Challenger Acquisitions Plc Initiation of coverage Partner to the giants The London eye, now in its sixteenth year of operation is 14 September 2016 still the benchmark standard for successful Giant Observation Wheels (GOW). By 2010, it was turning over Key Statistics £59m with operating profits of over £30.5m. Challenger’s Code : CHAL.L Starneth Group has shown it can generate significant Listing : LSE Main Market Sector : Travel & Leisure revenue from its unparalleled expertise in the design and Market Cap : £3.84m engineering of GOWs. Starneth grossed €11.4m at a pre- Share in issue : 21.18m tax profit margin of nearly 10% in 2014, driven by project Current Price : 18.13 work on the Dubai-I and the New York Wheel. This work is 12 mnth High/Low : 45.5p/18.13p now substantially complete. Stock Performance 50 The pipeline is strong including a conditional contract for 45 turnkey project management services to build a Giant 40 Observation Wheel in Jakarta likely to generate revenues 35 over three years of close to $100m. However until a major 30 project is confirmed trading at Starneth will be 25 20 challenging. In the medium term, Challenger can look 15 forward to the opening of the New York Wheel in early 10 2018, in which it has invested $3m for an equity stake Dec/2015 Jan/2016 Feb/2016 Mar/2016 Apr/2016 May/2016 Jun/2016 Jul/2016 Aug/2016 likely to represent circa 2% of the completed project. Starneth is actively pursuing a further 24 projects for Giant Source: Fidessa Observation Wheels worldwide. This includes negotiations for Financials Turnkey Projects in the Americas, Europe and the Middle East. Its Pre-Acquisition Starneth Group Summary P&L Challenger Acquisitions Y/e Dec-13 Dec-14 H1 Jun 15 H1 Jun 16 management does not foresee the total market size higher than €m €m €m £m 8-12 new iconic-type projects over the next 10 years. However, Revenue 4.4 11.4 6.0 2.0 the Board believes that this market represents a potential PBT 0 1.1 1.6 (1.5) Source: Company results and re -admission of at least US$1 billion in revenues. document Company description The New York Wheel, set to be one of the largest in the world, Challenger Acquisitions is a leader in the Giant Observation Wheel (GOW) industry. Its fully owned will be significantly bigger than the London eye with each rotation Starneth Group specialises in the design and capable of carrying 1,440 vs 800 passengers for London. Its engineering of GOWs and structures with key team members having been behind the design and location on the soon to be regenerated Staten Island waterfront construction of the wheel and drive system for the benefits from the 12m tourists who annually use New York ferry London Eye, the drive and control system for the Las boats, and an estimated annual footfall of 6m to the soon to open Vegas High Roller and the design and engineering for the wheels in Dubai and New York, due to open in Empire Outlets retail park. Our 3.5m annual passenger assumption early 2018. The Company is reviewing a pipeline of is arguably conservative, but our model still suggests annual cash 25 potential GOW projects worldwide. The Company also has a US$3m stake in the New York Wheel which flows of over $50m once debt of circa $416m has been paid off, is expected to be the world’s largest GOW and attract and suggests an NPV of $6.5m attributable to Challenger, upwards of 3.5m visitors per year. more than double its original investment. The current market cap reflects delays in getting Jakarta over the HYBRIDAN LLP line, and the debt within Challenger. The signing of a major 20 Ironmonger Lane, London, EC2V 8EP Website: www.hybridan.com project is the catalyst that would get the shares moving from these levels. Given the pipeline and calibre of the team this could Derren Nathan Tel: 020 3764 2344 be delivered over the next six months, potentially sooner, at Email: [email protected] which point our investment case suggests an equity valuation of £11.6m three times the current value. For analyst certification and other important disclosures, refer to the Disclosure Section Challenger Acquisitions Plc Contents 1. Background .......................................................................................................................... 3 2. Investment case ................................................................................................................ 5 2.1. Team and track record of underlying business .................................................. 5 2.2. Big ticket engineering projects ................................................................................ 5 2.2.1. The New York Wheel ................................................................................................... 6 2.2.2. The Southeast Asian Wheel, Jakarta ....................................................................... 8 2.2.3. Extended Pipeline ......................................................................................................... 9 2.3. Equity investment strategy ......................................................................................... 10 2.3.1. London Eye validates economic model and the world has followed .... 10 2.3.2. Well run GOWs generate long term stable high margins ......................... 11 2.3.3. Aiming to build portfolio of dividend paying profit streams ................... 11 2.4. Valuation ......................................................................................................................... 11 3. Recent financials ............................................................................................................. 12 4. Financial Tables ................................................................................................................ 13 5. Board of Directors and management ....................................................................... 17 6. Significant shareholders and loan notes ................................................................ 21 7. Research Disclaimer ....................................................................................................... 22 2 Challenger Acquisitions Plc 1. Background In terms of design and engineering, Challenger Acquisitions is the leading creator of Giant Observation Wheels (GOWs). Leading is a term we use sparingly, but these are iconic The Challenger team engineering projects of which only four have been constructed ever, with a further two under has a strong track record of specialist way, and in total the Challenger Team has been significantly involved with four of these. Of project delivery the two where Starneth has not been significantly involved is included a wheel which has been beset by operational issues, The Melbourne Flyer. This is indicative of the level of complexity that these major engineering projects encompass and the importance of employing a technical team with the rare and valuable expertise required to get these massive undertakings delivered on time and on budget. Barely a month after opening in December 2008, following a two-year delay, the Melbourne Flyer was closed not to be reopened again until 2013; after a nearly complete rebuild. The re-opening of the renamed Melbourne Star was plagued by a number of further safety incidents. Originally listed as an investment vehicle for acquisitions in the ‘Attractions’ sector, Challenger delivered on this promise via the reverse acquisition of the Starneth Group in July The Group as it stands 2015, plus a direct investment in the New York Wheel project in May 2015. The total today is the result of acquisitions and consideration for Starneth comes to €7.2m plus a variable component equivalent to 30% of investments made in December 2015 the amount by which Starneth exceeds EBITDA of €1.267m annually in the three years following the deal. Of the fixed consideration there remains €2.5m of cash consideration and 1.1m shares. Following the deferral of €1.25m that was originally due 15 July 2016, this will now be paid on the earlier of the financial closing of the Jakarta project or 50% of the balance on 15 January 2017 and the remaining 50% of the balance on 15 April 2017. The payment is secured by a 33.3% share of Challenger’s investment in the New York Wheel Project. A further €1.25m cash payment is due in July 2017, as is the final tranche of 1.1m consideration shares. The market capitalisation of Challenger at £3.84m is currently below the acquisition price of its operating business, and only slightly above the carrying value of its equity stake in the New York Wheel Project. It is important to draw a distinction between Ferris Wheels and Giant Observation Wheels. Giant Observation Whilst an imposing size is obviously a characteristic of GOWs there exists some very large Wheels are complex structures and the Ferris Wheels too, such as the 160-meter Star of Nanchang in China. It is primarily the size consequences of engaging non and design of the capsule that defines a GOW. Most Ferris wheels cannot take more than 8 specialists can be passengers per capsule (which can be open or closed) whereas the London Eye carries 25 disastrous people per capsule and offers genuine 360 degree views. Rather than just hanging there like a gondola cabin, the capsules rotate individually as the wheel turns. They also have separate mechanical and electrical systems such as audio broadcasts and climate control. These factors plus the extra weight of these capsules present significant engineering challenges. 3 Challenger Acquisitions Plc Starneth’s recently