The new executive team has set out its stall and taken a visible, significant step towards executing a vigorous strategy of active portfolio management. After a down year in FY16, earnings are on a recovery track this year and a stronger run rate is expected in FY18. The valuation is on a growth footing and, at this early stage, indications support gathering earnings momentum.
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Elementis |
Increasingly active
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Speciality chemicals |
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3 March 2017 |
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The new executive team has set out its stall and taken a visible, significant step towards executing a vigorous strategy of active portfolio management. After a down year in FY16, earnings are on a recovery track this year and a stronger run rate is expected in FY18. The valuation is on a growth footing and, at this early stage, indications support gathering earnings momentum.
Focusing on higher-growth opportunities
FY16 mixed operational performance had been well flagged and results were consistent with this, with some excellent progress offset by areas affected by exogenous (FX and oil price) factors. Momentum in personal care is particularly interesting; it was the fastest growing FY16 subsector (CER FY +14%, H2 +23%), having been backed with additional sales and technical resource. Moreover, the acquisition of SummitReheis (for an expected U$360m, announced on 10 February, completion by mid-year subject to regulatory review) adds scale, profits and synergy fit. Specifically, capability in antiperspirant active ingredients brings significant opportunities to the enlarged subsector. The board was sufficiently confident in future cash generation to maintain the underlying dividend and pay a slightly increased special dividend (together with the final yielding 3.8%).
Positive markers for progress
Underlying FY17 progress will largely be driven by incremental gains from business improvement programmes, which will gather momentum as the year progresses. A possible exit from Surfactants would free up cash and management time. Alongside the SummitReheis (SR) acquisition, these are two examples of active portfolio management and clearly demonstrate the influence of new financial discipline. SR is to contribute for six months in FY17, with full year effects from FY18. By the end of FY17, management expects net debt:EBITDA to be c 1.8x, declining by c 0.4x pa under normal trading conditions. This leaves scope to add further complementary acquisitions and continue to pay out a healthy dividend stream.
Valuation: Several strings to FY18 progress
The share price responded well to the SR acquisition announcement, but has since settled in the middle of its ytd trading range. The SR full year effect brings the FY18 P/E down sharply. By this time, the impact of underlying business improvement actions should be more apparent, and SR synergies at or above indicated levels would provide scope for faster earnings progression. On this timescale, stronger chromium and/or energy sector recovery could further boost group progress.
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Consensus estimates
Source: Bloomberg. Note: *FY15 and FY16 include declared special dividend. |
EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Disclaimer
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Disclaimer
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Gear4music (G4M) has ended the year with 58% revenue growth, slightly ahead of expectations, and has also guided to profit performance marginally ahead. Driven by European sales growth, this shows continuing development of its international presence, as does the opening of (now) two distribution centres on the mainland. Sales growth is now building against strong growth last year, and the strategic argument for medium-term investment continues to strengthen.