Challenger Acquisitions Plc
Partner to the giants
Initiation of coverage
14 September 2016
Key Statistics
Code
Listing
Sector
Market Cap
Share in issue
Current Price
12 mnth High/Low
Stock Performance
:
:
:
:
:
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CHAL.L
LSE Main Market
Travel & Leisure
£3.84m
21.18m
18.13
45.5p/18.13p
50
45
40
35
30
25
20
15
10
Dec/201 5
Jan /2016
Feb/2016 Mar/ 2016 Apr/2016 May/201 6 Jun/2016
Jul/2016
Aug/2016
Source: Fidessa
The London eye, now in its sixteenth year of operation is
still the benchmark standard for successful Giant
Observation Wheels (GOW). By 2010, it was turning over
£59m with operating profits of over £30.5m. Challenger’s
Starneth Group has shown it can generate significant
revenue from its unparalleled expertise in the design and
engineering of GOWs. Starneth grossed €11.4m at a pretax profit margin of nearly 10% in 2014, driven by project
work on the Dubai-I and the New York Wheel. This work is
now substantially complete.
The pipeline is strong including a conditional contract for
turnkey project management services to build a Giant
Observation Wheel in Jakarta likely to generate revenues
over three years of close to $100m. However until a major
project is confirmed trading at Starneth will be
challenging. In the medium term, Challenger can look
forward to the opening of the New York Wheel in early
2018, in which it has invested $3m for an equity stake
likely to represent circa 2% of the completed project.
Starneth is actively pursuing a further 24 projects for Giant
Observation Wheels worldwide. This includes negotiations for
Financials
Pre-Acquisition Starneth Group Summary P&L Challenger Acquisitions
Y/e
Dec-13
Dec-14 H1 Jun 15
H1 Jun 16
€m
€m
€m
£m
Revenue
4.4
11.4
6.0
2.0
PBT
0
1.1
1.6
(1.5)
Source: Company results and re-admission
document
Company description
Challenger Acquisitions is a leader in the Giant
Observation Wheel (GOW) industry. Its fully owned
Starneth Group specialises in the design and
engineering of GOWs and structures with key team
members having been behind the design and
construction of the wheel and drive system for the
London Eye, the drive and control system for the Las
Vegas High Roller and the design and engineering for
the wheels in Dubai and New York, due to open in
early 2018. The Company is reviewing a pipeline of
25 potential GOW projects worldwide. The Company
also has a US$3m stake in the New York Wheel which
is expected to be the world’s largest GOW and attract
upwards of 3.5m visitors per year.
Turnkey Projects in the Americas, Europe and the Middle East. Its
management does not foresee the total market size higher than
8-12 new iconic-type projects over the next 10 years. However,
the Board believes that this market represents a potential
of at least US$1 billion in revenues.
The New York Wheel, set to be one of the largest in the world,
will be significantly bigger than the London eye with each rotation
capable of carrying 1,440 vs 800 passengers for London. Its
location on the soon to be regenerated Staten Island waterfront
benefits from the 12m tourists who annually use New York ferry
boats, and an estimated annual footfall of 6m to the soon to open
Empire Outlets retail park. Our 3.5m annual passenger assumption
is arguably conservative, but our model still suggests annual cash
flows of over $50m once debt of circa $416m has been paid off,
and suggests an NPV of $6.5m attributable to Challenger,
more than double its original investment.
The current market cap reflects delays in getting Jakarta over the
HYBRIDAN LLP
20 Ironmonger Lane, London, EC2V 8EP
Website: www.hybridan.com
line, and the debt within Challenger. The signing of a major
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
Email: [email protected]
be delivered over the next six months, potentially sooner, at
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
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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
has a strong track
record of specialist
project delivery
engineering projects of which only four have been constructed ever, with a further two under
way, and in total the Challenger Team has been significantly involved with four of these. Of
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
today is the result of
acquisitions and
investments made in
December 2015
2015, plus a direct investment in the New York Wheel project in May 2015. The total
consideration for Starneth comes to €7.2m plus a variable component equivalent to 30% of
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
Wheels are complex
structures and the
consequences of
engaging non
specialists can be
disastrous
Whilst an imposing size is obviously a characteristic of GOWs there exists some very large
Ferris Wheels too, such as the 160-meter Star of Nanchang in China. It is primarily the size
and design of the capsule that defines a GOW. Most Ferris wheels cannot take more than 8
passengers per capsule (which can be open or closed) whereas the London Eye carries 25
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.
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Challenger Acquisitions Plc
Starneth’s recently
opened manufacturing
facility will open up
opportunities in new
product areas
In July this year Challenger announced that Netherlands based Starneth had opened a new
UL Certified manufacturing facility to design, manufacture and test the critically important
control systems, which are used to direct and manage the operating systems for Giant
Observation Wheels. This will enable Starneth to bring in-house an activity that was
previously outsourced. We understand this will help the Company to charge additional high
margin fees on future GOW projects. The Company sees this as an opportunity to offer its
drive and control system capabilities to a multitude of projects, not just GOWs.
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Challenger Acquisitions Plc
2. Investment case
2.1. Team and track record of underlying business
The Starneth team’s involvement in GOWs dates back as far as the London Eye, completed
Starneth has previously
won multi million dollar
contracts for GOW
projects
in 2000, which is still considered to be the Gold Standard in terms of Giant Observation
Wheels. The contracts are large and rare by nature but Starneth is the ‘goto’ name in the
Sector. The Pre-Acquisition Starneth Group demonstrated the attractive profits it can
generate through its FYDec2014 results which enjoyed the benefits of the Dubai-I contract
that had been identified during 2013. This was for the design of a wheel and supply of a
drive-system. The Dubai- I is likely to be completed by 2018 and is currently expected to be
the largest GOW in operation at 200+m high.
2014 was its record
trading year with
€11.4m of revenues
and €1.1m PBT
Pre-Acquisition, Starneth Group reported 2014 revenues of €11.4m up 160% due largely to
the Dubai-I project. The company recorded a pretax profit of €1.1m. The acquired Group
has no ongoing work commitments in respect of the Dubai-I, with all contingent liabilities
and assets relating to an arbitration Starneth brought against Hyundai Engineering being
held in a separate entity outside of the Group.
The acquired Starneth Group does not directly hold a contract for the design, manufacture
and construction of the New York Wheel. Rather post acquisition it has entered into a
collaboration agreement with Starneth LLC, a non-Group company to provide procurement
and project management services in respect of the New York Wheel project. At the time of
admission, Starneth had received €1.3 million under the collaboration agreement and
expected approximately €1.1 million in the three months to 31 December 2015 and less than
€0.5 million in 2016.
2.2. Big ticket engineering projects
By offering a full
turnkey project
management service,
significantly higher
project revenues can
be generated
What is interesting about the Dubai-I contract is that it represented a relatively small part of
the overall offering that Starneth is equipped to fulfill in terms of services to developers of
GOWs. These are high profile big ticket engineering projects. The New York Wheel is
budgeted at US$500m. Starneth has the capabilities to provide turnkey project management
services, whereby Starneth would be contracted to manage the entire construction of the
project including all design, engineering, procurement, construction, testing and project
management. In such a project, the Starneth team is compensated as the project manager
with responsibility to hire and manage multiple subcontractors to assist in the construction
of the project.
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Challenger Acquisitions Plc
Starneth is already
conditionally engaged
to deliver one project
for over $90m
For example, in 2015, Starneth entered into a conditional agreement to turnkey project
management services for the design, procurement, fabrication, assembly, erection and
commissioning of an observation wheel to be built in Jakarta, Indonesia. The project still
requires a bank financing structure to be finalized, but the original contract terms initially
envisaged the payment of $89 million over the life of the two-year contract, plus further
amounts for specified items.
2.2.1.
Challenger’s final stake
in the $590m New York
Wheel is likely to be in
the region of 2%
The New York Wheel
Starneth’s technical involvement with the completion of the New York Wheel is coming to an
end. However, in May 2015, Challenger invested $3m for a 2.463% interest in New York
Wheel Investor LLC, the company setup to fund the equity component for the New York
Wheel Project. By the time the wheel is complete, we understand that Challenger’s stake is
likely to be diluted to circa 2%. Circa $275m has been spent on the wheel so far with the
total budget now standing at $590m. Currently, $121m has been equity funded with the
balance of debt funding being either drawn or committed.
Artist’s impression of the completed project
Source: http://newyorkwheel.com/
The New York Wheel is
intended to become
one of New York City’s
great landmark
attractions, alongside
the Statue of Liberty
and the Empire State
Building.
The New York Wheel is intended to become one of New York City’s great landmark
attractions, alongside the Statue of Liberty and the Empire State Building. Located on eight
acres on the northeastern side of Staten Island (St. George), the 630-foot attraction (nearly
50% taller than the London Eye) will be one of the tallest observation wheels in the world.
More than three million tourists already ride the free Staten Island Ferry every year to get a
closer view of the Statue of Liberty. The New York Wheel will give them a reason to stay
and spend more time on the island before returning to Manhattan. In relation to the current
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Challenger Acquisitions Plc
tourism traffic, attractions on the island are extremely limited. Alongside the wheel another
major development is underway on the Staten Island waterfront which will serve to further
swell visitor numbers which can only help traffic to the wheel. Empire Outlets is set to open
in late 2017, alongside the ferry terminal and the New York Wheel. Covering 350,000 sq ft
of retail space, it will be New York City’s first designer outlet destination, comprising over
100 shops, a 190 room boutique hotel and entertainment facilities. Empire Outlets has
estimated that 6 million visitors will shop at this development annually.
The New York Wheel is expected to open in early 2018. The Project includes a 630ft
observation wheel, a 68,000 sq ft terminal and retail building, a 950 space parking garage
and a 5,000-person capacity green roof for events.
We have modelled a discounted cash flow based on some broad brush assumptions. We
have estimated that 3.5m visitors per year should generate circa $150m of revenue annually,
split 2/3 ticket revenues (3.5 million at $30/ticket) and 1/3 naming rights and ancillary
revenues (events, car park, on site facilities etc.). In the first year we have limited total
revenue expectations to $100m. We are assuming no inflation until the fifth year of operation
at which point we are assuming 1% per annum. We are assuming that the $195m of senior
debt is paid as soon as possible from initial cash flows with the remaining debt being paid
off evenly over the following six years. We assume that all funding is now committed and
therefore model cash flows from 2018 (deemed year 2) as the first year of operation. Our
other key assumptions are listed below.
•
Year one operating margin: 40%
•
Operating margin thereafter: 52% (London eye reached circa 50%. Additional scale
of NYW should enable at least slightly higher margins)
•
Interest rate 9%
•
Tax rate kicking in first debt free year of 35%
•
Discount rate 9%
•
Life of wheel is designed for at least 50 years with $100m decommissioning
costs net of scrap value. It is indeed possible that with relevant maintenance the
Our model shows
annual project
cashflow’s of over
$50m once the debt
has been repaid
wheel could operate well beyond this horizon. Vienna’s Iconic ‘Riesenrad’ Ferris
wheel has been operating since 1897!
Material project cash flows start to materialise once the senior debt is paid off with $24.5m
in year 7 rising to $54.9m by year 13, the first debt free year. The total project NPV comes
out at $323m of which $6.47m is attributable to Challenger based on a 2% stake.
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Challenger Acquisitions Plc
New York Wheel Project NPV
Years Revenues $m Opex $m
2
100.0
(60.0)
3
150.0
(72.0)
4
150.0
(72.0)
5
150.0
(72.0)
6
151.5
(72.7)
7
153.0
(73.4)
8
154.5
(74.2)
9
156.1
(74.9)
10
157.7
(75.7)
11
159.2
(76.4)
12
160.8
(77.2)
13
162.4
(78.0)
14 through 51
7,538.7 (3,618.6)
52
0.0
0.0
Total
9,344.0 (4,497.1)
Op Profit Interest $m
40.0
(37.3)
78.0
(35.3)
78.0
(31.2)
78.0
(26.8)
78.8
(22.2)
79.6
(18.2)
80.4
(14.9)
81.2
(11.6)
82.0
(8.3)
82.8
(5.0)
83.6
(1.7)
84.5
0.0
3,920.1
0.0
0.0
0.0
4,846.9
(212.6)
Tax $m Debt repayment $m
0.0
(2.6)
0.0
(42.8)
0.0
(46.8)
0.0
(51.1)
0.0
(51.7)
0.0
(36.8)
0.0
(36.8)
0.0
(36.8)
0.0
(36.8)
0.0
(36.8)
0.0
(36.8)
(29.6)
0.0
(1,372.0)
0.0
0.0
0.0
(1,401.6)
(416.0)
Net Cashflow $m
0.1
(0.1)
(0.0)
0.1
4.9
24.5
28.6
32.7
36.9
41.0
45.1
54.9
2,548.1
(100.0)
2,716.7
Challenger Share at 2% $m
NPV
0.1
(0.1)
(0.0)
0.0
2.9
13.4
14.4
15.1
15.6
15.9
16.0
17.9
213.6
(1.13)
323.6
6.47
Source: Hybridan LLP Model
The regeneration of
Staten island and
natural foot flow to the
area gives the project a
good chance of beating
our expectations
Given the capacity of the wheel and the regeneration of Staten Island delivering a solid flow
of potential passengers the wheel has a good chance of bettering London numbers. Our
model assumes a utilisation rate of only 25%. If from the second year of operation the wheel
generated 4m visitors before at an average price of $30 that would generate a further $15m
per annum of ticket sales alone. Assuming no extra ancillary revenue and a percentage point
improvement to operating margin and plugging that into our model increases Challenger’s
share of the net present value of cash flows to $8.08m an improvement of 25%. There of
course remains significant execution in the already delayed completion of the wheel, and its
operation, but in our opinion it is well primed to become a major attraction in one of the
world’s most visited cities. We understand the operating team in place has an exemplary
record of running major tourist attractions. Discussions are underway with river taxis and
the operators of harbour cruises which between them carry over seven million visitors a year.
2.2.2.
The Southeast Asian Wheel, Jakarta
The Jakarta wheel could ultimately serve as a template for the provision of Starneth’s
specialist engineering services to the pipeline of GOW projects it is assessing, as well as
being Challenger’s next equity holding in a GOW operation. In June 2015, Starneth signed
an agreement to deliver a Turnkey project for the erection of an Iconic Wheel in the
Should financial close
be reached, Jakarta
should generate
revenues of over
$100m in project
management fees
Indonesian capital Jakarta. The 125m wheel is envisaged to comprise eighteen capsules each
carrying forty passengers. 15% of headline figure is payable on financial completion of
the project with the remainder being paid over the expected two-year delivery timetable. An
estimated further $27m is payable for specified items, based on actual cost plus a fixed profit
margin of net 10 per cent. The contract provides that all capital purchases are pre-funded
by the developer. Starneth is set to receive a minority stake in the project which would give
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Challenger Acquisitions Plc
the Group its second holding in an operational Giant Observation Wheel after New York. This
provides the potential for long term dividend income to Challenger with no capital outlay.
The Contract Agreement envisages the payment of US$98.7 million over the life of the
two-year plus contract plus further amounts for specified items, based on actual cost plus a
fixed profit margin of net 10 per cent., excluding VAT. These additional amounts are
estimated with a total of US$27 million. Starneth has been able to negotiate an uplift to the
original fee structure on the back of financing delays. The landsite has been secured but
financing delays continue. Initially the project was expected to go live in early to mid 2016.
We understand the company is confident financing will complete but until such time Starneth
lands a significant project it is likely to remain loss making. We would expect the final terms
of the deal to be altered somewhat given the delay. However, the size of these projects
should mean that even one would enable profitable trading across their duration.
2.2.3.
It is the company’s
objective to secure at
least one major project
per year
Extended Pipeline
In addition to Jakarta, Starneth is actively pursuing a further 24 projects for Giant
Observation Wheels worldwide. This includes negotiations for Turnkey Projects in the
Americas, Europe and the Middle East. Given the scale of the projects it is likely that a
significant number will not come to fruition, but we believe that there is no competitor in the
market with comparable expertise. It is the company’s objective to secure at least one major
project per year. This would go a long way to reducing the volatility of financial results and
give the company visibility on multimillion dollar revenue streams, and an opportunity to
generate annual operating profits from engineering services of over $1m.
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Challenger Acquisitions Plc
2.3. Equity investment strategy
2.3.1. London Eye validates economic model and the world has followed
The iconic status of
GOWs is attractive to
blue chip sponsors
Having completed its first commercial revolution in 2000, the London Eye quickly became as
much a part of the London skyline as the Eiffel Tower is to Paris. The London Eye has also
been a great success financially as can be seen from the historical operating performance
below particularly in the light of the £70m development cost. Since 2010 Merlin
Entertainments no longer reports the performance of the London Eye separately.
The
London Eye is such a success due to the right combination of natural footfall, attractions,
and views of key London sites, characteristics which we believe the New York Wheel shares.
The Eye’s iconic status has attracted Blue Chip Investors and Sponsors alike, having started
life as the British Airways London Eye, before becoming Merlin Entertainments London Eye
following the acquisition of Tussauds, then the EDF Energy London Eye and latterly the CocaCola London Eye.
London Eye Operating History
Year Turnover Operating Profit
£000
£000
2007
49,062
21,424
2008
52,043
24,682
2009
56,438
29,087
2010
59,577
30,531
Margin
%
43.7%
47.4%
51.5%
51.2%
Source: Challenger Acquisitions Presentation.
The man behind
Starneth was the
project manager for the
London Eye
construction
The success of the London Eye has generated considerable interest worldwide to emulate it,
and the Starneth Team contains much of the Human Capital that can make it happen. The
CEO of the Starneth Group, Chiel Smits, was the Project Manager for the London Eye project
and several members of the former London Eye engineering, construction and erection team
are either permanent employees of the Starneth Group or working as consultants on specific
projects when required.
We understand that many projects were set back following the 2008 credit crunch.
Nonetheless five further GOWs have been completed or commissioned since then with
members of the current Starneth team having some involvement with all bar the ill-fated
Melbourne Star. Starneth’s pipeline of 25 projects shows the depth of demand for these
landmark structures, and we believe the team has the experience to align itself with the
projects likely to generate the most favourable returns.
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Challenger Acquisitions Plc
2.3.2. Well run GOWs generate long term stable high margins
GOW’s are long
duration assets which
could conceivably
operate long beyond
the 50 year headline
lifespan of the New
York Wheel
Giant Observation Wheels have long lives potentially way in excess of 50 years and if run
well can have operating margins in excess of 50%. There is something innate about Man’s
desire to view the world from on high. 85 years after opening the Empire State Building
observation decks still generate more than $80m per annum. Given the early age of the
wheels, once they reach a stable operating status, they can almost be viewed as an annuity
for investors. However, this is contingent on the right location, a competent operating team,
and a creative marketing strategy.
2.3.3. Aiming to build portfolio of dividend paying profit streams
Challenger’s equity
investment strategy
aims to build a portfolio
of dividend paying
income streams over
the long term
As well as to deliver a pipeline of engineering projects, the Group’s strategy is to build a
portfolio of select stakes in GOWs around the globe. This may be through stakes allocated
as part of Starneth’s project management services, or through the reinvestment of future
profits and shareholder’s capital. As our modelling of the New York Wheel shows GOWs have
the potential to generate strong profits with relatively quick pay back times. In the long term,
therefore, Challenger could be in receipt of multiple dividend streams which would help to
smooth the Group’s cash flows from the relatively lumpy engineering side.
2.4. Valuation
Challenger is at an early stage on the road to executing its strategy, of executing a pipeline
of turnkey project management operations for Giant Observation Wheels globally, and
Starneth could
conceivably generate
circa $20-$40m of
annual revenues per
annum based on
running one to two
projects concurrently.
building up a portfolio of select stakes in operational wheels. However, in terms of the team
in place and the discussions underway there is, in our opinion, no entity better equipped to
reach this goal. The engineering business is difficult to put a value on at this juncture. There
is little in the way of guaranteed revenue, with much being dependent in the short term, on
financial completion in Jakarta, and in the medium to long term execution of the wider
pipeline. However, over time, based on the Jakarta contract, and previous work done on the
New York and Dubai, Starneth could conceivably generate circa $20-$40m of annual
revenues per annum based on running one to two projects concurrently.
The pipeline suggests that this could indeed be the case within the next 12 to 18 months
At the bottom end of
this range Starneth
could be worth £14.8m
but this is by no means guaranteed. However, we feel the capabilities and track record of
Starneth merit some value despite the current lack of revenue visibility. Taking the bottom
end of this range, applying 1x revenue multiple and then applying a 75% risk weighting for
the current uncertainty gives us a GBP value of £3.7m. However, if Jakarta is financed
However Challenger
needs to deliver on
contracts and plug its
funding deficit
before the year end, that ought to underpin $20m plus of revenue annually for
the next three years. This would enable us to remove our risk discount and
correspondingly quadruple the valuation of the specialist engineering division to
£14.8m. There would still be scope for upside from additional pipeline conversions. Our
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Challenger Acquisitions Plc
valuation of the New York Wheel investment is currently £4.8m but in a scenario where
visitor numbers exceed 3.5m annually we can see this going above £6m. The base case
suggests a total enterprise value of £8.6m against a current market cap of £3.84m. However,
Challenger currently has borrowings of circa £6.9m leaving an equity value of just £1.7m.
Delivery of Jakarta or a
similar project could
unlock significant value
a multiple of the
current market price
The Company’s immediate future is highly dependent on the completion of the Jakarta
contract or one of the other potential major contracts in its pipeline. Based on the above
logic such an event could take our valuation up to an equity value of 11.6m, three times
the current market value. This does not account for the value of any equity stake granted
in Jakarta or the other Giant Observation Projects being discussed. However, if significant
revenues are not secured before the year end the, Company will require further funding.
There are clearly material short term risks involved in an investment in Challenger, but the
potential upside on successful execution of the strategy is a multiple of the current market
value. The recent dismissal of a legal claim by Madison Markets removes one worry that has
been concerning investors. Commercial and financial progress is now what the market wants
to see.
3. Recent financials
Challenger recently reported H1Jun2016 results. It recorded revenues of £2m and a loss of
£1.5m with trading being impaired by the delay in Jakarta. The balance sheet showed a net
current liability position of £4.2m. Within that would be the second anniversary payment to
Starneth (now deferred) and £2.8m of convertible notes meaning that it is not all cash
liabilities. With fixed costs of circa £250k/month and approximately $800k in revenue left to
claim on the NYW project, it is clear that without a commercial launch of Jakarta or one of
its pipeline projects this year, the Company will require further financing before the year
end.
12
Challenger Acquisitions Plc
4. Financial Tables
Pre-Acquisition Starneth Group Summary P&L
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Operating (loss)/profit
Finance income
Finance costs
(Loss)/profit on ordinary activities before
taxation
Income tax expense
(Loss)/profit after taxation
Other comprehensive income
Total comprehensive (loss)/income
Audited
year
ended
31-Dec
2012
€’000
60
60
(87)
(27)
(27)
(27)
-
Audited
year
ended
31-Dec
2013
€’000
4,393
(3,059)
1,334
(1,284)
50
3
Audited Unaudited
year
6 months
ended
ended
31-Dec
30-Jun
2014
2015
€’000
€’000
11,420
5,980
(7,291)
(2,588)
4,129
3,392
(3,043)
(1,754)
1,086
1,638
29
22
(51)
(6)
(13)
2
1,109
1,109
(1)
1,647
1,647
(7)
2
-
attributable to equity shareholders of the
Pre-Acquisition Starneth Group
Pro forma loss/earnings per share
attributable to owners of the Parent:
Basic and diluted (cents)
(27)
2
1,108
1,640
(0.21)
0.02
8.48
12.59
Source: Challenger Acquisitions Prospectus, 2 December 2015
13
Challenger Acquisitions Plc
Challenger Acquisitions P&L
Period ended
30-Jun
2016
(unaudited)
£'000
2,029
-1,553
476
Period ended
30-Jun
2015
(unaudited)
£'000
-
-498
-966
-18
-669
-988
-687
Finance costs
Loss before income taxes
-521
-1,509
-68
-754
Income tax expense
Loss after taxation
-1,509
-754
Loss for the period
-1,509
-754
Other comprehensive expense
-20
-
Total comprehensive loss
attributable to owners of the
parent
-1,529
-754
-0.11
-0.09
Revenue
Cost of sales
Gross profit
Personnel expenses
Administrative expenses
Operating loss on ordinary
activities before taxation
Loss per share:
Basic & diluted
Source: Challenger acquisitions interim results statement, 30 August 2016
14
Challenger Acquisitions Plc
Challenger Acquisitions Cash Flow
Net cash used in operating activities
Loss for the period before taxation
Depreciation and amortisation
Share option charge
Finance cost
Operating cash flows before movements
in working capital
Increase in receivables
Increase in accounts payable and
accrued liabilities
Net cash used in operating activities
Investment in property, plant and
equipment
Investment in available for sale financial
asset
Net cash outflow from investing
activities
Issue of ordinary shares net of issue
costs
Issue of convertible loan notes net of
issue costs
Finance Cost
Net cash inflow from financing activities
Net increase
equivalents
in
cash
and
cash
Cash and cash equivalent at beginning of
period
Cash and cash equivalent at end of
period
Period ended
30-Jun
2016
unaudited
Period ended
30-Jun
2015
unaudited
£'000
£'000
-1,509
39
5
521
-754
-
-944
-754
-508
-5
88
263
-1,364
-496
-16
-
-805
-1,976
-821
-1,976
-
1,020
2,402
2,532
-108
-
2,294
3,552
109
1,080
325
-
434
1,080
Source: Challenger acquisitions interim results statement, 30 August 2016
15
Challenger Acquisitions Plc
Challenger Acquisitions Balance Sheet
As at 30 June As at 31 December
Assets
Current assets
Cash
and
cash
equivalents
Trade
and
other
receivables
Total current assets
Non-current assets
Property, plant and
equipment
Intangible assets
Available-for-sale
financial assets
Total
non-current
assets
Total assets
Equity and liabilities
Capital and reserves
Share capital
Share premium
Shares to be issued
Translation reserve
Reserve options
Accumulated deficit
Total
equity
attributable to equity
holders
Current liabilities
Borrowings
Trade
and
other
payables
Total current liabilities
Non-current liabilities
Borrowings
Total
non-current
liabilities
Total
equity
and
liabilities
2016
unaudited
£'000
2015
audited
£'000
434
325
699
202
1,133
527
144
140
4,811
4,817
2,781
1,976
7,735
6,933
8,869
7,460
149
2,508
1,650
-23
583
-4,110
133
2,080
1,650
-3
9
-2,601
756
1,268
4,243
4,374
1,134
1,046
5,377
5,420
2,736
772
2,736
772
8,869
7,460
Source: Challenger acquisitions interim results statement, 30 August 2016
16
Challenger Acquisitions Plc
5. Board of Directors and management
Mark Gustafson
Chief Executive Officer
Mark Gustafson is a Canadian based Chartered Accountant with over 30 years of experience
in building public and private companies and arranging financing either as a senior executive
or through his personal consulting company, M.G.G. Consulting. Over the span of his career
he has been actively involved in numerous corporate acquisitions directly participating in
debt and equity fundings totaling over 200 million Canadian dollars (CAD).
After qualifying as a Chartered Accountant with Price Waterhouse, Mr Gustafson joined
EnServ Corporation where he spent 6 years helping to build the company through various
acquisitions into a sizable energy services company, which in 1996 was acquired for CAD
229 million by Precision Drilling Corporation. Mr Gustafson then served as President and CEO
of Total Energy Services Ltd, a Toronto Stock Exchange listed company providing oilfield
rental services, for which he raised CAD 25 million. He also served as Chairman and Chief
Executive Officer of Triangle Petroleum Corporation where he helped to lead active
exploration shale plays in North America and to raise over USD 84 million in convertible and
equity instruments. More recently, Mr Gustafson held the position of President and Chief
Executive Officer of Euromax Resources Ltd. where he was responsible for securing funding
of CAD 18 million to advance gold and base metal projects in Serbia, Macedonia and Bulgaria.
Previously Mr Gustafson served as Chairman of Tuzo Energy Corporation, overseeing an
unconventional oil and gas company and helping to raise CAD 50 million in private equity
funding to advance this project. Mr Gustafson is experienced in successfully developing and
growing start-up businesses through focused acquisitions into commercially viable
companies.
Markus Kameisis
Chief Financial Officer
Mr Kameisis is a Swiss-based German finance executive with over 10 years of experience in
the banking and financial industry. After graduating with a “Diplom-Kaufmann” in Auditing
and Controlling from the University of Trier, Germany, Mr Kameisis joined UBS in
Luxembourg and following promotion to Associate Director, he moved to UBS in Switzerland
where he worked on a finance IT platform project across Europe. Afterwards, Mr Kameisis
took over as Head of Accounting of UBS Leasing AG where he was responsible for
implementation of the Basel II internal rating based approach. He was then promoted to the
CFO role within UBS Swiss Financial Advisers AG, a FINMA and SEC regulated broker serving
US clients in Switzerland where he was, amongst other things, responsible for the
implementation of a new software system, the regulatory reporting and all corporate tax
filings.
17
Challenger Acquisitions Plc
In 2013, Mr Kameisis was recruited by Gutenberg Group AG, a FINMA regulated financial
services group with a banking license, specifically to oversee the Group’s finance and
reporting function. Shortly after his assignment, Gutenberg Group AG decided to give back
its banking license and Mr Kameisis agreed to support the Group during this transition as the
CFO. In August 2014, Mr Kameisis founded an outsourcing and advisory firm for SME
companies called Icelia AG, for which Mr. Kameisis is the CEO and a director. He also serves
as a senior finance executive at a Swiss based oil and gas company with a portfolio of oil
and gas assets in Africa and Europe. Icelia AG provides accounting services to the Starneth
Group.
John Le Poidevin
Non-Executive Chairman
John Le Poidevin, aged 45, is an experienced independent consultant and non-executive who
sits on several company and fund boards and advises companies across the leisure,
hospitality and entertainment sector. Now Guernsey-based, he was a Partner at BDO LLP in
London for many years, where he was Head of Consumer Markets, transforming BDO's
practice into being a significant market player with a leading position in the leisure sector.
John has significant experience of working with leisure and hospitality businesses in relation
to their overall strategy, investment and financing decisions, M&A matters, corporate
governance, risk and financial reporting. He has been involved in the successful flotations of
a number of major leisure businesses, including 888 Holdings and Carluccios. John is a Fellow
of the Institute of Chartered Accountants in England and Wales.
Richard Marin
Non-Executive Director
Richard is currently President and CEO of The New York Wheel, LLC. He is a finance industry
executive with 37 years' experience with previous positions including Chairman and CEO of
AFI (USA) Inc, a major commercial property developer, former Chairman and CEO of Bear
Stearns Asset Management, a member of the Management Committee of Bankers Trust
Company, and Chairman and CEO of Deutsche Asset Management, Inc. He is a Founder
and Partner of Beehive Ventures LLC, and is a General Partner of Green Visor Capital LLC.
Mr. Marin was CEO of Ironwood Global LLC, a hedge fund, when it was self-liquidated in
2012.
Mr. Marin is a member of the faculty of the Johnson School at Cornell University where he is
a Clinical Professor. He is Chairman Emeritus of the Johnson School's Advisory Council and
was elected to the Johnson School Hall of Honor in 2001. A 1975 graduate of Cornell
University with a BA in economics and government, Mr. Marin received an MBA in finance
18
Challenger Acquisitions Plc
from the Johnson School in 1976. He is also an adviser to Penbridge Advisers and is a
director of CARE, the global relief and development agency.
Gert Rieder
Non-Executive Director
Mr Rieder has over 20 years of experience as a senior executive and consultant building
companies, markets and revenues globally while heading up start-ups, advising on board
positions, and leading business development and growth for companies and customers in
Scandinavia, Europe and the Middle East. After graduating from Aarthus School of Business,
Mr Rieder joined leading telecom provider Tele Danmark where he took on a series of
commercial roles finally becoming a Product Director. He then moved to a telecom start-up
Sunrise Communications in Switzerland where he joined as Chief Commercial Officer and
was later promoted to COO, leading the product roadmap activities and successfully
developing the initial product launch plan. At Danish TDC Fixnet Nordic he served as
Executive Vice President and Member of the Executive Board, focusing on restructuring the
organisation with an emphasis on strengthening the customer service and sales operations.
He was also responsible for optimisation of distribution channels by redefining a nationwide
chain of retail shops and call centres. He was also a Deputy CEO of Vopium, a global VOIP
player, helping to prepare the company for listing on Euronext Paris. Mr Rieder also served
as CEO of Batelco in Bahrain, one of the leading telecom providers in the MEA region, and
as CEO for Comendo Group, the leading provider of cloud-based IT-security solutions in
Scandinavia - both publicly listed companies that focus on growing through extensive M&A
activities. Mr Rieder is highly experienced in consumer marketing having built his career
creating and selling products and services.
Machiel (“Chiel”) Smits
CEO of Starneth Group
Chiel Smits, aged 57, is a native Dutchman with an engineering degree from Dordrecht
Hogere Techniche School. Before founding Starneth in 2007, he was a core founder and
board member of the Great Wheel Corporation acting as the Chief Technical Officer and
working on start-up development of wheels in Beijing, Orlando and Berlin. His experience in
the construction of observation wheels stemmed from having been the lead designer and
project manager of the British Airways “London Eye” for Hollandia B.V. Chiel is acting as
Chief Executive Officer of the Starneth Group and is the Managing Director of Starneth
Europe B.V. and Starneth Holding B.V. with particular focus on new developments, both in
market size and technology.
19
Challenger Acquisitions Plc
Leonardus (“Leon”) Heijkoop
Senior Manager
Leon Heijkoop, aged 49, a native Dutchman with an engineering background, has been
based in the Middle East since early 2005. Prior to joining Starneth in 2013 he worked as
regional manager in the Middle East for the Great Wheel Corporation and as a project
manager on various construction and fabrication contracts for amongst others Hollandia B.V.,
the steel construction company, and Lamprell Energy Ltd. Leon has more than 20 years of
experience in project management and construction services in the oil and gas industry as
well as leisure and entertainment. At Starneth Group, he is the Managing Director of SME
Engineering JLT, with a regional office in Dubai. Under Leon’s leadership, the Starneth Middle
East’s project management team worked as a subcontractor on the Dubai-I, the giant
observation wheel which if completed will be the largest observation wheel development in
the world. Leon’s main focus is now on expanding the Starneth Group’s business in the
Middle East and India.
Wil Armstrong,
President Starneth America
Qualified engineer with over 30 years operational and management experience in the
amusement and attraction industry Previously Vice President and General Manager of the
Great Orlando Wheel Corporation with responsibility for managing a team of independent
consultants, architects, engineers, accounting and legal advisors Responsible for all new
GOW’s in North America, South America and Latin America.
20
Challenger Acquisitions Plc
6. Significant shareholders and loan notes
Shareholders
GSC Global Fund – 17.5%
Smits International (Controlled by Chiel Smits) – 8.3%
Mark Gustafson, CEO – 4.7%
Loan notes
Quantum £
Due
1,970,431 06-May-17
1,030,331 30-Jun-19
500,000 02-Mar-17
500,000 22-Apr-18
500,000 10-Jun-18
4,500,762
Coupon
12% in cash or shares
8% (1% shares/7% new notes)
5% in cash or shares
8% in cash or shares
8% in cash or shares
Conversion price
Lower of 50p or 3 day VWAP less 7.5%
80p at holders' option
25p at Company option
Lower of 25p and lowest 10 day VWAP
Lower of 25p and lowest 10 day VWAP
Source: Challenger Acquisitions internal records as at 12 September
21
Challenger Acquisitions Plc
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Challenger Acquisitions Plc
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23