Premier Technical Services — Trinity acquisition enhances earnings by c 10%

Premier Technical Services — Trinity acquisition enhances earnings by c 10%

PTSG has announced the acquisition of Trinity Fire and Security Systems along with a brief trading update noting that FY18 ended in line with management expectations. Trinity brings in a scale presence in electrical/ electronic systems, while its expertise complements PTSG’s existing Fire Solutions capabilities and expands the combined service offer. We have increased our earnings estimates by c 10% and, on this basis, the stock is trading on FY19 multiples of 11.3x P/E and 8.7x EV/EBITDA.

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Written by

Premier Technical Services

Trinity acquisition enhances earnings by c 10%

Acquisition and

year-end update

Industrial support services

23 January 2019

Price

153.0p

Market cap

£188m

Net debt* (£m) at 30 June 2018

*company definition

11.8

Shares in issue

123.2m

Free float

59%

Code

PTSG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.2

(3.5)

(22.7)

Rel (local)

4.6

(1.7)

(13.7)

52-week high/low

208.0p

136.5p

Business description

Premier Technical Services Group (PTSG) is an independent provider of regulated and safety related specialist building services in four divisions across the UK. It listed on AIM in February 2015 at 52p.

Next event

FY18 results

26 March

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Premier Technical Services is a research client of Edison Investment Research Limited

PTSG has announced the acquisition of Trinity Fire and Security Systems along with a brief trading update noting that FY18 ended in line with management expectations. Trinity brings in a scale presence in electrical/ electronic systems, while its expertise complements PTSG’s existing Fire Solutions capabilities and expands the combined service offer. We have increased our earnings estimates by c 10% and, on this basis, the stock is trading on FY19 multiples of 11.3x P/E and 8.7x EV/EBITDA.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

39.2

7.5

7.6

1.4

20.1

0.9

12/17

52.9

10.2

9.7

1.6

15.7

1.0

12/18e

69.9

14.4

11.8

1.8

13.0

1.2

12/19e

124.4

19.7

13.6

1.9

11.3

1.2

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

Broadening out and scaling up in Fire Solutions

Trinity is a specialist in electrical/electronic fire (80% of revenue) and integrated security systems from a 10-office network offering broadly national coverage. The company’s testing and maintenance activities account for c 60% revenue from a contracted customer base with 80%+ renewal rates and across a range of commercial and public sector buildings. It also designs and installs these systems. Trinity’s c £40m annualised revenue run rate compares to c £15m for PTSG’s existing Fire Solutions division (including M&P, acquired in July), although it generates a lower EBITDA margin (of 5.5% versus PTSG’s 20%+ in this division). Part of the margin difference is sub-sector specific; the opportunity for PTSG is to bring the Trinity workflows onto its Clarity ERP system to improve operational efficiency and also to offer the combined customer list an integrated fire solution package over time.

Important, earnings-enhancing deal

PTSG is paying an initial £10.8m consideration equivalent to 4.9x run rate EBITDA (or £7.7m net of cash acquired and 3.5x on this basis) with a potential further £5m deferred depending on performance over the following two years. For the reasons outlined above, this is an important transaction on what we consider to be a typically keen PTSG acquisition multiple. Adjusting for cash acquired, this deal, together with Guardian Electrical Compliance (acquired in October), invests most of the c £19m net raised by PTSG via a placing in October. On our estimates, Trinity by itself enhances our last published earnings by c 10%. Overall, ie including the placing and Guardian effects, our EPS forecasts have increased by c 13% and c 16% for FY19 and FY20, respectively, since we initiated coverage on 8 October.

Valuation: Growth expected and to be delivered

PTSG’s share price has started to rebuild from the lows seen in December and the Trinity deal should further support this momentum. The 2017–20 EPS CAGR is now 14.6% on our estimates giving a PEG of c 1.1x and resulting in FY20 valuation metrics of 10.5x on a P/E basis and 7.6x for EV/EBITDA.

Exhibit 1: Financial summary

£'ms

2011

2012

2013

2014

2015

2016

2017

2018e

2019e

2020e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

9.0

12.1

13.9

18.0

25.8

39.2

52.9

69.9

124.4

138.1

Cost of Sales

 

 

(3.7)

(4.9)

(5.5)

(7.7)

(11.8)

(18.9)

(25.9)

(34.1)

(64.5)

(71.6)

Gross Profit

 

 

5.3

7.1

8.4

10.3

14.0

20.3

27.1

35.8

59.9

66.5

EBITDA

 

 

2.0

3.3

3.8

4.7

6.2

9.0

12.3

17.3

23.4

26.2

Operating Profit (before GW and except.)

1.6

2.9

3.2

4.0

5.3

7.9

10.6

15.0

20.6

23.0

Intangible Amortisation

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

 

 

(0.9)

(0.1)

(0.5)

(2.5)

(4.2)

(4.8)

(8.4)

(9.9)

(5.5)

(5.5)

Other

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Operating Profit

 

 

0.7

2.8

2.6

1.5

1.1

3.0

2.3

5.1

15.1

17.5

Net Interest

 

 

(0.0)

(0.0)

(0.1)

(0.3)

(0.3)

(0.4)

(0.5)

(0.7)

(0.9)

(0.8)

Profit Before Tax (norm)

 

 

1.6

2.8

3.0

3.7

5.0

7.5

10.2

14.4

19.7

22.3

Profit Before Tax (FRS 3)

 

 

0.7

2.8

2.5

1.2

0.8

2.6

1.8

4.5

14.2

16.8

Tax

 

 

(0.1)

(0.6)

(0.6)

(0.6)

(0.3)

(0.3)

(0.5)

(1.2)

(3.0)

(4.0)

Profit After Tax (norm)

 

 

1.3

2.2

2.4

2.9

4.2

6.7

9.4

13.1

16.8

18.2

Profit After Tax (FRS 3)

 

 

0.5

2.2

1.9

0.5

0.5

2.3

1.3

3.3

11.3

12.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

 

 

 

77.1

85.9

88.1

96.8

110.6

123.7

124.7

EPS - normalised (p)

 

 

 

 

 

3.77

4.87

7.63

9.73

11.81

13.55

14.63

EPS - FRS 3 (p)

 

 

 

 

 

0.69

0.57

2.61

1.37

2.96

9.10

10.23

Dividend per share (p)

 

 

 

 

 

0

1.00

1.40

1.60

1.80

1.90

2.00

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

58.9

59.2

60.5

57.3

54.3

51.9

51.2

51.2

48.2

48.2

EBITDA Margin (%)

 

 

22.3

27.2

27.1

26.2

24.0

23.0

23.3

24.7

18.8

19.0

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

18.1

23.6

22.8

22.3

20.5

20.0

20.1

21.5

16.5

16.7

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

2.5

3.4

4.6

5.0

13.9

16.0

32.1

43.3

51.8

53.1

Intangible Assets

 

 

1.8

2.4

3.5

3.6

10.7

12.4

26.2

35.8

43.3

44.5

Tangible Assets

 

 

0.6

0.9

1.1

1.3

2.4

3.2

4.3

6.6

7.6

7.6

Investments

 

 

0.1

0.0

0.0

0.0

0.8

0.4

1.6

0.9

0.9

0.9

Current Assets

 

 

2.5

4.3

5.9

8.3

13.5

27.4

40.8

51.7

66.1

78.6

Stocks

 

 

0.1

0.1

0.1

0.2

0.4

0.5

1.2

1.6

2.5

2.8

Debtors

 

 

2.4

3.6

5.4

8.1

13.1

20.3

32.5

37.5

52.9

58.4

Cash

 

 

0.1

0.6

0.4

0.0

0.0

6.5

7.0

12.6

10.7

17.4

Current Liabilities

 

 

(2.2)

(3.3)

(4.8)

(8.5)

(9.3)

(17.9)

(24.7)

(24.8)

(27.9)

(32.2)

Creditors

 

 

(2.0)

(3.1)

(3.2)

(5.7)

(8.3)

(8.6)

(11.2)

(14.1)

(27.2)

(31.5)

Short term borrowings

 

 

(0.2)

(0.3)

(1.6)

(2.7)

(1.0)

(9.4)

(13.5)

(10.7)

(0.7)

(0.7)

Long Term Liabilities

 

 

(0.1)

(0.3)

(4.6)

(3.6)

(9.2)

(13.4)

(15.7)

(13.9)

(24.7)

(23.9)

Long term borrowings

 

 

(0.1)

(0.3)

(4.1)

(3.1)

(6.6)

(10.8)

(13.1)

(13.1)

(23.9)

(23.9)

Other long term liabilities

 

 

0.0

0.0

(0.5)

(0.5)

(2.5)

(2.6)

(2.7)

(0.8)

(0.8)

(0.0)

Net Assets

 

 

2.7

4.1

1.2

1.1

8.9

12.0

32.4

56.3

65.3

75.6

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

2.0

2.4

1.8

2.6

(0.5)

0.6

(0.8)

9.3

11.5

17.9

Net Interest

 

 

(0.0)

(0.0)

(0.1)

(0.3)

(0.3)

(0.4)

(0.5)

(0.7)

(0.9)

(0.8)

Tax

 

 

(0.3)

(0.2)

(0.9)

(0.6)

(0.5)

(0.8)

(0.8)

(0.8)

(1.2)

(3.0)

Capex

 

 

(0.5)

(0.2)

(0.1)

(0.2)

(0.1)

(0.4)

(0.7)

(1.1)

(2.2)

(2.4)

Acquisitions/disposals

 

 

(0.1)

(0.3)

(0.8)

(0.7)

(3.3)

(2.7)

(16.1)

(14.2)

(10.8)

(2.7)

Financing

 

 

0.0

0.0

(4.0)

0.0

4.7

0.2

15.8

19.0

0.0

0.0

Dividends

 

 

(0.8)

(0.7)

(0.8)

(0.8)

(0.5)

(1.1)

(1.5)

(1.9)

(2.3)

(2.4)

Net Cash Flow

 

 

0.4

0.9

(4.9)

0.1

(0.6)

(4.7)

(4.6)

9.6

(5.8)

6.7

Opening net debt/(cash)

 

 

0.6

0.3

(0.1)

5.3

5.8

7.6

13.6

19.5

11.2

13.9

HP finance leases initiated

 

 

(0.0)

(0.3)

(0.4)

(0.5)

(0.6)

(1.0)

(1.0)

(0.7)

0.0

0.0

Other

 

 

0.0

(0.2)

(0.1)

(0.1)

(0.5)

(0.2)

(0.4)

(0.6)

3.1

0.0

Closing net debt/(cash)

 

 

0.3

(0.1)

5.3

5.8

7.6

13.6

19.5

11.2

13.9

7.2

Closing net debt/(cash) - company definition*

(0.1)

(0.6)

4.6

5.0

6.3

12.1

18.4

9.4

12.1

5.4

Source: PTSG, Edison Investment Research. Note: PTSG was listed on AIM in February 2015; FY15 (and the FY14 comparative) were fully reported in April of that year and the prior year information shown above was taken from the company’s IPO document. Company-defined net debt differs from the other net debt line shown as it excludes finance leases. Neither definition includes outstanding loan notes (Integral Cradles deferred consideration), which are non-interest bearing but are expected to flow out as cash in FY18 £1.9m and FY20 £0.8m (included in acquisitions/disposals).

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Rockhopper Exploration — Market heavily discounting Sea Lion

Based on our analysis, we believe the current share price implies a c 20% chance of success for Sea Lion Phase 1 at $70/bbl or c 39% at a $60/bbl long term oil price (excluding any value for further phases of Sea Lion). Given recent progress with the award of letters of intent (LOIs) for key project components and with more than 60 people working on the development, we are more positive on the chance of success. In our view, the key outstanding risks are in project funding and politics. H119 has the potential to be eventful for Rockhopper with more definitive guidance on the availability of export credit funding and a hearing on the Ombrina Mare arbitration, scheduled for February. Our valuation increases to 78.9p/share (+7.2%) largely due to sterling weakness. This valuation assumes a 55% chance of Sea Lion Phase 1 progressing and 20% for subsequent phases at a $70/bbl long-term oil price. Given the subjectivity of key inputs, we provide sensitivities to these key value drivers in this note.

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