these areas. With a strong pipeline entering FY17, K3 is in a good position to generate growth in revenues, profitability and cash flows.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/15

83.4

7.2

19.1

1.50

18.2

0.4

06/16

89.2

8.8

23.0

1.75

15.1

0.5

06/17e

97.2

11.3

25.3

1.93

13.8

0.6

06/18e

101.0

12.3

27.5

2.12

12.7

0.6

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Retail strength offset by Sage weakness

K3 reported FY16 revenue growth of 6.9%, 1.9% ahead of our forecast helped by strong order intake for the Retail business in H216. While group gross profit and gross margin exceeded our forecasts, the Sage business acted as a drag on profitability and higher than expected operating expenses (in part because one customer went into administration close to year-end) resulted in adjusted operating profit 6.7% below our forecast. Normalised EPS, however, was only 1.1% below our forecast helped by lower interest and tax charges. CEO David Bolton has announced that he is moving to the role of executive chairman and the search for a new CEO is underway.

Outlook and changes to forecasts

We have revised our forecasts to take account of the relative performances of the two divisions, factoring in stronger growth for Retail and slower growth for Manufacturing & Distribution as well as adding in the recent Merac acquisition. While we raise our FY17 revenue forecast by 1.7%, higher ongoing operating expenses result in a 3.5% cut to our adjusted profit and 3.7% cut to our normalised EPS forecast (9.7% EPS growth). We introduce a forecast for 8.7% EPS growth in FY18. We forecast a £4.4m reduction in net debt in FY17 moving to a net cash position by the end of FY18.

Valuation: Trading at a discount to peers

K3 is trading on a P/E multiple of 13.8x FY17e normalised EPS and 12.7x FY18e compared to small-cap UK software and IT services stocks trading on an average 19.8x current year and 16.8x next year EPS. K3 continues to invest in developing and supporting its own-IP solutions and building out its partner channel. Combined with a focus on selling hosting services to a larger proportion of customers, the company has the potential to grow the business on a multi-year basis. Continued evidence of consistent revenue growth and margin improvement should help to reduce the discount to peers.

Review of FY16 results

K3 reported group revenue growth of 6.9%, 1.9% ahead of our forecast. On a divisional basis, Retail revenues came in 6.2% ahead of our forecast whereas Manufacturing & Distribution was 2.1% below. The company had to write off revenues relating to a major customer, My Local, which went into administration at the end of FY16. We understand this comprised mainly hosting and maintenance revenues, with the greatest impact on the Retail division and a smaller effect on Manufacturing & Distribution. Recurring revenues grew 4% y-o-y to make up 46.7% of total revenues, slightly down from 47.8% in FY15.

Group gross profit of £48.5m was 2.5% ahead of our forecast whereas normalised operating profit was 6.7% below. The My Local bad debt, incurred at the end of H216, made up a large percentage of the operating expense overrun. In addition, the company bolstered its legal team and other senior management, resulting in higher than expected head office costs. The net interest expense of £701k was lower than our £780k forecast, and the tax rate came in below our forecast (13.3% versus 18.0% on a normalised basis), resulting in normalised EPS only 1.1% below our forecast. As previously flagged in the July trading update, net debt was higher than our forecast due to a combination of currency (c £0.6m impact), the My Local write-off and licence deals signed at the end of the period. In addition, total capex (tangibles plus capitalised development costs) came in at £5.6m compared to our £4.7m forecast.

The company announced a final dividend of 1.75p, +16.7% y-o-y and ahead of our 1.65p forecast.

Exhibit 1: Summary financials

£m

FY15

FY16

FY16

% difference

% y-o-y

Retail revenues

39.7

42.3

44.9

6.2

13.0

Manufacturing & distribution revenues

43.7

45.2

44.3

-2.1

1.3

Total revenues

83.43

87.50

89.18

1.9

6.9

Retail

3.51

5.25

6.05

15.1

72.4

Manufacturing & distribution

5.12

5.50

4.28

-22.2

(16.4)

Head office costs

(0.46)

(0.54)

(0.80)

48.5

73.9

Normalised* operating profit

8.17

10.22

9.53

-6.7

16.6

Operating margin

9.8%

11.7%

10.7%

-1.0

0.9

Normalised PBT

7.24

9.44

8.83

-6.4

23.9

Normalised net income

6.16

7.74

7.65

-1.1

24.1

Reported EPS (p)

10.9

14.0

12.6

-9.4

15.6

Normalised EPS (p)

19.1

23.3

23.0

-1.3

20.4

Net debt

12.08

5.77

8.88

54.0

(26.5)

Source: K3 Business Technology Group, Edison Investment Research. Note: *Normalised profitability measures exclude exceptionals, share-based payments and amortisation of acquired intangibles.

Exhibit 2: Own-IP related revenues

£m

H115

H215

H116

H216

% y-o-y

% h-o-h

Product licence revenues

4.54

4.20

4.89

5.87

39.8

20.0

Retail

2.62

2.88

3.13

4.21

46.2

34.5

Manufacturing & distribution

1.92

1.32

1.76

1.66

25.8

-5.7

Product-related revenues

4.53

4.62

4.67

5.84

26.4

25.1

Retail

4.32

4.08

4.49

5.64

38.2

25.6

Manufacturing & distribution

0.21

0.54

0.18

0.20

-63.0

11.1

Gross profit

5.8

5.92

6.27

7.81

31.9

24.6

Retail

3.84

4.18

4.47

6.10

45.9

36.5

Manufacturing & distribution

1.96

1.74

1.80

1.71

-1.7

-5.0

Gross margin (%)

63.9

67.1

65.6

66.7

-0.4

1.1

Retail

55.3

60.1

58.7

61.9

1.9

3.3

Manufacturing & distribution

92.0

93.5

92.8

91.9

-1.6

-0.8

K3 IP-related revenues/total revenues (%)

21.8

21.1

22.6

25.0

3.9

2.4

Source: K3 Business Technology

The company is gradually increasing the proportion of own-IP related sales (ie the combination of sales of licences based on K3’s IP plus related revenues). As this is higher margin, this should help drive the group gross margin up over time. Efforts to reduce the cost of implementation in the Retail division are also helping to bring up the Retail own-IP gross margins.

Exhibit 3: K3 divisional performance

£m

FY16a

FY16e

% difference

Revenues

Software

16.23

14.99

8.3

Retail

10.34

8.90

16.2

Manufacturing & distribution

5.89

6.09

-3.3

Services

25.74

26.23

-1.9

Retail

14.52

15.43

-5.9

Manufacturing & distribution

11.22

10.80

3.9

Recurring revenues

41.62

40.47

2.8

Retail

16.74

14.40

16.3

Manufacturing & distribution

24.88

26.07

-4.6

Hardware & other revenues

5.59

4.85

15.3

Retail

3.32

2.59

28.2

Manufacturing & distribution

2.27

2.26

0.4

Total revenues

89.18

87.50

1.9

Retail

44.92

42.29

6.2

Manufacturing & distribution

44.26

45.22

-2.1

Gross profit

48.54

47.38

2.5

Retail

23.36

21.20

10.2

Manufacturing & distribution

25.18

26.17

-3.8

Gross margin (%)

54.4

54.1

0.3

Retail

52.0

50.1

1.9

Manufacturing & distribution

56.9

57.9

-1.0

Operating costs

39.04

37.19

5.0

Retail

17.31

15.95

8.5

Manufacturing & distribution

20.90

20.67

1.1

Head office

0.83

0.57

45.6

Adjusted operating profit*

9.50

10.19

-6.7

Retail

6.05

5.25

15.1

Manufacturing & distribution

4.28

5.50

-22.2

Head office

-0.83

-0.57

45.6

Adjusted operating margin (%)

10.7

11.6

-1.0

Retail

13.5

12.4

1.0

Manufacturing & distribution

9.7

12.2

-2.5

Source: K3 Business Technology. Note: *Adjusted operating profit excludes exceptionals and amortisation of acquired intangibles.

Retail

The division saw strong growth of 13.0% in FY16. Excluding the £0.8m contribution from DdD (two months’ worth), revenues grew 11.0%. This is after writing off revenues from the failure of My Local. Software licence sales were particularly strong, up 44.8% y-o-y. H216 licence sales were up 90.8% y-o-y and 29.8% h-o-h, with several major deals signed in the period. The division also continues to see a steady flow of work from the Ikea franchisees as they roll-out and upgrade stores.

Recurring revenues increased 13% to make up 37% of revenues (flat versus FY15). Several customers have signed extended software licence enhancements ahead of Microsoft’s planned licensing structure changes.

Services revenues decreased 4% after the completion of several contracts that used high levels of contractors. The company has worked to bring the cost of implementation down and has built more automation into the process, resulting in improved gross margins of 27% for this part of the business (up from 24%).

The division received orders worth £21.0m in FY16, compared to £11.3m in FY15. Larger contracts included orders from Bonmarché, Sue Ryder, Fortnum & Mason and Ann Summers. The channel partner network generated orders from 27 customers (eight for ax│is Fashion), including the contracts with TriStyle, KLiNGEL and Lacoste that were previously announced. Orders through the channel totalled £2.43m, compared to £1.60m in FY15.

Adjusted operating profit of £6.05m (13.5% margin) came in 15% ahead of our forecast despite the loss generated from the My Local write-off.

Outlook

The new deal pipeline has expanded by 40% y-o-y and 70% h-o-h to £44.9m, including £4.6m via channel partners. Management continues to see North America as a good opportunity for new orders and is building a team with sales and pre-sales capability in addition to developing its channel partner strategy there.

Manufacturing & Distribution

This division saw mixed performance, with revenues increasing by only 1.3% to £44.3m (2.1% below our forecast) and adjusted operating profit coming in 22% below our forecast to generate a margin of 9.7% compared to 11.7% the prior year. We note that the Starcom acquisition added revenues of £2.5m and adjusted operating profit of £0.25m y-o-y. The SYSPRO business saw good levels of renewals and upgrades to new customers but saw disappointing levels of new business in H2. The expected improvement in the Sage business did not materialise in H216, resulting in a £1m negative impact on profitability y-o-y. The cloud hosting and managed services business has made good progress in the year, ending the year with a contracted subscription run rate of £8.5m (£6.5m from hosting), up from £8.0m (£6.0m from hosting) at the end of FY15 despite losing the My Local business.

Software licence revenues declined 12% y-o-y, mainly due to lower sales of Sage and CRM solutions. This conversely had a positive impact on licence gross margins, increasing to 58.4% from 54.9% a year ago. Services revenues rose 15% y-o-y reflecting implementation activity for Microsoft Dynamics, CRM and hosting. New orders increased 43% y-o-y to £14.3m, as the Microsoft Dynamics AX and NAV had a strong H2.

Outlook

At the end of H216, action was taken to refresh the SYSPRO new business sales team and changes made to the Sage sales team to improve closure rates, which should result in improved levels of new business in FY17. The new business pipeline stood at £31.2m at the end of FY16, up 4.7% y-o-y and 3.3% h-o-h.

Outlook and changes to forecasts

The company is focused on developing and selling its own-IP product, and continues to cultivate its partner channel. The strong order book and new business pipeline support growth in FY17. We note that the gradual shift towards consumption-based licensing models will extend the period over which profits are recognised and cash is received, although the precise impact is difficult to forecast owing to the wide variety of contract types.

We summarise below the changes to our forecasts. We expect the company to move to a net cash position by the end of FY18. The main changes in our forecasts arise from:

■

Revenues: stronger performance from Retail and weaker performance in Manufacturing & Distribution plus adding in Merac from the beginning of July.

■

Higher operating costs reflecting the increases described above.

■

Higher working capital.

■

Higher dividend forecasts for FY17 and FY18 (assume 10% growth in both years).

Exhibit 4: Changes to forecasts

£m

Old

New

Change

New

Growth (%)

FY17e

FY17e

(%)

FY18e

FY17e

FY18e

Retail

48.4

50.4

4.1

52.9

12.2

5.0

Manufacturing & distribution

47.2

46.8

-0.8

48.1

5.7

2.7

Revenues

95.61

97.20

1.7

100.99

9.0

3.9

Margins (%)

Retail

6.44

7.41

15.1

7.98

14.7

15.1

Manufacturing & distribution

6.29

5.21

-17.2

5.52

11.1

11.5

Head office costs

(0.58)

(0.89)

53.4

(0.93)

Normalised operating profit

12.15

11.73

-3.5

12.57

Operating margin

12.7%

12.1%

-0.6

12.4

Normalised PBT

11.85

11.33

-4.4

12.32

Normalised net income

9.59

9.29

-3.1

10.10

Reported EPS (p)

20.2

18.0

-10.7

21.4

Normalised EPS (p)

26.2

25.3

-3.7

27.5

Net debt/(cash)

2.18

4.43

103.8

(2.25)

Source: Edison Investment Research


Exhibit 5: Financial summary

£'000s

2012

2013

2014

2015

2016

2017e

2018e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

67,961

63,513

71,950

83,427

89,175

97,200

100,990

Cost of Sales

(28,491)

(30,375)

(32,990)

(40,446)

(40,636)

(44,830)

(46,744)

Gross Profit

39,470

33,138

38,960

42,981

48,539

52,370

54,246

EBITDA

 

 

12,942

7,261

9,861

10,975

12,843

15,930

17,166

Operating Profit (before am of acq. intang. and except.)

11,405

5,164

7,328

8,169

9,529

11,730

12,566

Amortisation of acquired intangibles

(3,586)

(3,182)

(2,989)

(2,800)

(2,734)

(2,900)

(2,900)

Share-based payments

(72)

(70)

(27)

(18)

(28)

(30)

(30)

Other

(395)

(727)

(1,722)

(546)

(1,538)

(500)

0

Operating Profit

7,352

1,185

2,590

4,805

5,229

8,300

9,636

Net Interest

(1,309)

(723)

(705)

(926)

(701)

(400)

(250)

Profit Before Tax (norm)

 

 

10,096

4,441

6,623

7,243

8,828

11,330

12,316

Profit Before Tax (FRS 3)

 

 

6,043

462

1,885

3,879

4,528

7,900

9,386

Tax

(319)

780

675

(436)

(425)

(1,416)

(1,687)

Profit After Tax (norm)

8,591

4,165

5,874

6,162

7,650

9,294

10,104

Profit After Tax (FRS 3)

5,724

1,242

2,560

3,443

4,103

6,484

7,699

Average Number of Shares Outstanding (m)

28.2

29.2

31.4

31.6

32.4

36.0

36.0

EPS - normalised (p)

 

 

30.4

14.3

18.7

19.5

23.6

25.8

28.1

EPS - normalised fully diluted (p)

 

 

29.7

14.1

18.5

19.1

23.0

25.3

27.5

EPS - FRS 3 (p)

 

 

20.3

4.3

8.1

10.9

12.6

18.0

21.4

Dividend per share (p)

1.00

1.00

1.25

1.50

1.75

1.93

2.12

Gross Margin (%)

58.1

52.2

54.1

51.5

54.4

53.9

53.7

EBITDA Margin (%)

19.0

11.4

13.7

13.2

14.4

16.4

17.0

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

16.8

8.1

10.2

9.8

10.7

12.1

12.4

BALANCE SHEET

Fixed Assets

 

 

68,325

69,398

67,067

67,497

78,072

77,242

74,792

Intangible Assets

21,255

21,040

20,040

20,806

26,369

25,739

23,439

Tangible Assets

2,722

2,927

2,439

2,316

2,389

2,189

2,039

Goodwill

43,540

44,610

43,952

43,541

48,793

48,793

48,793

Other

808

821

636

834

521

521

521

Current Assets

 

 

32,418

25,523

29,535

33,734

43,695

46,098

51,479

Stocks

0

0

0

0

0

0

0

Debtors

30,322

25,251

28,888

31,839

40,923

41,809

43,440

Cash

2,096

272

647

1,895

2,772

4,288

8,039

Current Liabilities

 

 

(48,043)

(39,272)

(40,278)

(32,886)

(36,332)

(40,875)

(37,295)

Creditors

(8,797)

(5,842)

(7,218)

(7,640)

(8,324)

(9,061)

(9,409)

Other Creditors

(21,468)

(19,379)

(18,799)

(21,803)

(24,632)

(23,132)

(22,132)

Short term borrowings

(17,778)

(14,051)

(14,261)

(3,443)

(3,376)

(8,682)

(5,754)

Long Term Liabilities

 

 

(5,797)

(4,524)

(3,719)

(14,850)

(12,025)

(3,171)

(2,646)

Long term borrowings

0

(32)

(14)

(10,531)

(8,272)

(38)

(38)

Other long term liabilities

(5,797)

(4,492)

(3,705)

(4,319)

(3,753)

(3,133)

(2,608)

Net Assets

 

 

46,903

51,125

52,605

53,495

73,410

79,294

86,330

CASH FLOW

Operating Cash Flow

 

 

7,284

8,022

5,352

9,600

5,498

13,781

14,884

Net Interest

(839)

(820)

(848)

(950)

(783)

(400)

(250)

Tax

(1,312)

(1,217)

290

(264)

(688)

(2,036)

(2,212)

Capex

(3,160)

(4,613)

(4,487)

(4,564)

(5,573)

(5,000)

(5,050)

Acquisitions/disposals

(7,132)

(1,917)

(129)

(1,998)

(7,386)

(1,270)

0

Financing

5,026

2,677

277

69

13,175

0

0

Dividends

(214)

(286)

(316)

(397)

(477)

(630)

(693)

Net Cash Flow

(347)

1,846

139

1,496

3,766

4,444

6,679

Opening net debt/(cash)

 

 

15,486

15,682

13,811

13,628

12,079

8,876

4,432

HP finance leases initiated

0

0

0

0

0

0

0

Other

151

25

44

53

(563)

0

0

Closing net debt/(cash)

 

 

15,682

13,811

13,628

12,079

8,876

4,432

(2,247)

Source: K3 Business Technology Group, Edison Investment Research

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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 2016. “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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by K3 Business Technology 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 2016. “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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Regeneus — Update 14 September 2016

Regeneus

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