Order variability was referenced in H1 results, but latterly intake patterns have weakened. This has affected UK premium brands, following through into manufacturing activity also. We have reflected this in lower earnings estimates (c 10% for this year and next, with a smaller reduction for FY20) ahead of greater clarity on consumer behaviour in this segment. This news has been received harshly – judging by a sharp negative share price reaction – but feels overdone in our view.
Written by
Walker Greenbank |
Weaker order intake in Q4 |
Trading update |
Care & household goods |
16 November 2017 |
Share price performance
Business description
Next events
Analyst
Walker Greenbank is a research client of Edison Investment Research Limited |
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Order variability was referenced in H1 results, but latterly intake patterns have weakened. This has affected UK premium brands, following through into manufacturing activity also. We have reflected this in lower earnings estimates (c 10% for this year and next, with a smaller reduction for FY20) ahead of greater clarity on consumer behaviour in this segment. This news has been received harshly – judging by a sharp negative share price reaction – but feels overdone in our view.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
01/16 |
87.8 |
8.9 |
11.6 |
2.9 |
13.0 |
1.9 |
01/17 |
92.4 |
10.4 |
12.9 |
3.6 |
11.7 |
2.4 |
01/18e |
110.7 |
12.9 |
14.5 |
4.5 |
10.4 |
3.0 |
01/19e |
115.2 |
13.4 |
15.1 |
5.6 |
10.0 |
3.7 |
Note: *PBT and EPS (fully diluted) are normalised, excluding exceptional items and LTIP charges.
Patchy order intake gives way to weaker trend
An encouraging order intake period just before the H118 results announcement has proved to be a false read for the remainder of the year. A previously variable UK intake profile has weakened in the last few weeks across Walker Greenbank’s premium brand portfolio, although Clarke & Clarke is understood to be showing good y-o-y progress. Elsewhere in Brands, International and Licensing revenues are trading well and ahead of the prior year. Given that approaching half of the Manufacturing division’s gross revenue supports Brand activities, the weaker sales trend clearly has profit implications in a vertically integrated model.
Estimates lowered
Current year PBT guidance has been lowered by c 10%; we have reflected this in our estimates, with a slightly larger reduction for FY19 (-12%) and a more moderate one for FY20 (-6.5%). Our EBIT revisions are split between both divisions, being proportionately larger in Manufacturing but larger by value in Brands. Having increased our dividend growth expectations – particularly for future years – at the interim stage, we may revisit this at the full year stage, although we note that FY20 cover of 2.4x on revised estimates is still comfortable in conventional terms. Balance sheet gearing is expected to be modest at the end of FY18, with positive cash generation thereafter.
Valuation: Reaction overdone
While the trading update was disappointing, we consider that a downward share price move of c 28% is disproportionate set against the scale of estimate revisions. Consequently, the current year P/E and EV/EBITDA have compressed to 10.4x and 6.7x respectively. Financial risk is very low and a prospective FY18 dividend yield of c 3% (3.2x covered) offers another indication of value.
Exhibit 1: Financial summary
£'ms |
2013 |
2014 |
2015 |
2016 |
2017 |
2018e |
2019e |
2020e |
||
January |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
75.7 |
78.4 |
83.4 |
87.8 |
92.4 |
110.7 |
115.2 |
120.7 |
Cost of Sales |
|
|
(30.2) |
(30.3) |
(32.7) |
(35.9) |
(36.2) |
(44.3) |
(46.1) |
(48.3) |
Gross Profit |
|
|
45.5 |
48.1 |
50.7 |
52.0 |
56.2 |
66.4 |
69.1 |
72.4 |
EBITDA |
|
|
8.6 |
9.7 |
10.7 |
11.8 |
13.4 |
16.6 |
17.3 |
19.0 |
Operating Profit (before GW, except. & LTIP) |
6.6 |
7.5 |
8.3 |
9.1 |
10.6 |
13.2 |
13.6 |
15.0 |
||
Operating Profit (before GW and except.) - reported |
5.8 |
6.5 |
7.3 |
8.2 |
9.8 |
12.2 |
12.6 |
14.0 |
||
Net Interest |
|
|
(0.2) |
(0.2) |
(0.2) |
(0.2) |
(0.2) |
(0.3) |
(0.2) |
(0.1) |
Intangible Amortisation - acquired |
|
|
0 |
0 |
0 |
0 |
(0.3) |
(1.1) |
(1.1) |
(1.1) |
Pension net finance charge |
(0.7) |
(0.9) |
(0.8) |
(0.7) |
(0.5) |
(0.7) |
(0.7) |
(0.7) |
||
Exceptionals |
|
|
0 |
0 |
0 |
0 |
(1.8) |
(0.5) |
0.0 |
0.0 |
Other |
|
|
0 |
0 |
0 |
0 |
0.0 |
0.0 |
0.0 |
0.0 |
Profit Before Tax (norm) |
|
|
6.4 |
7.3 |
8.1 |
8.9 |
10.4 |
12.9 |
13.4 |
14.9 |
Profit Before Tax (FRS 3) |
|
|
4.9 |
5.5 |
6.3 |
7.3 |
7.0 |
9.7 |
10.7 |
12.2 |
Tax |
|
|
(1.0) |
(0.5) |
(1.2) |
(1.5) |
(1.6) |
(2.3) |
(2.4) |
(2.5) |
Profit After Tax (norm) |
|
|
5.4 |
6.6 |
6.9 |
7.5 |
8.6 |
10.6 |
11.0 |
12.4 |
Profit After Tax (FRS 3) |
|
|
4.0 |
5.0 |
5.1 |
5.9 |
5.4 |
7.5 |
8.3 |
9.7 |
|
|
|
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
57.5 |
58.5 |
59.3 |
60.0 |
62.7 |
70.2 |
71.0 |
71.4 |
|
EPS - normalised (p) FD |
|
|
9.4 |
10.7 |
11.2 |
11.6 |
12.9 |
14.5 |
15.1 |
16.8 |
EPS - FRS 3 (p) |
|
|
6.9 |
8.6 |
8.6 |
9.8 |
8.6 |
10.7 |
11.8 |
13.6 |
Dividend per share (p) |
|
|
1.5 |
1.9 |
2.3 |
2.9 |
3.6 |
4.5 |
5.6 |
7.0 |
|
|
|
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
|
60.1 |
61.3 |
60.8 |
59.2 |
60.8 |
60.0 |
60.0 |
60.0 |
EBITDA Margin (%) |
|
|
11.4 |
12.4 |
12.8 |
13.4 |
14.6 |
15.0 |
15.0 |
15.7 |
Operating Margin (before GW and except.) (%) |
7.7 |
8.3 |
8.8 |
9.3 |
10.7 |
11.0 |
10.9 |
11.6 |
||
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
|
|
|
Fixed Assets |
|
|
18.5 |
21.1 |
21.5 |
18.9 |
47.5 |
47.4 |
46.2 |
44.7 |
Intangible Assets |
|
|
6.7 |
7.3 |
7.2 |
7.1 |
31.6 |
31.5 |
30.2 |
29.0 |
Tangible Assets |
|
|
9.8 |
11.7 |
12.7 |
11.7 |
15.8 |
15.9 |
15.9 |
15.7 |
Investments |
|
|
2.0 |
2.2 |
1.6 |
0.1 |
0.0 |
0.0 |
0.0 |
0.0 |
Current Assets |
|
|
32.6 |
35.3 |
37.1 |
40.3 |
51.3 |
57.0 |
56.1 |
62.8 |
Stocks |
|
|
16.8 |
18.4 |
22.0 |
18.1 |
30.3 |
32.3 |
33.6 |
35.3 |
Debtors |
|
|
12.8 |
13.9 |
14.1 |
19.3 |
15.5 |
17.1 |
17.7 |
18.5 |
Cash |
|
|
2.9 |
2.8 |
1.0 |
2.9 |
1.5 |
4.4 |
1.6 |
6.0 |
Other |
|
|
0.1 |
0.2 |
0.0 |
0.0 |
|
|
|
|
Current Liabilities |
|
|
(17.3) |
(19.4) |
(20.7) |
(19.4) |
(34.8) |
(35.5) |
(30.2) |
(31.9) |
Creditors |
|
|
(16.9) |
(19.0) |
(20.3) |
(19.0) |
(28.0) |
(28.7) |
(30.2) |
(31.9) |
Short term borrowings |
|
|
(0.4) |
(0.4) |
(0.4) |
(0.4) |
(6.8) |
(6.8) |
0.0 |
0.0 |
Long Term Liabilities |
|
|
(9.6) |
(10.2) |
(10.9) |
(4.5) |
(12.7) |
(10.2) |
(7.3) |
(4.4) |
Long term borrowings |
|
|
(1.4) |
(0.9) |
(0.6) |
(0.2) |
0.0 |
0.0 |
0.0 |
0.0 |
Other long term liabilities |
|
|
(8.2) |
(9.2) |
(10.4) |
(4.3) |
(12.7) |
(10.2) |
(7.3) |
(4.4) |
Net Assets |
|
|
24.2 |
26.9 |
26.9 |
35.3 |
51.3 |
58.8 |
64.7 |
71.1 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
6.0 |
6.2 |
3.5 |
7.1 |
12.4 |
9.9 |
13.4 |
14.7 |
Net Interest |
|
|
(0.2) |
(0.2) |
(0.2) |
(0.1) |
(0.2) |
(0.3) |
(0.2) |
(0.1) |
Tax |
|
|
(0.0) |
(0.0) |
(0.0) |
(0.6) |
(2.3) |
(2.3) |
(2.4) |
(2.5) |
Capex |
|
|
(3.1) |
(4.7) |
(3.2) |
(2.5) |
(6.7) |
(3.5) |
(3.5) |
(3.5) |
Acquisitions/disposals |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
(27.1) |
0.0 |
0.0 |
0.0 |
Financing |
|
|
(0.1) |
(0.0) |
(0.4) |
(0.1) |
18.3 |
1.8 |
0.0 |
0.0 |
Dividends |
|
|
(0.7) |
(0.9) |
(1.1) |
(1.4) |
(1.8) |
(2.7) |
(3.3) |
(4.2) |
Net Cash Flow |
|
|
1.8 |
0.3 |
(1.5) |
2.3 |
(7.4) |
2.9 |
4.0 |
4.4 |
Opening net debt/(cash) |
|
|
0.7 |
(1.2) |
(1.5) |
(0.0) |
(2.3) |
5.3 |
2.4 |
(1.6) |
HP finance leases initiated |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
(0.0) |
0.0 |
0.0 |
0.0 |
Other |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
(0.2) |
0.0 |
0.0 |
0.0 |
Closing net debt/(cash) |
|
|
(1.2) |
(1.5) |
(0.0) |
(2.3) |
5.3 |
2.4 |
(1.6) |
(6.0) |
Source: Company accounts, Edison Investment Research. Note: This note calculates EV/EBITDA multiples using last reported net debt.
|
|
Research: TMT
EQS flagged in September that it was accelerating investment to grasp the market opportunity prompted by further regulation. Q3 figures show the impact of the additional cost, with year-to-date EBITDA of €1.9m (prior year: €2.5m). Our forecasts are unchanged on confirmed guidance. The newer cloud-based products are scalable and should build recurring revenues, with market interest to date very encouraging. The service range continues to broaden out, particularly in corporate governance and compliance, while the geographic reach is also extending. The valuation remains in line with global peers, reflecting EQS’s strong growth potential.