Tyman — Well positioned going into H2

Two of Tyman’s three divisions improved LFL and reported revenue and profitability, while the UK market remains more challenged. Newly acquired businesses appear to have settled in well and we expect seasonally stronger H2 trading and cash flow to result in a year-end net debt position below £200m and be equivalent to c 1.9x EBITDA.

AmesburyTruth (H118 revenue U$243m, EBIT pre-central U$41.3m, margin 17.0% +50bp)

In North America, the respective US newbuild segments have all exhibited low single-digit growth ytd, while Canada has seen modest overall growth, with single family dwelling starts flat y-o-y. Repair and remodelling activity also picked up at the beginning of the year. AmesburyTruth’s (AT) underlying revenue progress including higher pricing appeared to be slightly ahead of its markets in aggregate. A 50bp EBIT margin increase during a period of some input cost pressures (especially zinc and aluminium) also reflects well on pricing actions taken.

All four of the primary US manufacturing facilities (identified as centres of excellence) are now operational with the latest at Statesville, NC building activity levels since Q3 last year. The early part of 2017 was particularly affected by ramping up volumes at Juarez and Sioux Falls, SD and the y-o-y benefit from improving operating efficiencies here was in the order of $0.75m in H118. This has also facilitated progress with smaller Tier 3/4 customers; we believe that there is scope for this to accelerate under the new national third-party distribution agreement with ICS, which has just reached its first anniversary. Network investment by ICS and additional products/more pile weatherstrip capacity coming on stream will also support growth in this segment. The consolidation of operations at Statesville still has some equipment lines to be moved in but there does not appear to have been any material divisional level disruption. An exited Statesville site was sold in February and a separate site in Amesbury, MA is actively being marketed for disposal.

Among the newer businesses, Bilco (acquired mid-2016) saw like-for-like revenue growth of 5.7% with a healthy commercial market and improving demand for its residential lines (eg lightwells) after a sluggish prior year. This business is fully integrated now and management notes U$3.5m total synergy benefits achieved and improved y-o-y EBIT margin, we believe. The in-year acquisition of Ashland Hardware (which completed on 15 March) made an implied contribution of c U$26m and over U$4m to revenue and EBIT, respectively, during H118. Moreover, management’s expectation is now for Ashland to be earnings-enhancing this year, which implies a c U$11m EBIT contribution in 2018, which is in line with the full year prior to acquisition. This may include an early capture of some of the anticipated U$4m of synergy benefits by 2020. For the existing AT footprint programme, U$2m efficiency benefits are expected to accrue 2018 also, with a higher run rate by the year-end going into 2019.

SchlegelGiesse (H118 revenue €63.1m, EBIT pre-central €7.7m, margin 12.2% +60bp)

SchlegelGiesse’s (SG) like-for-like run rate was pretty flat at the AGM stage, so to end H1 with a 3% underlying revenue increase suggests that Q2 was stronger. The earlier order book uptick gave an indication that this might be the case and chimes with management’s comments that the majority of end-markets continue to strengthen, ie the overall picture improved as H1 progressed.

There were no acquisitions in the period or annualised acquisition effects from 2017. Similarly, no significant manufacturing, operational or restructuring changes were made in H118 so the progress outlined above is a fair representation of underlying performance, we believe. Continental European demand was good overall, as was the Middle East, with EMEAI revenues +6% y-o-y. Bearing in mind that Italy is the largest market in this region (ie pre-acquisition-Giesse’s domestic market and now the divisional headquarters) and sales here were flat against the prior year in a relatively sluggish local economy, gains elsewhere were clearly above the headline rate. Other regions also saw mixed country outcomes with double-digit revenue growth in China diluted by lower y-o-y contributions from the rest of the Asia-Pacific bloc, including Australia. In Latin America, volume and prices both rose in Argentina and Brazilian volumes were flat with both countries facing economic challenges. Based on a rising order book (book to bill ratio at 108.9 at the end of June) the suggestion is that underlying volume momentum is likely to be better in H2 than H1 and this may reflect an increase in commercial and/or project-related work in the Asia-Pacific region.

ERA (H118 revenue £42.8m, EBIT pre-central £4.8m, margin 11.3% -280bp)

Consistent with the AGM update, difficult market conditions persist in UK repair, maintain or improve (RMI) spending, with subdued housing transactions levels and consumer confidence readings. Management estimates that share has been gained in a residential hardware market that is thought to have declined by c 8% ytd. This environment is also restricting the extent to which input cost increases in 2018 can be recovered and resulting in EBIT margin pressure in the first six months. More positively, commercial Access Solutions saw double-digit like-for-like revenue growth (and a small annualised Howe Green acquisition benefit), while Ventrolla also grew modestly. Zoo (acquired in May) made implied revenue and EBIT contributions in H118 in the order of c £3.2m and £0.3m, we believe and underlying revenue growth was +11% y-o-y. The new divisional head office site (which consolidated certain distribution operations at i54, near Wolverhampton) will form the platform for improved customer engagement, including testing and training, in addition to new product development and service. The launch of new electronics-based ranges is a good example of this and sales momentum should gather here going forward. ERA may well also bring in some light manufacturing and/or assembly functions. Momentum at Zoo, commercial order books and improved margins form the basis for confidence in a better H2 outturn in 2018.

The acquisitions of Ashland and Zoo were the primary influence on a c £56m increase in net debt to almost £219m over the six months ending June 2018.

EBITDA rose by £2m y-o-y and this was largely reflected in the increase in operating cash flow to £22m in the period. Non-trading cash flows (relating to provision movements/ restructuring, M&A fees and pensions) were collectively above £5m in this half but the y-o-y increase was substantially offset by a lower working capital outflow. Directionally, the change in the reported working capital line items was consistent with normal seasonal investment (in inventory and receivables, part-funded by payables). That said, the increase in each case was smaller than in the prior year, giving an impression of retained business control during a period of underlying growth and M&A activity.

Further down the cash flow statement, interest and tax cash payments were both lower y-o-y (in aggregate £8.6m versus £14.9m) due to timing differences. Gross capex including intangible spend was over £1m higher at c £7.4m (or 1.1x depreciation/own amortisation) but netted down to £4.9m after taking asset disposal proceeds into account, sold at around book value. After all of the above, free cash flow (FCF) was +£8.5m, stronger than H117 but seasonally less important than H2.

This positive FCF performance, together with higher borrowings, funded:

Cash flow outlook: Tyman is well placed for its seasonally stronger second-half trading period. We expect H2 FCF of c £40m; net of the c £6m H118 interim dividend payment and a c £10m adverse FX adjustment leaves our projected end-FY18 net debt at £195m. This represents 1.9x EBITDA generated during the year and slightly lower allowing for annualised acquisition contribution effects. In the absence of any further acquisitions, we expect Tyman to generate net cash inflows in excess of £30m in the following two years, leaving net debt standing at c £127m by the end of FY20 or 1.1x EBITDA in that year. That said, we consider further bolt-on M&A activity to be very likely – further infilling the product portfolio and segment/geographic presence. As things stand and based on our projections, Tyman appears to have headroom to pursue smaller deals if opportunities arise.

The US, Tyman’s largest sales region, is currently growing strongly (OECD real GDP growth: 2018 +2.9%, 2019 +2.8%) while the Euro area, Argentina and Brazil are all expected to expand by c 2% in 2018. In this company, the UK remains the laggard with projected growth of 1.3–1.4% this year and next on the same basis, with private consumption progress seen below this.

Our underlying earnings estimates are substantially unchanged, save for a £1m lower ERA contribution in the current year. Updating our £/U$ assumption (from 1.38 to 1.35) increases AT’s sterling profitability by just over £2m. Further down the P&L, a higher bank interest cost (from increased net debt and currency effects) is offset in our model by lower other finance charges (chiefly fee amortisation). The net increases in headline metrics are shown in Exhibit 2. Our dividend expectations are unchanged.

One forthcoming change flagged by the company is the intended adoption of IFRS16 – Leases with effect from 1 January 2019. This requires the recognition of most assets and liabilities relating to leases on company balance sheets. Preliminary information provided by Tyman suggests that underlying earnings per share and net assets will both be reduced by c 1–3%, compared to the existing presentation with ROCE (noted as 13.9% for H118) lowered by their estimated 90–150bp. Net debt to EBITDA multiples will be inflated by this accounting standard. We will adjust our model for the FY18 base year when the full set of related information is available. Thereafter, subsequent years will be presented on the same basis.