Tenon — Update 2 December 2015

Tenon is a US-centric supplier of specialist – predominantly wood – mouldings, boards, stair parts, doors and other millwork products for use in residential housing, supplying both pro-dealer and retail channels. It manages an extended supply chain - including sawmill and remanufacturing facilities in New Zealand and other owned processing capability in the US and third-party suppliers - to provide high service levels to multiple channels and customer locations. NZ facilities also supply domestic Australasian markets as well as exporting to Europe and China.

Based on our revised estimates, Tenon’s valuation is on mid to high single-digit multiples for the current year, compressing to low single-digit multiples by FY18. Specifically, EV/EBITDA is 6.2x in FY16e falling to 2.8x in FY18e, while its P/E rating reduces from 7.8x to 4.0x over the same period. Against a selected US peer group on a comparable basis, discounts are significant at c 30-50% for calendarised 2016 and 2017 earnings. Applying weighted peer multiples in line with the company’s new US home and remodelling revenue exposure, generates the following valuation ranges:

We expect Tenon to be on a prospective c 3.0% dividend yield for FY16.

Following FY15 results, we have increased FY16 and FY17 EBITDA estimates by 5.5% and 26.9% respectively – partly due to more favourable FX rates – and introduced a FY18 forecast for the first time. The reintroduction of a dividend payment earlier than we had anticipated was also noteworthy and Tenon ended FY15 with US$58m net debt. Our revised estimates include incremental new business revenues on top of underlying growth rates, where we have taken a conservative view relative to market forecasts. With a ramp-up in EBITDA margin (from 3.2% in FY15 to 8.4% in FY18e), this drives a more than fourfold expected increase in EPS by FY18. Rising EBITDA is also reflected in a sharp increase in free cash flow, which partly funds a growing dividend payout but also results in an expected rapid reduction in net debt to c US$10m by the end of FY18e, absent any new significant capex projects and/or acquisitions.

Almost 90% of FY15 revenues were generated in the US. The NZ$/US$ is a key cross rate, most obviously in the translation of US$ earnings into NZ$, the currency denomination of Tenon’s share price. Moreover, Tenon makes significant export products from its NZ manufacturing facilities as a supplier to its US distribution activities. Some forward hedging of these costs takes place, but over time a stronger/weaker US$ (relative to NZ$) is beneficial/detrimental with a +/- US 1c move equal to a +/- US$0.65m profit impact. The US$ has strengthened by around 10c since the middle of 2014, and this is reflected in our estimates. More broadly, the health of the US economy and specifically the drivers of its housing markets, (including consumer confidence and interest rates), will influence levels of demand over time. Having experienced a severe downturn at the end of the last cycle, the newbuild market is now into a third year of recovery although the improvement in the remodelling market has been more muted. In each of these segments, Tenon has a degree of customer concentration. Lowe’s has been a significant customer for over 20 years and continues to award incremental product categories to Tenon under its vendor-managed inventory programme.

Tenon is a leading North American full-service supplier of specialist millwork building products.

Tenon is an integrated supplier of moulding and millwork, including solid, finger-joint and decorative mouldings, clear boards, stair parts and door components, mainly in higher-grade softwoods and hard woods for use in residential housing. The US is the dominant market addressed and represented almost 90% of group revenue in FY15. Of the US$357m of revenue generated here:

In FY15, just over half of US revenues went through the pro-dealer channel (ie trade and wholesale customers for new build housing) and the remainder via ‘big box’ DIY retailers (such as Lowe’s, Home Depot and Menards to meet remodelling demand). The pro-dealer percentage of US sales has increased from a low of c 30% to c 55%, reflecting faster recovery of this subsector relative to remodelling, but also increasing penetration by Tenon companies from initiatives taken. In addition to sourcing and distribution, Empire (Tenon’s US full-service distribution and largest operating company) also undertakes in-store retail vendor-managed inventory programmes. In Australasia, Tenon operates the largest clearwood sawmill in NZ and downstream operations that produce high-grade moulding and millwork. Over 80% of this goes to North America, c 15% to Europe and a small amount to Asia Pacific. Other lesser lumber grades are sold into the domestic NZ/Australian markets as well as China, and to a lesser extent, Europe. In FY15, Tenon started an exclusive three-year supply deal for selected moulding products with Masters (a Lowe’s/Woolworths JV). The company has previously owned NZ forestry assets, but now sources almost all of its logs, part-processed and finished product from FSC-certified supply chains.

Tenon has a clear strategy centred around its existing manufacturing, sourcing and distribution capabilities to increase profitability, having previously cited an annual EBITDA target from existing operations of c US$45m (versus FY15 US$13m) based on an expected US housing market mid-cycle position and an NZ/US$ 0.70 cross rate. The ongoing recovery of US housing demand remains central to this. Announced investment to increase NZ manufacturing facility efficiency, actions to widen and deepen pro-dealer coverage and growth of DIY retail product categories, together with procurement and distribution initiatives, have raised mid-cycle EBITDA guidance to c US$50m (at NZ$/US$ 0.65). Broader organic growth, complementary investment, and possibly acquisitions, could strengthen this further.

The group board is comprised of five NEDs, led by Luke Moriarty as chairman since 2005 (and previously an NED and member of the executive office of predecessor parent company Fletcher Challenge). He is also CEO of Rubicon (Tenon’s largest shareholder), which shares two other NEDs with Tenon. Together, the directors bring a mix of finance, logistics, US business and consulting experience to the board. The executive management team was recently restructured, with Dennis Berry appointed as President, North America and Tony Johnston (formerly COO) as President, Asia Pacific. With other internal promotions in North America, these businesses are now more closely aligned, especially with regard to their supply chains.

Operationally, Tenon’s business model is a combination of distribution, primary manufacture, secondary processing and sourcing activities, all in the core area of mouldings and millwork, stair parts, doors and boards for the housing market. It has distinct operations in the US and NZ. We discuss them by region below, but they are very much interlinked and together form the basis for high service levels and high-quality product supply in its largest market. We believe that the degree of coordination between US operations is in the process of increasing further.

From being largely an exporter from NZ, Tenon steadily built its presence in North America between 1999 and 2009. It took an initial stake in The Empire Company at the beginning of this period, before establishing its own direct distribution operation in 2001. The Empire shareholding was increased further in FY04, and became a wholly owned subsidiary in FY06, when Tenon also bought a majority holding in Southwest Mouldings. Outright acquisition of Ornamental Mouldings in FY07 was followed by the purchase of the outstanding Southwest Mouldings minorities in FY09. These operations as they are today are summarised below.

Reflecting the original location of the constituent companies, which have all radiated out over time from their traditional local markets, Tenon’s North American exposure is substantially to pro-dealer and DIY retail demand in the eastern half of the US. Distribution and supply arrangements with the national big box retailers and pro-dealers are agreed on a regional or territory basis. The pro-dealer segment is also characterised by more regional and independent players in the new home building supply chain.

Finished products sourced from Taupo, the three US manufacturing sites and other external sources in North America and overseas are distributed from seven primary warehouses located in Florida, Texas (x2), Michigan, Virginia, Pennsylvania and North Carolina. Collectively, Tenon’s US companies supply 2,700 DIY retail stores and over 2,000 pro-dealer locations directly. In the case of its leading DIY retail customer, Empire undertakes a full, vendor-managed inventory service with in-store responsibility for the type and quantity of stock carried, as well as providing a strong IT analytics capability with a proprietary customer performance management model. Short order horizons are typical in both primary segments and the distribution network has to balance this with longer overseas product supply lines by carrying inventory. (In FY15, year-end inventory was equivalent to around one quarter of COGS in that year). The ability to successfully meet customer orders on time/in full is a key service requirement.

Following a complete operational review in FY15, we believe that greater harmonisation and steps to optimise the logistics functions between the pro-dealer and DIY retail channels are being implemented, while maintaining the distinct product and service levels of each channel. We see the management changes announced in May and plans to consolidate two warehouses in Texas into one in the early part of 2016, as evidence of this. Where there are product commonalities and/or efficiencies from shared delivery-route planning, this would seem to serve the twin objectives of enhancing customer service and at the same time controlling costs to serve.

Tenon’s largest direct peers in North America are understood to be indigenous players. As they are mainly private companies (eg Metrie and ECMD Inc), we are unable to comment on relative size and profitability compared to Tenon.

The corporate head office and primary manufacturing facilities are located in NZ, in Auckland and Taupo respectively, both in the North Island. In 2012, Tenon acquired manufacturing and inventory assets in Victoria, Australia to service the local market directly and develop exports of radiata pine products from Taupo.

The Taupo sawmill is a leading processor of pruned radiata pine logs – sourced from FSC-certified forest plantations – into high-grade clearwood boards and solid linear mouldings. It supplies the majority of this product to the US and is understood to be responsible for c 60% of the pine exported from NZ to the US. There are two other players of any size in this market: Claymark (a private NZ company and Pan Pac Forest Products, now part of the Oji Group of Japan).

To improve the recovery of clearwood grade material from the logs processed, Tenon is investing US$5m in new edging machinery in the sawmill, and a further US$2m on an integrated grade scanner and cross-cut saw in remanufacturing. Designed to maximise high-grade yield and revenues, this capex has an eighteen-month payback. The edger is operational now, while the downstream equipment is expected to be on line by mid-Q316.

In Australia, Tenon announced in the middle of 2014, that it had signed an agreement to supply Masters Home Improvement stores. This Lowe’s/Woolworths DIY chain JV had 49 stores at the time – now up to 60 – with an intention to grow to more than 100 in due course. Tenon is believed to be replicating its Lowe’s direct supply model in the US. Revenue from this relationship started to build at a low level during FY15, and further growth will depend on the value of product that Masters carries per store and the rate at which its store portfolio expands.

In many respects, the US housing market appears to be having a stronger end to 2015 than the prior year, notwithstanding the expectation of an imminent rate rise (being the first increase from the low base established in 2009). While near term data readings may fluctuate, longer term commentary on US GDP growth and housing prospects – especially in the newbuild segment – remains positive. We note that growth rates in both the newbuild and remodelling subsectors are expected to be ahead of those for US GDP. As Tenon’s largest market, a favourable US cyclical backdrop is an important driver of its growth aspirations.

The US new housing market showed some signs of softening in the first quarter of 2015, with permit and start activity (seasonally-adjusted annual rates, SAAR) dipping in January and February, before rebounding to levels above those seen in the second half of 2014. With a natural lag, a similar pattern has also occurred in completions and sales, although the September reading fell back again. NAHB/Wells Fargo surveys have highlighted a positive sentiment indicator among homebuilders for the last six months, although the latest reading was less strong than in October, which represented an eight-year high.

Existing home sales underwent a step down at the same time as new home starts/permits, before showing a strong recovery in the last four or five months. While inventory levels have risen from lows at the turn of the year (to broadly similar levels to a year ago), the rate of existing home house price growth has been remarkably stable at c +5% y-o-y. Transactions – supported by house price inflation over time – are considered to be a lead indicator for remodelling activity, typically within the following two years.

The latest OECD Economic Outlook (November) points to a very steady expected real GDP growth picture for the US, projected to be +2.5% in 2016 and +2.4% in 2017, following two years of comparable progress. Falling unemployment and rising real incomes and consumer spending are cited as important drivers, and they of course are also positive indicators for the housing market. The latest NAHB forecasts (November) predict very strong activity levels in new single-family housing starts, rising 22.8% in 2016 and 30.9% in 2017 (after +10.5% in 2015). On this trajectory, the total number of housing starts (all dwellings) would reach what is considered to be mid-cycle build rates of c 1.6m units in 2018. More modest, but still positive growth expectations for existing single-family home sales are for +3.2% in 2016 and 2017 (after +7.3% in 2015), which is slightly ahead of the highlighted GDP growth rate expectations.

We have seen third-party market research which is consistent with the NAHB forecasts outlined above. In aggregate terms, it projects compound annual growth of almost 12% for new single dwelling housing starts between 2015 and 2020. Strictly speaking, we should probably be considering activity levels in those states in the eastern half of the country, as this is predominantly where Tenon generates its US revenues. Looking into the detail, all regions are expected to contribute to the headline progress, with double-digit growth in all except the Northeast (still +7-8% CAGR). Aggregate spending on residential home improvements is expected to grow at just over a 4% CAGR over the same period, and there is broad consistency on this measure in the +3.5-4.5% range across all regions. Drilling down further and more specific to Tenon’s product groups, expenditure in the moulding and trim segment for residential use is expected to be in line with the headline growth rates in both subsectors, with newbuild spending growing more than twice and almost three times faster respectively than in remodelling.

In terms of current market conditions, the previously mentioned NAHB/Wells Fargo survey showed that the West was the strongest regional market among new home builders, with the Northeast relatively weak, but still with a reading of just above 50 (which is considered to be neutral for sentiment). The South and Midwest regions remained well above this level. Note that this is more of a short-term current/expected conditions survey.

Lastly, revisiting the latest Harvard LIRA report (October) predicts an improved one-year outlook for remodelling activity, with spending on homeowner improvements rising from an annualised +2.4% in Q315 to +6.8% by Q216 (ie the second half of Tenon’s FY16). The associated commentary cites the strengthening of housing market conditions “encouraging owners to invest in more discretionary home improvements such as kitchen and bath remodelling,” as well as replacing worn items at the end of their functional life.

Alongside its FY15 results announcement in August, Tenon notified investors that a formal strategic review process was underway, for which the company had engaged external advisers (Deutsche Craigs in NZ and Deutsche Bank in New York) to assist. The purpose of the review is “to determine the best risk-adjusted path most likely to close the share price value gap” for shareholders. No time limit was given for the review period, but the company subsequently announced (on 27 October) that it had received “inbound interest from third parties”. Hence, a potential business sale investigation is to be included as part of the strategic review. No further comment is currently anticipated before the company’s annual shareholder meeting to be held on 3 December.

In the last twelve months or so, Tenon has taken a number of steps intended to enhance shareholder value, including liquidity initiatives for small shareholdings, some share buybacks and latterly, the commencement of dividend payments. It has also taken actions to improve the market positions and penetration of its US operations supported by investment there and in NZ. As well as the business sale route referenced earlier, other options for Tenon include:

There are varying degrees of visibility associated with each of these courses of action, and by definition, they would also require the participation of third parties. Tenon has not externally expressed a preference at this stage, for any of these or any other option.

Tenon’s US operations generated almost 90% of group revenue in FY15, and as noted previously, only just over one third of the product concerned is sourced in the country. Of the remainder, around one quarter comes from the company’s own NZ facilities and Tenon typically hedges its NZ manufacturing costs forward by c six months. As an importer, a strong US$ is beneficial; in the absence of hedging, a +/- US 1c movement in the NZ$/US$ rate affects operating profit by c US$0.65m. In the preceding four years, this cross rate had largely moved within the NZ$/US$ 0.75-0.85 range until the beginning of FY15. Since then, the US$ has strengthened significantly to 0.65. As a US-centric business, the health of the local US economy and especially housing and retail banking industries, as well as consumer confidence are key drivers. (Note that Tenon’s business bias is towards the central and eastern half of the US.) These elements are, of course, all cyclical to some degree; Tenon came through a deep recession at the end of the last decade and is now servicing a growing new homebuilding customer channel (c 55% or revenue) and a potentially recovering retail/remodelling segment (c 45%). That said, a US interest rate rise is considered to be imminent and the strength of housing demand under this scenario is yet to be tested. Tenon is growing its pro-dealer customer profile regionally and by expanding its product offering, while retail is naturally concentrated with the ‘big box’ customers. Tenon provides Lowe’s with a full vendor-managed inventory and proprietary customer performance management service (rather than just product supply), and consequently we consider this to be a long-term relationship, subject to meeting agreed service levels. Tenon’s top three shareholders account for c 83% of the register; this can been seen as beneficial on one hand (ie stability to execute strategy, ability to move quickly if corporate opportunities arise, responsiveness to strategic review) and unhelpful in another sense (eg ability to attract new secondary investors).

In this section, we take the view that the valuation should be a balance between current profitability and earnings levels and a reasonable mid-cycle view of the business potential. Profit recovery is underway. Tenon’s mid-cycle EBITDA guidance is c US$50m (based on NZ$/US$ 0.65) for the company in its current form. Our own FY18 estimate is US$45m (at NZ$/US$ 0.675). We point out that these estimates are somewhat ahead of the c US$28m EBITDA (adjusted for acquisitions) in FY07. With a sharp rate of expected profit increase, our mid-point valuations below, based on peer-group multiples (calendar year basis) are:

Tenon is generating profits and earnings on a strong growth trajectory over our forecast period. Unsurprisingly, trailing valuation multiples compress rapidly under this scenario. Starting in the current year – which has started well – Tenon appears to be valued by the market at an equivalent level to an ex-growth business. Based on FY18 estimates, we consider that Tenon offers a deep value attraction to investors. We summarise the traditional valuation metrics as follows:

A projected three-year EPS CAGR of 65% against a trailing P/E of c 18.4x gives a PEG of less than 0.3x. This suggests the market is adopting a more cautious view of Tenon or its end markets, and is perhaps currently unwilling to take a medium- to longer-term view at this stage. Other factors may include the very tight share register and the NZ listing for what is primarily a US business.

Note also that Tenon offers:

As in previous reports, we have considered Tenon’s market valuation in the context of some listed US peers operating in adjacent segments with similar drivers in the company’s leading sectors of new home building and remodelling of existing homes.

By way of broader context, the S&P 500 Index is only marginally ahead in 2015 to date, although has recovered well from a sharp sell-off during Q3. More relevant to Tenon, we track the performance of the S&P Homebuilders Select Industry Index and some of its constituent companies. Over the same period, performance has been relatively stable and the index has risen by c 6% ytd. Exhibit 4 shows the aggregate and subsector valuations for this peer group.

Calendarising Tenon’s EBITDA and EPS figures and comparing the resulting multiples to a 60:40 blend of homebuilder:retailer multiples (and calculating EV using last reported debt), highlights the following:

Equivalent multiples to the overall peer average, give indicative Tenon’s share price ranges based on each of the calendar years’ expected earnings of:

Clearly, each forecast year for Tenon, has a progressive and material impact on the valuation.

The implied earnings growth rates among the selected peer group are largely in a healthy 10-20% range for 2016 and 2017. In contrast, our equivalent EPS growth estimates for Tenon are 130% and 81% respectively (and 37% for CY17). To some extent, Tenon is possibly coming from a lower base level, giving a faster recovery profile. For example in FY07, Tenon’s operating businesses generated c US$400m revenue and US$28m EBITDA; on similar revenue FY15 EBITDA was US$13m suggesting scope for better margin performance at current activity levels. In addition, the company has also won incremental new business with both pro-dealer and retail customers, so that revenue growth above the market rate is likely. As discussed below, Q116 financial performance provides a strong indication that this is being achieved in FY16 to date. Clearly, attaining the higher valuation ranges indicated above are dependent upon Tenon delivering the expected growth rates.

Tenon’s profit progression has been in steady increments rather than spectacular over the last two years, although we should not forget this is still a significant improvement from FY12 levels. FY15 was characterised by improved financial performance – despite some operational headwinds – and investment in both North America and NZ to facilitate future growth. A return to the dividend list came slightly earlier than anticipated, with the declaration of a FY15 final payment. An increase in net debt to US$58m reflected growth investment made in the period.

North America: FY15 revenue increased by 3.4% y-o-y, with a pick up in the rate of growth as the year progressed (ie H1 +2.9%, H2 +3.9%). The trade/pro-dealer segment was the primary driver of growth, being ahead by c 8% in the year (and by c 5-6% in H1) reflecting exposure to new homebuilding customers. We understand that remodelling/retail revenue was flat for the year, consistent with the pattern seen at the interim stage. We believe that the North American performance could have been stronger, but for some likely impact from industrial actions affecting west coast ports, and in retail, a higher than normal level of store reset costs (relating to new displays and products). For the year as a whole, pro-dealer represented c 55% of total North American revenue and retail the remaining 45% and we would expect that the annualised run rate at the beginning of FY16 was slightly further in favour of pro-dealers.

Around mid-year, Tenon announced that an operational review of the company’s North American footprint was underway, targeting growth initiatives and service efficiencies. Management change was announced in May; new senior management at the two largest subsidiaries Empire and Southwest Mouldings under a new president, North America – all filled by internal promotions – indicates that strategic implementation is underway. We believe that deeper penetration of both pro-dealer and retailer segments with a greater degree of supply chain integration are the key elements of this strategy. Additional pro-dealer regions, new product lines into both pro-dealer and retail segments and a planned consolidation of two warehouses into one in Dallas during H216 are all examples of actions that should begin to bear fruit in FY16, but more so in future periods.

Australasia: operationally, sawmill and remanufacture processing facilities in Taupo were very busy, especially with exported product to support US activities. Domestically, demand for higher grade products were also good, although the pull through into a new supply agreement in Australia appeared to have a relatively slow first year. The volume of logs and lower-grade throughput was somewhat lower in H2 versus H1, although this may partly have been by design. In other export markets, European demand has been growing, while that from China was subdued.

The key development in FY15 was the decision to invest US$7m into two projects, US$5m for new edging equipment and US$2m on a ripline to raise higher value-added production. The first of these was commissioned during Q116 and the second is expected to come on stream – and will provide greater downstream balance to the edger – during Q316.

Net debt rose by US$8m over the course of FY15, ending the year at US$58m. Higher than normal working capital and tangible fixed-asset investment was the explanation for the debt movement as Tenon prepared for its next phase of growth. Inventory built progressively over the course of FY15 and by the year end some US$16m of cash flow was absorbed here, taking the year-end value to US$81m. We believe that this was swollen by ramping up for the new business wins alluded to above, specifically two additional product lines for Lowes’ and the expansion of pro-dealer distribution in existing and five new regions. Hence, the inventory investment is to support associated revenues which are expected to grow in FY16 and beyond. In recent years, capex has run at c US$2m pa, but in FY15 this rose to US$6m (versus depreciation of c US$3m), reflecting initial cash outflows for new equipment at Taupo. This programme will also run over into FY16 (we estimate US$6m total capex in this year also).

Elsewhere, the above outflows were partly offset by the improvement in EBITDA, a trade creditor inflow (total working capital absorption was US$9m in FY15 against US$5m in FY14) and lower cash interest payments.

In terms of outlook, we have modelled further working capital investment, although growing less slowly than current projected revenue in future periods as the company implements more advanced procurement and inventory management initiatives and moves through the initial new business period. Apart from the significant increase in EBITDA expected, the other line item worthy of mention is dividends. Having declared a FY15 final to be followed by regular interim and final dividends going forward, we expect cash outflow here to rise from c US$3.5m in FY16 to c US$4.1m by FY18. Overall, on the numbers presented, net debt should start to decline during the current financial year and be substantially lower by the end of FY18.

At the time of announcing FY15 results, Tenon indicated that it was targeting EBITDA in excess of US$20m in FY16, excluding FX effects. Our FY16 revenue projection is broadly unchanged; although the FY15 base year is lower than anticipated, new business wins support the higher implicit growth rate compared to previous estimates. Underlying margins show a good improvement over FY15, although we have taken a slightly more cautious view to reflect a degree of ongoing store reset costs in the US and to allow for some implementation impact from new investment bedding in. However, updating our FX assumptions for prevailing rates (ie to US$/NZ$0.6950 for FY16 vs NZ$0.75 previously) provides a c US$3m benefit to PBT estimates, with a full y-o-y benefit approaching US$5m. In subsequent years, the benefit to our new compared to previous estimates is c US$4m. Otherwise, underlying profit momentum is provided from both US and Australasian operations. A trading update (on 21 October) reported Q116 EBITDA of US$6m (after strategic review costs and hedging losses) – almost double Q115 and equal to H115 overall – and a higher ‘run rate’ was noted at the recent ASM (3 December).

Although not shown in Exhibit 6 above, we currently expect Tenon to declare a jump in dividends in FY16 from NZ 5c, to NZ 8.25c/US 4c to US 5.7c, reflecting a return to interim payments plus some growth in the final. Beyond this, we see growth of c 10% in the next two years, which would still leave dividend cover in excess of 4x.

From the 2012 low point of US$2m, Tenon rebuilt EBITDA to US$13m in FY15. During this time, the revenue and profit performance of both North American and Australasian operations has improved, with little contribution from FX movements (with a NZ$/US$ average around 0.80 in FY12 and FY15). As we have seen, a stronger US$/weaker NZ$ and increased activity levels in the US housing market alongside the company’s own business development are favourable indicators for ongoing progress towards Tenon’s mid-cycle EBITDA aspirations.

US demand is the key driver; taking a simple average of third-party projections for the moulding and trim segment gives double-digit market growth rates in the 11.0-13.5% range for 2015 to 2018. We have assumed Tenon’s North American revenue increases at the lower end of this range in FY16 in underlying terms and have taken a more conservative view than the projections cited in FY17 and FY18. New pro-dealer regions and new Lowe’s lines add incremental revenues over and above this in all three years. Investment in NZ should facilitate good growth in FY16 and FY17 in particular, especially into other export markets. The other key elements of our estimates are:

We assume that Tenon will be making interim and final dividend payments (one third:two thirds ratio) rising from NZ 8.25c (US$ 5.7c) in FY16e by c 10% pa in NZ$ and be well covered by EPS.

Year-end net debt peaked at US$58m at June 2015, with a sizeable investment in inventory in the period, as described earlier. We expect working capital investment to remain a feature to service higher revenues, although new procurement and warehouse consolidation initiatives may bring opportunities to mitigate this. With capex equal to or slightly ahead of depreciation, steadily reducing interest costs and a relatively low annual cash tax payment (owing to US tax losses carried), our significant expected increase in free cash flow is substantially driven by the rising EBITDA profile described above.

With the above profit and cash profiles, projected net debt declines rapidly – more so from FY17 onwards – to c US$10m by the end of FY18, absent any acquisitions.

Net assets have been stable around US$120m since 2012, and were slightly ahead of that at US$123m at the end of FY15 (no new equity has been issued for over a decade). Asset backing is substantially in the form of net trade working capital (US$86m) and tangible fixed assets (US$24m). At the end of FY15, Tenon had a US$75m total debt facility in place to May 2020 (including c US$10m of amortising term loan at that time). Period-end debt of US$58m and goodwill of US$67m – relating to North American operations – were the other main balance sheet items.