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TP Group — Update 21 April 2016

TP Group — Update 21 April 2016

TP Group

Analyst avatar placeholder

Written by

TP Group

Transitioning for growth

FY15 results

Aerospace & defence

21 April 2016

Price

3.12p

Market cap

£13m

Net cash (£m) at 31 December 2015

7.0

Shares in issue

422.5m

Free float

99%

Code

TPG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.7

47.1

(26.5)

Rel (local)

5.5

35.7

(20.7)

52-week high/low

6.25p

2.13p

Business description

TP Group is a specialist engineering, technical and managed services group, delivered by four capability-based divisions: Design & Technology (4% of FY15 sales) Engineering (35%), Maritime (54%) and Managed Solutions (7%), primarily for aerospace, defence, energy and maritime markets.

Next event

AGM

May 2016

Analysts

Andy Chambers

+44 (0)20 3681 2525

Roger Johnston

+44 (0)20 3077 5722

TP Group is a research client of Edison Investment Research Limited

Having successfully addressed the inherited losses ahead of plan, management can now embark on driving a more growth oriented business focused on high integrity support, services and solutions. Removing speculative development losses, combined with improved returns from a growing top line, should ensure a more accurate reflection of underlying economic value. Our FY16-based sum of the parts returns a value of 8.7p.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

21.7

(3.4)

(0.8)

0.0

N/A

N/A

12/15

20.4

(1.2)

(0.2)

0.0

N/A

N/A

12/16e

22.7

(0.2)

0.0

0.0

N/A

N/A

12/17e

24.6

0.8

0.1

0.0

N/A

N/A

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

FY15 results demonstrate good progress

The achievement of a break-even adjusted EBITDA in FY15 is a significant milestone in the rehabilitation and emergence of TP Group from its previous guise. The focus has clearly been shifted away from the speculative development activities to the provision of specialist technology and support services solutions for critical applications to an established, high-quality client base. The improved profit performance was achieved despite the weakness in downstream energy markets that led to several project deferrals late in 2015, and serves to demonstrate the greater flexibility of the group to respond to market challenges. For 2016 it appears that even energy market opportunities may be improving, including for the nuclear market and downstream projects around the globe. TPG Maritime, which contains the submarine activities of the group, is also in the midst of an intensive period of bidding domestically and overseas, and appears well positioned to deliver sustained profit growth.

Company being reoriented to drive growth

In the next phase of the reorientation, management is transitioning the company into four capability-based divisions. This is to support the growth strategy aimed at extending the group’s market presence for existing high integrity technologies, support services and solutions, as well as into adjacencies via selective acquisitions. We expect the company to be free cashflow breakeven in the current year, providing a stable platform to pursue any suitable opportunities.

Valuation: Time to recognise potential

Our sum-of-the-parts valuation is now based on FY16 but continues to place a value only on the profitable aerospace and defence businesses with zero value attributed for the energy businesses. This returns a value of 8.7p/share and has clear upside potential when the energy-related businesses are returned to profit.

Moving to the next phase

FY15 results provide foundation for further growth

Highlights of TP Group’s 2015 results are:

■

Revenues fell to £20.4m as anticipated, reflecting deferrals of energy market projects partially offset by good progress in the Aerospace & Defence activities, primarily on submarines.

■

Adjusted EBITDA improved significantly to a break-even position from 2014’s £2.1m loss.

■

Net cash ended the year at a higher than expected £7.0m, a reflection of a much reduced operating cash burn, resulting from tighter financial controls and lower R&D spend.

The performance was boosted modestly by the initial contribution of Shaw Sheet Metal, acquired on 30 January 2015. It contributed £1.17m to revenues and an EBITDA in line with expectations.

The achievement of a break-even EBITDA is a significant step in the rehabilitation and emergence of TP Group from its previous guise. The focus has clearly been shifted away from the core speculative development activities to the provision of specialist technology and support services solutions for critical applications to an established high quality client base. The platform is now positioned to pursue both organic and acquired growth opportunities.

The improved profitability reflected the elimination of loss-making R&D activity, as reflected in sharply lower self-funded R&D of £1.3m (£2.4m), as well as the focus of management on margin improvement across the group. Gross profit rose by 35% or £1.4m to £5.6m, with the gross margin expanded to 27.4% from 19.1% in the prior year. Overhead costs fell by £0.3m to £7.8m, but this included the absorption of a £0.6m increase in reorganisation costs at TPG Design & Technology.

Exhibit 1: TP Group FY15 results summary

Year to Dec (£'000)

2014

2015

% change

Revenue

21,693

20,446

-5.7%

Cost of sales

(17,554)

(14,834)

-15.5%

Gross Profit

4,139

5,612

35.6%

Gross margin

19.1%

27.4%

SG&A

(8,066)

(7,907)

-2.0%

Operating loss

(3,927)

(2,295)

-41.6%

Adjusted EBITDA

(2,112)

45

n.m.

D&A

(1,339)

(1,328)

-0.8%

EBIT

(3,451)

(1,283)

-62.8%

Exceptionals & one-offs

(476)

(1,012)

112.6%

Operating loss

(3,927)

(2,295)

-41.6%

Net Interest

34

77

126.5%

PTP

(3,893)

(2,218)

-43.0%

Tax

172

311

80.8%

Net Income (reported)

(3,721)

(1,907)

-48.8%

EPS (reported)

(0.88)

(0.45)

-48.9%

EPS adjusted

(0.77)

(0.21)

-72.7%

FCF

(3,454)

(1,693)

-51.0%

Net cash

9,569

7,005

-26.8%

Source: TP Group

Outlook

While the order book fell by 16% to £14.5m (£17.3m) the pipeline of bid activity is strong across the divisions. It includes an improved energy environment, boosted by nuclear potentials, as well as strong submarine prospects with the Trident Successor programme expected to progress significantly this year, and overseas projects developing.

Visibility of current year revenues is thus good, aided by the timing of defence contracts in 2016, and we forecast an increase of 11% to £22.7m. Combined with lower reorganisation cost and continued focus on margin improvement across the business we would expect a positive EBITDA contribution and a break-even free cash performance in the current year.

We have adjusted our FY16 estimates as in Exhibit 2 below:

Exhibit 2: Updated Edison forecasts

Sales

Adjusted EBITDA

Adjusted EPS

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2015

20.5

20.4

-0.5%

0.02

0.05

+150.0%

(0.26)

(0.21)

-19.2%

2016e

22.7

22.7

0.0%

0.73

0.92

+26.0%

(0.04)

(0.04)

0.0%

Source: TP Group reports, Edison Investment Research forecasts

New structure reflects increased ambition

Exhibit 3: TP Group divisional breakdown - new structure

2014

2015

% Change

Revenue

Adjusted EBITDA

Margin

Revenue

Adjusted EBITDA

Margin

Revenue

Adjusted EBITDA

New Structure

TPG Maritime

9,593

2,128

22.2%

10,948

2,777

25.4%

14.1%

30.5%

TPG Engineering

9,081

17

0.2%

7,067

-242

-3.4%

-22.2%

n.m.

TPG Design & Technology

937

-2,955

-315.4%

901

-1,613

-179.0%

-3.8%

-45.4%

TPG Managed Solutions

2,082

188

9.0%

1,530

247

16.1%

-26.5%

31.4%

Unallocated Central costs

-1,490

-1,124

-24.6%

Total

21,693

-2,112

-9.7%

20,446

45

0.2%

-5.7%

-102.1%

Source: TP Group

The management team has now effectively transitioned the group towards the provision of through-life support services and technically sophisticated engineering products, systems and solutions for a variety of critical applications. Reflecting this, and to leverage the core competences available within the group, it has been restructured into four capability-based divisions, replacing the two market-oriented divisions of Aerospace & Defence and Process & Energy previously disclosed.

Broadly speaking the Aerospace & Defence activity is being split into TPG Maritime, primarily incorporating the submarine atmosphere control business, and TPG Managed Solutions, which provides contract management, support and resources to the MOD and its Defence Equipment and Support (DE&S) agency. New customer and commercial opportunities will be pursued alongside the continuing outsourcing potential expected as a result of the defence budgetary pressures in the UK. Process & energy is being split into TPG Engineering and TPG Design & Technology. The former specialises in the manufacture of large scale heat exchangers for industrial processes as well as other fabrications. The latter focuses on the design and development of high-speed turbomachinery, innovative compressors and expander generators using patented technologies.

The new divisional structure (Exhibit 4) is expected to stimulate growth from the existing activities through a greater focus on opportunities within the well-established customer base as well as identifying and exploiting new potentials as they develop. It will also provide a framework for selected M&A activity to further enhance existing capabilities as well as developing new customers, markets and applications for group technology and expertise.

It should also result in a more efficient use of resources and capital employed improving returns. Internal value should be created from the pull through of work and servicing across divisions and locations, elements of vertical integration in the fabrication of parts, as well as extending the long-term customer relationships.

Exhibit 4: TP Group new capability-based divisional structure

Source: Edison Investment Research, TP Group

As TP Group moves into this new phase, we feel it has identifiable key criteria to drive stakeholder value; the ability to provide unique, sometimes pioneering solutions to the established customer base with a drive to improve quality, achieving both supply chain and internal efficiencies.

Exhibit 5: TP Group stakeholder value proposition

Source: Edison Investment Research

We have rolled our sum of the parts valuation on to a FY16 basis, which in itself provides a 1.0p increase in the returned value. An additional 0.2p valuation gain is derived equally from improved operating performance (better Aerospace and Defence profitability, lower central costs) and the improved FY15 year-end cash position versus our previous forecast. We continue to adopt a very conservative approach in our sum-of-the-parts estimation of fair value. We still consider the loss-making energy businesses to be worth zero, choosing only to attribute a value to TPG Maritime and TPG Managed Solutions. If, as we expect, TPG Design & Technology and TPG Engineering move into sustained profitability, the value has upside potential. Nevertheless, our peer-based sum-of-the-parts currently returns a value of 8.7p.

Exhibit 6: Financial summary

£m

2013

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

19.3

21.7

20.4

22.7

24.6

Cost of Sales

(15.9)

(17.6)

(14.8)

(16.3)

(17.6)

Gross Profit

3.5

4.1

5.6

6.3

7.0

EBITDA

 

 

(3.0)

(2.1)

0.0

0.9

1.9

Operating Profit (before amort. and except.)

(4.3)

(3.5)

(1.3)

(0.2)

0.8

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

Exceptionals

(0.1)

(0.5)

(1.0)

(0.0)

(0.0)

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

(4.3)

(3.9)

(2.3)

(0.2)

0.7

Net Interest

0.0

0.0

0.1

0.0

0.0

Profit Before Tax (norm)

 

 

(4.3)

(3.4)

(1.2)

(0.2)

0.8

Profit Before Tax (FRS 3)

 

 

(4.3)

(3.9)

(2.2)

(0.2)

0.7

Tax

0.8

0.2

0.3

0.1

(0.2)

Profit After Tax (norm)

(3.5)

(3.2)

(0.9)

(0.2)

0.6

Profit After Tax (FRS 3)

(3.6)

(3.7)

(1.9)

(0.2)

0.6

Average Number of Shares Outstanding (m)

310.2

420.9

420.9

420.9

420.9

EPS - normalised (p)

 

 

(1.1)

(0.8)

(0.2)

(0.0)

0.1

EPS - normalised and fully diluted (p)

 

(1.1)

(0.8)

(0.2)

(0.0)

0.1

EPS - (IFRS) (p)

 

 

(1.1)

(0.9)

(0.5)

(0.0)

0.1

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

18.0

19.1

27.4

28.0

28.4

EBITDA Margin (%)

-15.3

-9.7

0.2

4.1

7.7

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

-22.1

-15.9

-6.3

-0.9

3.2

BALANCE SHEET

Fixed Assets

 

 

17.1

15.9

15.0

15.0

15.0

Intangible Assets

15.7

14.9

14.5

14.5

14.5

Tangible Assets

1.4

1.0

0.6

0.5

0.5

Investments

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

18.3

17.1

13.7

14.3

15.7

Stocks

0.2

0.1

0.2

0.4

0.7

Debtors

4.0

7.2

6.4

6.6

6.9

Cash

13.7

9.6

7.0

7.2

8.0

Other

0.3

0.2

0.1

0.1

0.1

Current Liabilities

 

 

(5.6)

(7.6)

(5.8)

(5.5)

(5.4)

Creditors

(5.6)

(7.6)

(5.8)

(5.5)

(5.4)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(4.0)

(3.3)

(2.8)

(2.8)

(2.8)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(4.0)

(3.3)

(2.8)

(2.8)

(2.8)

Net Assets

 

 

25.7

22.0

20.2

21.0

22.5

CASH FLOW

Operating Cash Flow

 

 

(4.4)

(3.4)

(1.6)

0.3

1.0

Net Interest

0.0

0.0

0.0

0.2

0.0

Tax

0.7

(0.0)

0.1

0.0

0.0

Capex

(0.0)

(0.2)

(0.2)

(0.2)

(0.2)

Acquisitions/disposals

0.0

0.0

(0.9)

0.0

0.0

Financing

10.8

(0.6)

(0.0)

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Net Cash Flow

7.1

(4.2)

(2.6)

0.2

0.8

Opening net debt/(cash)

 

 

(6.7)

(13.7)

(9.6)

(7.0)

(7.2)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(0.0)

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(13.7)

(9.6)

(7.0)

(7.2)

(8.0)

Source: TP Group reports, Edison Investment Research estimates

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Paysafe Group — Update 21 April 2016

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