Low & Bonar — Mixed trading, change underway

Low & Bonar — Mixed trading, change underway

A period of stability following management change and delivery on some flagged FY18 group projects would see a good return of interest to the fundamental Low & Bonar investment case, in our view. There are clear markers for tracking progress and, in the near term, a 3.3% yield with the expected final dividend payment is a clear attraction.

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Written by

Low & Bonar

Mixed trading, change underway

FY17 results

Diversified Industrials

12 February 2018

Price

60p

Market cap

£198m

€1.13/£

Net debt (£m) at end November 2017

138

Shares in issue

329.4m

Free float

99%

Code

LWB

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

15.3

(11.5)

(15.4)

Rel (local)

25.5

(6.8)

(14.8)

52-week high/low

89.8p

52.6p

Business description

Low & Bonar produces specialist performance materials for a variety of end-markets by combining polymers with specialty additives and pigments. It now reports as four global business units: Building & Industrial (19% of FY17 revenue), Civil Engineering (23%), Coated Technical Textiles (31%), and Interiors & Transportation (27%).

Next events

AGM

13 April 2018

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Low & Bonar is a research client of Edison Investment Research Limited

A period of stability following management change and delivery on some flagged FY18 group projects would see a good return of interest to the fundamental Low & Bonar investment case, in our view. There are clear markers for tracking progress and, in the near term, a 3.3% yield with the expected final dividend payment is a clear attraction.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

11/16

400.0

29.2

6.0

3.0

10.1

5.0

11/17

446.5

30.7

6.3

3.1

9.5

5.1

11/18e

417.0

30.1

6.4

3.3

9.3

5.5

11/19e

429.5

32.4

6.9

3.5

8.6

5.8

Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles and exceptional items. Excludes disposed grass yarns business.

Some good performances, some distractions

FY17 results were in line with modestly reduced December guidance and showed good improvements in the contributions from Building & Industrial and Interiors & Transportation activities, a similar y-o-y outturn from Coated Technical Textiles (despite a soft end to the year) and ongoing underperformance at Civil Engineering. The latter is being addressed in a strategic review; material impairment charges were booked in the year and initial remedial steps have been announced. Significant investment was made in FY17 – notably in China – and, in combination with a weak sales pull-through/higher inventory position at the year-end, resulted in an increased net debt of £138m. The final dividend was held, giving a 1.7% increase in the full year dividend overall.

Prioritising a busy agenda

Having flagged potential estimate changes post FY17, we have reduced our FY18 and FY19 EBIT expectations by c 13% reflecting trading headwinds (of c £2.5m covering y-o-y input cost and FX effects) and a lower base for Coated Technical Textiles. The senior management team is in a transition period currently, but a number of clear group priorities have been set for the new financial year. These include completing the Civil Engineering review, lowering group net debt and improving efficiency in the internal supply chain. At some point, we might reasonably expect the new management team to provide an updated operational strategy also, and greater clarity on this may well come around July when the second phase of the Civil Engineering review is expected to become visible.

Valuation: Good near-term yield underpinning

After a sharp step down following December’s trading update, Low & Bonar’s share price responded favourably and regained some ground following the FY17 results announcement. Nevertheless, sitting on an FY18e P/E of 9.3x and EV/EBITDA (adjusted for pensions cash) of 6.4x suggests that investors still have to buy in fully to the prospect of improved earnings. The trailing 5.1% dividend yield (including c 3.3% from the final DPS to be paid in April), covered c 2x and with further growth potential, should provide a solid near term underpinning for the share price.

FY17 results overview

In FY17, in constant currency terms, Low & Bonar delivered y-o-y group revenue and operating profit changes of +4.5% and -4.6% respectively (with a reported EBIT margin reduction of -70bp to 8.0%). FX translation had a favourable effect on reported earnings across the global business units (GBUs), although polymer input costs were a headwind to progress. The year closed with a c £138m net debt position, with higher than normal inventory positions to be worked down in FY19. A number of initiatives are underway to improve the group’s underlying profit potential including a strategic review of Civil Engineering activities and internal supply chain enhancements.

Exhibit 1: Low & Bonar GBU and interim splits

£m

H1

H2

2016

H1

H2

2017

H1 (% change)

FY (% change)

Reported

CER

Volume

Reported

CER

Volume

Group revenue

180.6

221.6

400.0

210.3

236.2

446.5

16.4%

4.6%

3%

11.6%

4.5%

3%

Building & Industrial

31.8

41.6

73.4

40.9

45.0

85.9

28.6%

14.2%

13%

17.0%

9.6%

9% 

Civil Engineering

39.5

51.3

90.8

45.8

56.2

102.0

15.9%

5.0%

9%

12.3%

4.9%

6% 

Coated Technical Textiles

60.1

71.9

129.8

66.5

71.8

138.3

10.6%

-0.2%

-6%

6.6%

-0.7%

-5%

Interiors & Transportation

49.2

56.8

106.0

57.1

63.2

120.3

16.1%

3.8%

4%

13.5%

7.1%

6%

Group operating profit - reported

13.3

21.4

34.7

15.5

20.0

35.5

16.5%

3.3%

2.3%

-4.6%

Building & Industrial

4.5

6.4

10.9

6.0

6.4

12.4

33.3%

17.6%

13.8%

6.0%

Civil Engineering

1.0

3.2

4.2

0.0

0.1

0.1

N/M

N/M

N/M

N/M

Coated Technical Textiles

3.5

5.2

8.7

4.9

4.4

9.3

40.0%

32.4%

6.9%

1.1%

Interiors & Transportation

7.3

9.8

17.1

7.9

11.2

19.1

8.2%

-3.7%

11.7%

5.5%

Unallocated central costs

-3.0

-3.2

-6.2

-3.3

-2.1

-5.4

N/M

N/M

N/M

N/M

Source: Low & Bonar

Building & Industrial (B&I)

Technical textiles, mats, composites, systems and screens for a range of applications

Headline performance metrics were clearly positive, although implied y-o-y progress in the second half was below that achieved in the first, partly influenced by the agro textiles disposal, we suspect. Adjusting for part year effects,1 we estimate that full year underlying GBU revenue progress was c 25% in sterling terms and +15-20% in local currency, most likely with some margin improvement. Therefore, the core building materials activities had a good year and management stated that this was well spread geographically and across a number of subsegments. New product development is considered to be a strong driver of top-line progress by driving core carrier fabric and membrane technologies into a wide variety of end-markets including roofing/green roofing, drainage, ventilation and filtration applications. Investment is being made to support this activity and to expand the accessible customer base. Air filtration in particular has seen good growth from a low base over the last couple of years and is becoming a more material contributor to GBU performance. As part of the review of the Civil Engineering product portfolio (see below), the Enka three-dimensional drainage plus matting lines are expected to be moved into this GBU to expand the offering to both existing and new customers during the course of this financial year. (Indicated annual revenue is c £20m; profitability will become apparent on GBU restatement.)

Part year effects were: agro textiles business (disposed 1 November, c 11-month contribution: c £18m revenue, break-even) and Walflor (acquired 17 January 2017; FY17 c 10.5-month contribution: £1.1m revenue, EBIT £0.5m).

Civil Engineering (CE)

Geotextiles and construction fibres contributing to groundworks integrity in infrastructure projects

Underlying revenue progress was broadly similar at c 5% in both halves of the year. Management noted good interest in H1, which was expected to translate to orders and shipments in H2. In the event, higher specification product demand did not materialise as anticipated. H2 is typically a seasonally stronger trading period and, while this pattern did repeat, mix effects and input cost pressures affected profitability, although the GBU did manage to achieve a modest profit in H2 and for the year as a whole. While EBITDA positive (adding back c £3m depreciation), inventory and probably debtor build will have more than offset this in cash terms. A previously flagged strategic review is underway and, in total, a c £32m impairment charge in relation to the carried goodwill and assets of this GBU was taken in FY17. The conclusion of the first phase is to exit the Ivanka site; this was originally a Texiplast facility (acquired in FY13) and had seen investment under Low & Bonar’s ownership. We believe that its product focus was on higher-specification woven applications, where project demand and timing has been disappointing overall. Some of the loom capacity may be relocated, so at this stage the extent to which the GBU is withdrawing from this subsector is not clear. More positively, management expects that the Ivanka exit process will generate a positive net cash flow impact of £3-5m arising from an expected sale of the site and assets.

In the second phase, the intended shift of the Enka (drainage and matting) product lines into the Building & Industrial GBU will leave the large non-wovens segment as the dominant remaining product range, followed by construction fibres. The former are manufactured at multiple locations, the latter only one, although none are discrete sites, being shared sites with other GBUs. This adds to the complexity of the review in our view, but we are told that this will be entirely complete by July and the long-term future of operations within this GBU will become clearer at this time.

Coated Technical Textiles (CTT)

Specialist coated woven carrier fabrics for a range of primarily outdoor applications

Underlying revenue and volume performance appeared to have been stable across the two half years, although we know from a pre-close trading update that the year ended in a weaker than expected fashion. Specifically, a recurrence of manufacturing issues – which we believe is due to a higher proportion of shorter-run, more frequent changeover work – affected production quality and achievable margin in this period, as seen in FY16. Attention has refocused on this area, with the GBU director changing in January, which also appears to reflect a desire to rebuild customer confidence to historic levels. This GBU, located on three manufacturing sites, has historically generated EBIT margins in the high single-digit/low double-digit range over an extended period. However, patches of internal underperformance over the last couple of years have generated lower returns, also affected we feel by a reduced ability to pass through higher input costs as a consequence. This said, it had implicitly regained some momentum in Q3, in our view, and longer-run architectural textile volume may have contributed to this. Management’s response is likely to be a simplification of business flows most discernibly through a lower number of stock items backed up by more robust manufacturing performance. This Europe-centric business should benefit from a positive EU growth outlook.

Interiors & Transportation (I&T)

Leading provider of technical non-woven carpet-backing materials, branded as Colback

This GBU showed excellent reported progress over FY17 with an acceleration in y-o-y revenue growth apparent in H2 in underlying terms. There was also margin improvement as the year progressed, although raw material cost increases were only partly passed through in the period, leaving EBIT margins slightly below the prior year overall. Within the mix, as seen at the interim stage, interior product applications saw relatively strong demand, while transportation (chiefly automotive) was comparatively slow versus the prior year. Excluding China, we estimate that underlying revenue growth was in the 4-5% range, amplified by favourable currency translation effects in reported numbers. We believe that revenue in China itself almost doubled versus the prior year (to 20% of the GBU total) and growth with carpet backing customers was supplemented by entry into the wallcoverings and decoration subsegments, all supported by the local production in Changzhou. Colback is regarded as a high-quality carrier/backing material and its versatility lends itself to the development of new market applications, which is benefiting revenue growth. A second Colback line in China is in the process of being commissioned and is expected to contribute to further volume growth from the second half of FY18. New product development supported by investment is expected to continue to be a driver of future growth.

Higher debt levels expected to decline in future periods

Low & Bonar ended FY17 with a £138m net debt position, an increase of c £27m over the year. This was largely a cash movement, save for c £3m adverse overseas debt translation. High investment levels in fixed and intangible assets were core and budgeted actions in the year, although a further working capital increase was more a reflection of some operational difficulties.

The company achieved a £3m y-o-y EBITDA increase to c £56m overall and, as in previous years, just over £4m additional pensions cash contributions were comfortably funded from this. Below this, almost £20m was absorbed into working capital, split more or less evenly between inventory and debtors, and we believe the primary drivers here were the Civil Engineering and CTT GBUs respectively. Cash interest and tax payments were both lower compared to the prior year but, including a higher minority dividend payment, the sum of these items was broadly similar at c £16m.

Spending on plant and equipment spiked up to £29m, of which c £16m related to the second I&T Colback line in China. A further c £6m was applied to intangible assets and over half of this related to a new group-wide ERP system which is currently being rolled out. Net M&A activity was modestly cash positive, with the proceeds arising from the agro textiles business disposal at the beginning of November (£7.2m) exceeding the Walflor acquisition costs (£3.4m). Lastly, cash dividends of £10m were consistent with previously declared FY16 final and H117 DPS announcements.

Cash flow outlook: in the near term, net debt will increase by the end of H118, reflecting a working capital build ahead of the seasonally stronger H2 trading period. Over the course of the year as a whole, a step down in capex (though still above depreciation) and achieving a stated £10-15m reduction in working capital, should result in a much stronger underlying FCF performance in FY18. Notwithstanding c £6m flagged exceptional cash outflow (which will be partly offset by Ivanka site and asset net disposal proceeds), we project a c £125m group net debt position by the end of FY18 and further reductions thereafter. In context, this represents a move from 2.5x EBITDA in FY17 to 1.8x in FY20, on our estimates. The still to be decided outcome of the Phase 2 review of the Civils GBU could clearly have some impact on this profile during the current financial year.

External headwinds and more conservative margins

Low & Bonar is a portfolio of businesses and technologies; the key management challenge is to continue to drive forward the two GBUs, which have been consistently good performers in recent years, while also addressing underperformance in the other two to clearly establish a sustainable platform for growth. GBU drivers vary, although management has pointed to c £1m FX and c £1.5m materials costs as y-o-y headwinds that affect each to some degree. We have also factored in more moderate growth rates generally, more so in CTT. Supply chain and cost reduction actions may start to have a more positive impact from FY19 and we will monitor progress here.

Exhibit 2: Low & Bonar estimate revisions

EPS FD normalised (p)

PBT normalised (£m)

EBITDA (£m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2017

6.1

6.3

3.3

30.3

30.7

1.3

54.3

55.8

2.8

2018e

7.4

6.4

(13.5)

36.3

30.1

(17.1)

61.3

55.1

(10.1)

2019e

7.9

6.9

(12.7)

38.7

32.4

(16.3)

64.5

58.4

(9.5)

2020e

N/A

7.5

N/A

N/A

35.0

N/A

N/A

60.7

N/A

Source: Edison Investment Research. Note: 2017 old = estimate, new = actual.

Managing change

We have discussed trading performance in earlier sections, but also feel that there has been change at Low & Bonar in the last 18 months that is also worthy of comment. This includes a gradual reshaping of the group (including exiting non-core grass yarns in FY16 and agro textiles in FY17) and two executive board changes2 during FY17.

In 2017, previous CFO Mike Holt stepped down from the board in May, being replaced by Philip de Klerk in October, while CEO Brett Simpson left in December ahead of taking up another post. Philip de Klerk is to become the new group CEO from 1 March 2018 and a search for a new CFO is underway.

The transition at board level is ongoing, pending the arrival of a new CFO. However, high-level messaging by prominent NEDs at the FY17 results presentation (ie chairman Martin Flower and current acting CEO Trudy Schoolenberg) reiterated existing group financial targets of 12% ROCE and a 10% return on sales. Profitability (before central costs) in the well-invested and better performing B&I and I&T business areas is likely to already be above these metrics on both counts. Coated Technical Textiles has probably also exceeded both metrics in the past, but has not done so in the last couple of years due to the operational problems referred to earlier and these are now being addressed under a new GBU director. Civil Engineering has underperformed for a while – and is unlikely to have achieved targeted returns to date – but is now under the strategic microscope. We have incorporated a profit recovery here in our estimates to previously achieved levels, but suggest there could be upside to earnings based on either a more successful turnaround or a reinvestment of cash into operations, generating better returns if the strategic decision to exit is made. In addition to specific GBU actions, the senior management team is set to focus on two key areas at group level to enhance the future profit potential of the group.

Improved capital discipline: net debt is higher than desirable at 2.5x historic EBITDA and a £10-15m reduction in working capital is a stated target for FY18 to benefit cash flow. We would add to this capital budget items; the track record has been mixed here in recent years ranging from a well-executed and successful Colback China greenfield facility and positive maiden Walflor contribution to disappointing outcomes for the Texiplast acquisition, Saudi JV and construction fibres investment. As mentioned earlier, there will be a natural step down in capex in FY18; the onus remains on effective capital deployment and the Civil Engineering strategic review forms part of this process. In due course, the appointment of a new CFO, in addition to Philip de Klerk moving into the CEO seat, will bring fresh perspective. We note that the process to refinance existing bank facilities has begun and the outcome of this may also provide some indications of the future capital requirements of the business. Lastly, we note that the UK DB pension scheme moved into an IAS19 surplus position at the year end and, while overseas DB schemes still show a deficit, the current triennial valuation could possibly result in a more favourable cash contribution outcome.

Right-sizing the supply chain: an internal project is underway to improve the operating efficiency and lower the cost of the group supply chain. The GBU/shared service model introduced in FY15 was designed to enhance commercial and business development presence with customers and, while this may have been achieved, it is felt that the support infrastructure had grown to become too unwieldy and bureaucratic for the company’s size. Hence, the intention is to improve the agility and responsiveness of the internal supply chain, perhaps by more directly linking manufacturing and customer-facing operations. This programme is being led by interim CEO Trudy Schoolenberg and supported by an Integrated Supply Chain director (appointed in April 2017) and is expected to be complete by the end of April. The company has flagged a £4m restructuring charge in FY18, which is expected to yield c £3m annualised savings in due course. The roll-out of a new group ERP system may also facilitate this process and the benefits to accrue from it.


Exhibit 3: Financial summary

£m

2014

2015

2015

2016

2017e

2018e

2019e

2020e

Year end 30 November

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

IAS19R

IAS19R

Restated IAS19R

IAS19R

IAS19R

IAS19R

IAS19R

IAS19R

Revenue

 

 

410.6

395.8

362.1

400.0

446.5

417.0

429.5

440.2

Cost of Sales

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Gross Profit

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

EBITDA

 

 

45.6

46.9

46.0

52.8

55.8

55.1

58.4

60.7

Operating Profit (ex SBP)

 

 

32.3

33.4

32.5

35.6

36.2

36.0

38.3

40.6

Net Interest

(5.0)

(4.2)

(4.3)

(5.4)

(4.6)

(5.0)

(5.0)

(4.8)

SBP

(0.6)

(0.6)

(0.6)

(0.9)

(0.7)

(0.7)

(0.7)

(0.7)

Saudi JV

(1.1)

(1.8)

0.0

0.0

0.0

0.0

0.0

0.0

PNFC

(0.4)

(0.2)

(0.2)

(0.1)

(0.2)

(0.2)

(0.2)

(0.2)

Profit Before Tax (company norm)

 

25.2

26.5

27.4

29.2

30.7

30.1

32.4

35.0

Intangible Amortisation

(5.2)

(4.1)

(4.1)

(4.0)

(3.7)

(3.7)

(3.7)

(3.7)

Exceptionals

(3.3)

(10.1)

(1.9)

0.7

(47)

(5)

0

0

Profit Before Tax (FRS 3)

 

 

16.7

12.4

21.4

25.9

(19.7)

21.4

28.7

31.3

Tax

(4.9)

(6.3)

(6.2)

(8.2)

2.1

(7.9)

(8.5)

(9.2)

Minorities

(0.3)

(0.5)

(0.5)

(0.6)

(0.6)

(0.6)

(0.6)

(0.6)

Other

(9.0)

(3.2)

Profit After Tax (norm)

18.3

18.6

19.0

19.9

21.4

21.8

23.5

25.4

Profit After Tax (FRS 3)

11.8

6.1

5.7

13.9

(18.2)

12.9

19.6

21.5

Average Number of Shares Outstanding (m)

327.0

328.1

328.1

329.0

329.4

329.7

329.7

329.7

EPS FD- normalised (p)

 

 

5.4

5.5

5.8

6.0

6.3

6.4

6.9

7.5

EPS - FRS 3 (p)

 

 

3.5

1.7

1.7

5.2

(5.5)

3.9

5.9

6.5

Dividend per share (p)

2.7

2.8

2.8

3.0

3.1

3.3

3.5

3.6

Gross Margin (%)

EBITDA Margin (%)

11.1

11.8

11.8

13.2

12.5

13.2

13.6

13.8

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

7.9

8.4

8.4

8.9

8.1

8.6

8.9

9.2

BALANCE SHEET

Fixed Assets

 

 

230.2

232.0

 

261.2

257.0

260.8

261.6

262.4

Intangible Assets

105.8

89.9

104.8

91.7

91.0

88.3

85.6

Tangible Assets

119.3

132.0

150.3

144.5

149.0

152.5

156.0

Investments

5.1

10.1

6.1

20.8

20.8

20.8

20.8

Current Assets

 

 

192.0

187.6

 

202.9

222.8

219.0

227.6

237.5

Stocks

90.9

82.6

97.5

97.3

88.9

89.5

89.8

Debtors

62.8

62.9

63.4

71.8

66.0

67.0

67.7

Other

12.5

8.2

15.7

15.5

15.5

15.5

15.5

Cash

25.8

33.9

26.3

38.2

48.6

55.6

64.5

Current Liabilities

 

 

(87.7)

(114.4)

 

(88.9)

(93.7)

(96.3)

(100.8)

(105.0)

Creditors

(87.7)

(82.9)

(88.8)

(91.0)

(96.3)

(100.8)

(105.0)

Short term borrowings

0.0

(31.5)

(0.1)

(2.7)

0.0

0.0

0.0

Long Term Liabilities

 

 

(147.6)

(133.3)

 

(171.5)

(204.4)

(200.2)

(196.0)

(191.8)

Long term borrowings

(113.8)

(104.5)

(137.2)

(173.9)

(173.9)

(173.9)

(173.9)

Other long term liabilities

(33.8)

(28.7)

(34.3)

(30.5)

(26.3)

(22.1)

(17.9)

Net Assets

 

 

186.9

171.9

 

203.7

181.7

183.3

192.5

203.1

CASH FLOW

Operating Cash Flow

 

 

34.1

35.3

 

33.9

32.2

59.0

55.0

57.9

Net Interest

(4.5)

(4.5)

(4.9)

(4.4)

(5.0)

(5.0)

(4.8)

Tax

(7.7)

(7.5)

(10.8)

(10.3)

(7.9)

(8.5)

(9.2)

Capex

(20.2)

(33.7)

(22.2)

(34.4)

(25.5)

(23.5)

(23.5)

Acquisitions/disposals

3.0

0.0

21.7

3.8

3.0

0.0

0.0

Financing

0

(1)

(0)

(1)

0

0

0

Dividends

(8.8)

(9.0)

(9.2)

(10.0)

(10.6)

(11.0)

(11.5)

Net Cash Flow

(4.0)

(20.2)

8.4

(23.9)

13.1

7.0

8.9

Opening net debt/(cash)

 

 

86.8

88.0

 

102.1

111.0

138.4

125.3

118.3

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

2.8

6.1

-17.3

-3.5

0.0

0.0

0.0

Closing net debt/(cash)

 

 

88.0

102.1

 

111.0

138.4

125.3

118.3

109.4

Source: Company, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Low & Bonar 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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

295 Madison Avenue, 18th Floor

New York, NY10017

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

New York, NY10017

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Low & Bonar 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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

295 Madison Avenue, 18th Floor

New York, NY10017

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

New York, NY10017

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

QinetiQ Group — Progressing as expected

QinetiQ’s strategy is focused on delivering efficiencies for the UK MOD and investing for medium-term growth. The Q3 trading statement reassures that underlying trading is in line with expectations and FY18 guidance is maintained.

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