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Low & Bonar — AGM flags significant FY17 progress expected

Low & Bonar — AGM flags significant FY17 progress expected

In a brief AGM statement, management stated that FY17 was off to a good start with unchanged guidance for the year. There is tangible evidence of strategic actions and their benefits extend beyond the current financial year. Low & Bonar’s share price has picked up recently and is beginning to acknowledge the company’s growth prospects.

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Written by

Low & Bonar

AGM flags significant FY17 progress expected

AGM update

Construction & materials

13 April 2017

Price

81.00p

Market cap

£267m

€1.14/£

Net debt (£m) as at end November 2016

111.0

Shares in issue

329.3m

Free float

99%

Code

LWB

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

19.1

18.3

33.9

Rel (local)

18.5

16.2

14.0

52-week high/low

81.0p

56.0p

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: Civil Engineering (23% of FY16 revenue), Building & Industrial (18%), Interiors & Transport (26%), and Coated Technical Textiles (33%).

Next events

H117 period end

May 2017

Completion of Saudi JV exit

tbc

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

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

In a brief AGM statement, management stated that FY17 was off to a good start with unchanged guidance for the year. There is tangible evidence of strategic actions and their benefits extend beyond the current financial year. Low & Bonar’s share price has picked up recently and is beginning to acknowledge the company’s growth prospects.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

11/15

362.1

27.4

5.8

2.8

14.0

3.5

11/16

402.2

29.2

6.0

3.0

13.5

3.7

11/17e

436.0

35.4

7.3

3.2

11.1

4.0

11/18e

457.4

39.2

8.1

3.3

10.0

4.1

Note: *PBT and EPS fully diluted are normalised, excluding amortisation of acquired intangibles and exceptional items. Figures shown are for ongoing businesses only.

Confidence in expected FY17 progress

Four months into the financial year, management sounds confident that FY17 will be a year of significant progress. No further detail on individual business unit progress was included in the update. We see the full benefit from the new China Colback plant (phase one), restored operational performance at Coated Technical Textiles and margin mix development in Civil Engineering as the most notable, high level growth drivers this year. At current levels, there will also be some favourable year-on-year FX translation benefit though below prior year levels (ie c £2.5m vs £3.4m reported for FY16). Low & Bonar has invested well above depreciation in the last three years. The company is committed to do so again in FY17, including a phase two expansion in China underscoring the success and local acceptance of the initial greenfield set-up. Consequently, we expect to see net debt increase over the course of the year.

Commercial momentum

Organisational change in 2015 (adopting a global business unit/group operations platform model) is clearly bedded in now and, to us, stronger group branding indicates growing corporate commercial confidence. The acid test will be the extent to which enhanced customer engagement supported by investment in plant and new product development translates to revenue and profit progress. Additionally, we would expect the active portfolio management strategy to result in rising group ROCE, which should, in turn, boost cash generation.

Valuation: Focusing on growth

Low & Bonar’s share price has mostly traded around the 70p level since the FY16 results announcement (1 February) before ticking up thus far during April. Consequently, it has out-performed the FTSE All Share Index by over 20% in the year to date, and is at its highest level since August 2014. The company’s FY17 P/E is now 11.1x with an EV/EBITDA (adjusted for pensions cash) of 7.0x. Our earnings growth estimates reduce these metrics to 9.5x and 5.9x, respectively, by FY19. An above-average dividend yield (3.7% historic) offers a further attraction.

Exhibit 1: Financial summary

£m

2014

2015

2015

2016

2017e

2018e

2019e

Year end 30 November

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

IAS19R

IAS19R

Restated IAS19R

IAS19R

IAS19R

IAS19R

IAS19R

Revenue

 

 

410.6

395.8

362.1

402.2

436.0

457.4

471.8

Cost of Sales

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

EBITDA

 

 

45.6

46.9

46.0

52.8

59.1

63.9

66.7

Operating Profit (ex SBP)

 

 

32.3

33.4

32.5

35.6

40.9

44.7

46.5

Net Interest

(5.0)

(4.2)

(4.3)

(5.4)

(4.5)

(4.5)

(4.3)

SBP

(0.6)

(0.6)

(0.6)

(0.9)

(0.9)

(0.9)

(0.9)

Saudi JV

(1.1)

(1.8)

0.0

0.0

0.0

0.0

0.0

PNFC

(0.4)

(0.2)

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

Profit Before Tax (company norm)

 

25.2

26.5

27.4

29.2

35.4

39.2

41.2

Intangible Amortisation

(5.2)

(4.1)

(4.1)

(4.0)

(4.0)

(4.0)

(4.0)

Exceptionals

(3.3)

(10.1)

(1.9)

0.7

0

0

0

Profit Before Tax (FRS 3)

 

 

16.7

12.4

21.4

25.9

31.4

35.2

37.2

Tax

(4.9)

(6.3)

(6.2)

(8.2)

(10.7)

(11.8)

(12.4)

Minorities

(0.3)

(0.5)

(0.5)

(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

24.2

26.9

28.3

Profit After Tax (FRS 3)

11.8

6.1

5.7

13.9

20.1

22.8

24.2

Average Number of Shares Outstanding (m)

327.0

328.1

328.1

329.0

329.1

329.1

329.1

EPS FD- normalised (p)

 

 

5.4

5.5

5.8

6.0

7.3

8.1

8.5

EPS - FRS 3 (p)

 

 

3.5

1.7

1.7

5.2

6.1

6.9

7.3

Dividend per share (p)

2.7

2.8

2.8

3.0

3.2

3.3

3.5

Gross Margin (%)

EBITDA Margin (%)

11.1

11.8

11.8

13.1

13.6

14.0

14.1

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

7.9

8.4

8.4

8.9

9.4

9.8

9.8

BALANCE SHEET

Fixed Assets

 

 

230.2

232.0

 

261.2

278.2

283.2

286.2

Intangible Assets

105.8

89.9

104.8

105.1

103.1

100.1

Tangible Assets

119.3

132.0

150.3

167.0

174.0

180.0

Investments

5.1

10.1

6.1

6.1

6.1

6.1

Current Assets

 

 

192.0

187.6

 

202.9

202.3

213.2

225.3

Stocks

90.9

82.6

97.5

95.7

98.4

99.5

Debtors

62.8

62.9

70.3

73.3

75.9

77.2

Other

12.5

8.2

8.7

11.6

13.8

15.1

Cash

25.8

33.9

26.3

21.7

25.2

33.5

Current Liabilities

 

 

(87.7)

(114.4)

 

(88.9)

(100.5)

(108.0)

(114.3)

Creditors

(87.7)

(82.9)

(88.8)

(100.5)

(108.0)

(114.3)

Short term borrowings

0.0

(31.5)

(0.1)

0.0

0.0

0.0

Long Term Liabilities

 

 

(147.6)

(133.3)

 

(171.5)

(167.0)

(162.5)

(158.0)

Long term borrowings

(113.8)

(104.5)

(137.2)

(137.2)

(137.2)

(137.2)

Other long term liabilities

(33.8)

(28.7)

(34.3)

(29.8)

(25.3)

(20.8)

Net Assets

 

 

186.9

171.9

 

203.6

213.0

225.9

239.2

CASH FLOW

Operating Cash Flow

 

 

34.1

35.3

 

33.9

58.6

57.8

62.4

Net Interest

(4.5)

(4.5)

(4.9)

(4.5)

(4.5)

(4.3)

Tax

(7.7)

(7.5)

(10.8)

(10.7)

(11.8)

(12.4)

Capex

(20.2)

(33.7)

(22.2)

(35.0)

(27.0)

(26.0)

Acquisitions/disposals

3.0

0.0

21.7

(2.9)

(0.5)

0.0

Financing

0

(1)

(0)

0

0

0

Dividends

(8.8)

(9.0)

(9.2)

(10.0)

(10.5)

(11.5)

Net Cash Flow

(4.0)

(20.2)

8.4

(4.5)

3.5

8.3

Opening net debt/(cash)

 

 

86.8

88.0

 

102.1

111.0

115.5

112.0

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

Other

2.8

6.1

(17.3)

0.0

0.0

0.0

Closing net debt/(cash)

 

 

88.0

102.1

 

111.0

115.5

112.0

103.7

Source: Low & Bonar accounts, 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 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

245 Park Avenue, 39th Floor

10167, New York

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Healthcare

Photocure — Looking at other strategic opportunities

Photocure recently announced that after seeking partners for Cevira and Visonac for the last few years, it is expanding the search to include outright sale of those products, possible spinoffs or other strategic alternatives. While partnership discussions are continuing, the chances that these will be successful appear diminished. As such, we have removed all partnership related milestones from our model and reduced the probability of success for Cevira from 50% to 20% and for Visonac from 60% to 20% as it is unclear how successful the broadened strategic search will be.

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