A new senior management team is in place with a clear agenda to improve operational and financial performance. FY18 is going to be a transition year but investors will still want to see evidence of progress from the two strongest business units and in addressing specific issues in the other two. We have not changed estimates at this stage, but note the increased H2 bias flagged by management. The attraction of the current valuation will depend on the level of investor confidence in underlying prospects.
Written by
Low & Bonar |
Transition year |
AGM update |
Diversified industrials |
17 April 2018 |
Share price performance
Business description
Next events
Analyst
Low & Bonar is a research client of Edison Investment Research Limited |
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A new senior management team is in place with a clear agenda to improve operational and financial performance. FY18 is going to be a transition year but investors will still want to see evidence of progress from the two strongest business units and in addressing specific issues in the other two. We have not changed estimates at this stage, but note the increased H2 bias flagged by management. The attraction of the current valuation will depend on the level of investor confidence in underlying prospects.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
11/16 |
400.0 |
29.2 |
6.0 |
3.0 |
9.0 |
5.6 |
11/17 |
446.5 |
30.7 |
6.3 |
3.1 |
8.5 |
5.7 |
11/18e |
417.0 |
30.1 |
6.4 |
3.3 |
8.3 |
6.2 |
11/19e |
429.5 |
32.4 |
6.9 |
3.5 |
7.7 |
6.4 |
Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles and exceptional items. Excludes disposed grass yarns business.
Progress and challenges
Overall demand conditions appear to be stable against previous updates and Q1 revenues were ahead of the prior year (although volume, price and FX effects were not separately disclosed). The largest two divisions (46% of FY17 revenue, 77% of EBIT before central costs) remain the better performers in this regard, although product mix and input costs are both flagged as headwinds. There were short progress reports on performance improvement initiatives in Civil Engineering (now under a special projects team) and Coated Technical Textiles, which were consistent with previous comments and reminded us they are not quick fixes. Our model factors in £5m exceptional costs into FY18 estimates and more clarity will emerge here as the year progresses.
Amplified H2 bias due to H1 markets and actions
Reducing working capital/net debt and improving operating efficiency are key focal points for the year. The roll-out of a new ERP system will facilitate these steps and a new CFO appointment adds to strong board finance representation. Low & Bonar’s markets typically generate H2 profit bias, which should be exaggerated in FY18 by actions taken during H1. Our flat FY18 EBIT expectation is comprised of an uplift in Civil offset by lower contributions from the two largest divisions; we will review this mix and the extent of the implied H2 required to meet our estimates at the interim stage.
Valuation: Requiring positive newsflow
Low & Bonar’s share price has fallen by c 40% over the last 12 months and, after a rally during Q1, is now back to lows seen at the beginning of 2018. On our existing estimates, the company is trading on a current year P/E of 8.3x and EV/EBITDA (adjusted for pensions cash) of 6.0x. We acknowledge that there may be some downside risk to our forecast; positive operational newsflow is likely to be a key determinant of future share price progress.
Exhibit 1: Financial summary
£m |
2014 |
2015 |
2015 |
2016 |
2017 |
2018e |
2019e |
2020e |
||
Year end 30 November |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
IAS19R |
IAS19R |
Restated IAS19R |
IAS19R |
IAS19R |
IAS19R |
IAS19R |
IAS19R |
||
Revenue |
|
|
410.6 |
395.8 |
362.1 |
400.0 |
446.5 |
417.0 |
429.5 |
440.2 |
Cost of Sales |
N/A |
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 |
N/A |
||
EBITDA |
|
|
45.6 |
46.9 |
46.0 |
52.8 |
55.8 |
55.1 |
58.4 |
60.7 |
Operating Profit (ex SBP) |
|
|
32.3 |
33.4 |
32.5 |
35.6 |
36.2 |
36.0 |
38.3 |
40.6 |
Net Interest |
(5.0) |
(4.2) |
(4.3) |
(5.4) |
(4.6) |
(5.0) |
(5.0) |
(4.8) |
||
SBP |
(0.6) |
(0.6) |
(0.6) |
(0.9) |
(0.7) |
(0.7) |
(0.7) |
(0.7) |
||
Saudi JV |
(1.1) |
(1.8) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
PNFC |
(0.4) |
(0.2) |
(0.2) |
(0.1) |
(0.2) |
(0.2) |
(0.2) |
(0.2) |
||
Profit Before Tax (company norm) |
|
25.2 |
26.5 |
27.4 |
29.2 |
30.7 |
30.1 |
32.4 |
35.0 |
|
Intangible Amortisation |
(5.2) |
(4.1) |
(4.1) |
(4.0) |
(3.7) |
(3.7) |
(3.7) |
(3.7) |
||
Exceptionals |
(3.3) |
(10.1) |
(1.9) |
0.7 |
(47) |
(5) |
0 |
0 |
||
Profit Before Tax (FRS 3) |
|
|
16.7 |
12.4 |
21.4 |
25.9 |
(19.7) |
21.4 |
28.7 |
31.3 |
Tax |
(4.9) |
(6.3) |
(6.2) |
(8.2) |
2.1 |
(7.9) |
(8.5) |
(9.2) |
||
Minorities |
(0.3) |
(0.5) |
(0.5) |
(0.6) |
(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 |
21.4 |
21.8 |
23.5 |
25.4 |
||
Profit After Tax (FRS 3) |
11.8 |
6.1 |
5.7 |
13.9 |
(18.2) |
12.9 |
19.6 |
21.5 |
||
Average Number of Shares Outstanding (m) |
327.0 |
328.1 |
328.1 |
329.0 |
329.4 |
329.7 |
329.7 |
329.7 |
||
EPS FD- normalised (p) |
|
|
5.4 |
5.5 |
5.8 |
6.0 |
6.3 |
6.4 |
6.9 |
7.5 |
EPS - FRS 3 (p) |
|
|
3.5 |
1.7 |
1.7 |
5.2 |
(5.5) |
3.9 |
5.9 |
6.5 |
Dividend per share (p) |
2.7 |
2.8 |
2.8 |
3.0 |
3.1 |
3.3 |
3.5 |
3.6 |
||
Gross Margin (%) |
||||||||||
EBITDA Margin (%) |
11.1 |
11.8 |
11.8 |
13.2 |
12.5 |
13.2 |
13.6 |
13.8 |
||
Operating Margin (before amort. and except) (%) |
7.9 |
8.4 |
8.4 |
8.9 |
8.1 |
8.6 |
8.9 |
9.2 |
||
BALANCE SHEET |
||||||||||
Fixed Assets |
|
|
230.2 |
232.0 |
|
261.2 |
257.0 |
260.8 |
261.6 |
262.4 |
Intangible Assets |
105.8 |
89.9 |
104.8 |
91.7 |
91.0 |
88.3 |
85.6 |
|||
Tangible Assets |
119.3 |
132.0 |
150.3 |
144.5 |
149.0 |
152.5 |
156.0 |
|||
Investments |
5.1 |
10.1 |
6.1 |
20.8 |
20.8 |
20.8 |
20.8 |
|||
Current Assets |
|
|
192.0 |
187.6 |
|
202.9 |
222.8 |
219.0 |
227.6 |
237.5 |
Stocks |
90.9 |
82.6 |
97.5 |
97.3 |
88.9 |
89.5 |
89.8 |
|||
Debtors |
62.8 |
62.9 |
63.4 |
71.8 |
66.0 |
67.0 |
67.7 |
|||
Other |
12.5 |
8.2 |
15.7 |
15.5 |
15.5 |
15.5 |
15.5 |
|||
Cash |
25.8 |
33.9 |
26.3 |
38.2 |
48.6 |
55.6 |
64.5 |
|||
Current Liabilities |
|
|
(87.7) |
(114.4) |
|
(88.9) |
(93.7) |
(96.3) |
(100.8) |
(105.0) |
Creditors |
(87.7) |
(82.9) |
(88.8) |
(91.0) |
(96.3) |
(100.8) |
(105.0) |
|||
Short term borrowings |
0.0 |
(31.5) |
(0.1) |
(2.7) |
0.0 |
0.0 |
0.0 |
|||
Long Term Liabilities |
|
|
(147.6) |
(133.3) |
|
(171.5) |
(204.4) |
(200.2) |
(196.0) |
(191.8) |
Long term borrowings |
(113.8) |
(104.5) |
(137.2) |
(173.9) |
(173.9) |
(173.9) |
(173.9) |
|||
Other long term liabilities |
(33.8) |
(28.7) |
(34.3) |
(30.5) |
(26.3) |
(22.1) |
(17.9) |
|||
Net Assets |
|
|
186.9 |
171.9 |
|
203.7 |
181.7 |
183.3 |
192.5 |
203.1 |
CASH FLOW |
||||||||||
Operating Cash Flow |
|
|
34.1 |
35.3 |
|
33.9 |
32.2 |
59.0 |
55.0 |
57.9 |
Net Interest |
(4.5) |
(4.5) |
(4.9) |
(4.4) |
(5.0) |
(5.0) |
(4.8) |
|||
Tax |
(7.7) |
(7.5) |
(10.8) |
(10.3) |
(7.9) |
(8.5) |
(9.2) |
|||
Capex |
(20.2) |
(33.7) |
(22.2) |
(34.4) |
(25.5) |
(23.5) |
(23.5) |
|||
Acquisitions/disposals |
3.0 |
0.0 |
21.7 |
3.8 |
3.0 |
0.0 |
0.0 |
|||
Financing |
0 |
(1) |
(0) |
(1) |
0 |
0 |
0 |
|||
Dividends |
(8.8) |
(9.0) |
(9.2) |
(10.0) |
(10.6) |
(11.0) |
(11.5) |
|||
Net Cash Flow |
(4.0) |
(20.2) |
8.4 |
(23.9) |
13.1 |
7.0 |
8.9 |
|||
Opening net debt/(cash) |
|
|
86.8 |
88.0 |
|
102.1 |
111.0 |
138.4 |
125.3 |
118.3 |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|||
Other |
2.8 |
6.1 |
-17.3 |
-3.5 |
0.0 |
0.0 |
0.0 |
|||
Closing net debt/(cash) |
|
|
88.0 |
102.1 |
|
111.0 |
138.4 |
125.3 |
118.3 |
109.4 |
Source: Company, Edison Investment Research
|
|
Research: TMT
EQS is investing to take advantage of the opportunity it has to build a far larger enterprise and broaden its client base. The market for cloud-based tech systems to log and control aspects of corporate governance, risk and compliance is attractive and sits comfortably alongside its existing offerings in digital investor relations. The pursuit of this adapted goal, becoming a global tech B2B provider with high levels of recurring income, is costing the group short-term profitability, as shown in our reinstated forecasts, but the potential rewards are substantial. Earnings multiples are consequently high, but DCF analysis indicates a value of €86/ share.