Low & Bonar — Re-set dividend expectations, targeting recovery

Low & Bonar — Re-set dividend expectations, targeting recovery

Improving operating and financial performance and lower net debt are key management objectives. FY18 results should provide some evidence of progress here, although our revised estimates now contain lower margin and dividend expectations in all three forecast years. Balance sheet clarity and margin recovery will be key share price catalysts, in our view.

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Written by

Low and Bonar

Re-set dividend expectations, targeting recovery

Year-end trading update

General industrials

19 December 2018

Price

16.5p

Market cap

£54m

£/€ 1.12

Net debt (£m) at end November 2018

c 129

Shares in issue

330.0m

Free float

99%

Code

LWB

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(44.9)

(70.6)

(77.9)

Rel (local)

(42.1)

(67.6)

(75.0)

52-week high/low

67.8p

15.0p

Business description

Low & Bonar produces specialist performance materials for a variety of end markets by combining polymers with specialty additives and pigments. It reports as four global business units: Building & Industrial (19% of FY17 revenue), Civil Engineering (23%), Coated Technical Textiles (31%), and Interiors & Transportation (27%).

Next events

FY18 results

30 January 2019

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Low and Bonar is a research client of Edison Investment Research Limited

Improving operating and financial performance and lower net debt are key management objectives. FY18 results should provide some evidence of progress here, although our revised estimates now contain lower margin and dividend expectations in all three forecast years. Balance sheet clarity and margin recovery will be key share price catalysts, in our view.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

11/16

400.0

29.2

6.0

3.0

2.8

18.2

11/17

446.5

30.7

6.3

3.1

2.6

18.5

11/18e

429.5

17.0

3.6

2.1

4.6

12.7

11/19e

441.3

21.0

4.4

2.1

3.7

12.7

Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles and exceptional items. Excludes disposed grass yarns business.

Trading challenges, operating progress

An end-FY18 trading update pointed to a PBT outturn c 8% lower than our previous estimates although indicated revenue and net debt were slightly better. Divisional comments were similar to before but the recovery of input cost increases (especially polymers and freight) may be more patchy or taking longer to achieve in current markets. Actions taken to improve operating performance in Civil Engineering (CE) and Coated Technical Textiles (CTT), despite fire disruption at one site, appear to be starting to take effect and FY18 should also demonstrate progress with cost and working capital reduction.

Estimates and dividend expectations lowered

We have aligned our FY18 estimates with year-end guidance, chiefly by lowering the CTT and Building & Industrial contributions. No new forward guidance beyond this was provided; we have lowered subsequent years’ estimates by just over 10% to incorporate more modest margin progression although we acknowledge that actions to improve operational performance in some areas could counter this. As part of an ongoing review of capital structure, management has flagged a lower expected final dividend; we now assume it matches the H1 payout and at this level (2.1p for the year and going forward, around one-third lower than before) earnings and cash cover are both c 2x from FY19. A mooted disposal (of CE) and potential equity raise may also have a bearing on balance sheet structure in due course.

Valuation: Balancing value and perceived risk

Low & Bonar’s share price is around one-third of the level that it started 2018 and most of this decline has occurred in the last three months. At 16.5p, the company’s enterprise value is less than 0.5x revenue and equivalent to 5.1x (adjusted for pensions cash) EBITDA for FY18. It is also at a significant discount to our estimated end FY18 NAV of 49p. In the current climate, gearing and interest cover ratios may not be at comfortable levels for investors (ie net debt: EBITDA 3.3x and P&L interest cover c 4x), who may also be eyeing management comments regarding a potential equity issues as a way to lower perceived financial risk. On our revised dividend profile, earnings cover exceeds 2x in FY19 and is yielding 12%+.

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

429.5

441.3

452.1

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

39.9

45.8

50.5

Operating Profit (ex SBP)

 

 

32.3

33.4

32.5

35.6

36.2

22.5

27.4

32.1

Net Interest

(5.0)

(4.2)

(4.3)

(5.4)

(4.6)

(5.6)

(5.5)

(5.3)

SBP

(0.6)

(0.6)

(0.6)

(0.9)

(0.7)

0.3

(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

17.0

21.0

26.0

Intangible Amortisation

(5.2)

(4.1)

(4.1)

(4.0)

(3.7)

(2.8)

(2.8)

(2.8)

Exceptionals

(3.3)

(10.1)

(1.9)

0.7

(47)

(22)

0

0

Profit Before Tax (FRS 3)

 

 

16.7

12.4

21.4

25.9

(19.7)

(7.4)

18.2

23.2

Tax

(4.9)

(6.3)

(6.2)

(8.2)

2.1

(3.0)

(5.5)

(6.8)

Minorities

(0.3)

(0.5)

(0.5)

(0.6)

(0.6)

(0.6)

(0.6)

(0.6)

Other

0.0

0.0

(9.0)

(3.2)

0.0

0.0

0.0

0.0

Profit After Tax (norm)

18.3

18.6

19.0

19.9

21.4

12.1

15.1

18.7

Profit After Tax (FRS 3)

11.8

6.1

5.7

13.9

(18.2)

(11.0)

12.1

15.7

Average Number of Shares Outstanding (m)

327.0

328.1

328.1

329.0

329.4

329.8

330.0

330.0

EPS FD- normalised (p)

 

 

5.4

5.5

5.8

6.0

6.3

3.6

4.4

5.5

EPS - FRS 3 (p)

 

 

3.5

1.7

1.7

5.2

(5.5)

(3.3)

3.7

4.8

Dividend per share (p)

2.7

2.8

2.8

3.0

3.1

2.1

2.1

2.1

Gross Margin (%)

EBITDA Margin (%)

11.1

11.8

11.8

13.2

12.5

9.3

10.4

11.2

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

7.9

8.4

8.4

8.9

8.1

5.2

6.2

7.1

BALANCE SHEET

Fixed Assets

 

 

230.2

232.0

 

261.2

257.0

247.9

247.1

246.3

Intangible Assets

105.8

89.9

104.8

91.7

76.7

74.9

73.1

Tangible Assets

119.3

132.0

150.3

144.5

146.5

147.5

148.5

Investments

5.1

10.1

6.1

20.8

24.7

24.7

24.7

Current Assets

 

 

192.0

187.6

 

202.9

222.4

232.1

237.8

249.5

Stocks

90.9

82.6

97.5

97.3

91.6

92.1

92.4

Debtors

62.8

62.9

63.4

72.3

65.6

66.3

67.0

Other

12.5

8.2

15.7

14.6

14.4

16.1

16.1

Cash

25.8

33.9

26.3

38.2

60.6

63.3

74.0

Current Liabilities

 

 

(87.7)

(114.4)

 

(88.9)

(93.3)

(97.1)

(101.1)

(105.8)

Creditors

(87.7)

(82.9)

(88.8)

(90.6)

(97.1)

(101.1)

(105.8)

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)

(218.5)

(215.2)

(211.9)

Long term borrowings

(113.8)

(104.5)

(137.2)

(173.9)

(190.5)

(190.5)

(190.5)

Other long term liabilities

(33.8)

(28.7)

(34.3)

(30.5)

(28.0)

(24.7)

(21.4)

Net Assets

 

 

186.9

171.9

 

203.7

181.7

164.4

168.7

178.1

CASH FLOW

Operating Cash Flow

 

 

34.1

35.3

 

33.9

32.2

45.4

39.6

48.8

Net Interest

(4.5)

(4.5)

(4.9)

(4.4)

(5.6)

(5.5)

(5.3)

Tax

(7.7)

(7.5)

(10.8)

(10.3)

(4.5)

(5.5)

(6.8)

Capex

(20.2)

(33.7)

(22.2)

(34.4)

(19.8)

(19.0)

(19.0)

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)

(10.1)

(6.9)

(6.9)

Net Cash Flow

(4.0)

(20.2)

8.4

(23.9)

8.6

2.7

10.8

Opening net debt/(cash)

 

 

86.8

88.0

 

102.1

111.0

138.4

129.9

127.2

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

-0.1

0.0

0.0

Closing net debt/(cash)

 

 

88.0

102.1

 

111.0

138.4

129.9

127.2

116.5

Source: Company, Edison Investment Research

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This report has been commissioned by Low & Bonar and prepared and issued by Edison, in consideration of a fee payable by Low & Bonar. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Frankfurt +49 (0)69 78 8076 960

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

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Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Low & Bonar and prepared and issued by Edison, in consideration of a fee payable by Low & Bonar. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Metals & Mining

Auriant Mining — Tardan CIL >60% complete

Auriant’s Q318 results were characterised by a resumption of mining at Tardan, with 65kt of ore mined at an average grade of 2.79g/t to produce 96kg (3,087oz) gold during the quarter. As a result, the company expects Tardan to produce 380kg (12,217oz) in FY18, which implies production of 173.8kg (5,588oz) in Q418, 8.6% above its earlier guidance of 350kg (11,252oz). However, heavy rainfall in July led to widespread flooding in the Zabaikalsky region, so production at Solcocon in FY18 is now expected to be 73–75kg (2,347–2,411oz) versus earlier guidance of 150kg (4,823oz). As a result, we have updated our forecasts to reflect revised production guidance as well as a lower gold price in H218 versus H118.

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