Low & Bonar — Slow trading start to FY19, disposals underway

Low & Bonar — Slow trading start to FY19, disposals underway

May trading newsflow causes us to lower earnings estimates significantly. Improvements to operational performance and further de-leveraging are firmly on management’s agenda and the disposal of the construction fibres operation will help in the latter regard. Metrics point to attractions for deep-value investors.

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Written by

Low & Bonar

Slow trading start to FY19, disposals underway

May trading update and disposal

General industrials

14 June 2019

Price

9.0p

Market cap

£62m

€1.13/£

Net debt (£m) at end November 2018

128.5

Shares in issue

689.7m

Free float

99%

Code

LWB

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(41.2)

(47.7)

(81.9)

Rel (local)

(42.5)

(48.9)

(80.9)

52-week high/low

50.7p

8.6p

Business description

Low & Bonar produces specialist performance materials for a variety of end-markets by combining polymers with specialty additives and pigments. FY18 business units were: Building & Industrial (21% of FY18 revenue), Civil Engineering (18%), Coated Technical Textiles (32%), and Interiors & Transportation (29%). From FY19 Building & Industrial and Interiors & Transportation will be combined as the Colbond division.

Next events

H119 results

July - tbc

Analyst

Toby Thorrington

+44 (0)20 3077 5721

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

May trading newsflow causes us to lower earnings estimates significantly. Improvements to operational performance and further de-leveraging are firmly on management’s agenda and the disposal of the construction fibres operation will help in the latter regard. Metrics point to attractions for deep-value investors.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS*
(p)

P/E
(x)

Yield
(%)

11/17

446.5

30.7

5.4

2.6

1.7

29.2

11/18

431.9

16.7

3.0

1.2

3.0

13.6

11/19e

402.9

8.3

0.9

0.4

9.6

4.2

11/20e

412.4

15.7

1.6

0.6

5.7

7.1

Note: *PBT and EPS (fully diluted) are company normalised, excluding amortisation of acquired intangibles and exceptional items. Historical EPS and DPS are adjusted for bonus element of equity fund-raising.

Tough trading continues in the first four months

Many of the subsector trends from the end of the prior year have continued in FY19. The 20 May update specifically referenced softness in automotive and flooring demand – in the US and China – while European roofing markets remain competitive. Progress is evident with previously highlighted internal manufacturing issues at Coated Technical Textiles, although this is not yet translating to improved sales. Taken together, overall volumes have been below management expectations including a lower than expected rate of improvement in Q2 so far. H119 earnings are flagged as materially lower than last year (£9m reported EBIT). Low & Bonar’s trading year has a natural H2 bias; we have set our H219 estimates slightly below the prior year, leaving a lower FY19 outturn overall. At group level, we have lowered FY19 PBT expectations by around half, taking a more conservative view on the rate of recovery thereafter (with FY20 and FY21 reduced by around a quarter and 17% respectively). Adjusting for reduced capex and dividend outflows, this re-setting of our estimates has no material impact on net debt.

Disposal proceeds to lower net debt

The proposed disposal of Construction Fibres (for £5.6m; announced 3 June, due to complete around 1 July) is the first step in exiting Civil Engineering activities. The transaction is broadly neutral in P&L terms (with net interest benefits offsetting low level profitability foregone) and brings our expected year end net debt down to c £88m (or c 2.7x our FY19e EBITDA). Discussions over the sale of the larger Needle-Punched Non-Woven operations are said to be ongoing.

Valuation: Markers of value

Sentiment has been weighed down by downgrades and the share price is close to its low for the year. While market conditions remain soft in places, financial risk was reduced by the February equity raise. It should reduce further if flagged CE disposals complete, as management expects, during the current financial year. The FY19 P/E and EV/EBITDA (adjusted for pensions cash) multiples are now 9.6x and 5.3x, respectively. Other markers of value include EV sitting at 0.37x revenue and a projected 25p end FY19 NAV (ie a c 65% discount).

Exhibit 1: Financial summary

£m

2014

2015

2015

2016

2017

2018

2019e

2020e

2021e

Year end 30 November

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

IAS19R

IAS19R

Restated IAS19R

IAS19R

IAS19R

IAS19R

IAS19R

IAS19R

IAS19R

Revenue

 

 

410.6

395.8

362.1

400.0

446.5

431.9

402.9

412.4

422.8

Cost of Sales

N/A

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

N/A

EBITDA

 

 

45.6

46.9

46.0

52.8

55.8

39.2

32.6

39.0

42.7

Operating Profit (ex SBP)

 

 

32.3

33.4

32.5

35.6

36.2

22.0

14.4

20.8

24.5

Net Interest

(5.0)

(4.2)

(4.3)

(5.4)

(4.6)

(5.4)

(5.3)

(4.3)

(4.2)

SBP

(0.6)

(0.6)

(0.6)

(0.9)

(0.7)

0.2

(0.7)

(0.7)

(0.7)

Saudi JV

(1.1)

(1.8)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

PNFC

(0.4)

(0.2)

(0.2)

(0.1)

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

Profit Before Tax (company norm)

 

25.2

26.5

27.4

29.2

30.7

16.7

8.3

15.7

19.5

Intangible Amortisation

(5.2)

(4.1)

(4.1)

(4.0)

(3.7)

(2.8)

(2.8)

(2.8)

(2.8)

Exceptionals

(3.3)

(10.1)

(1.9)

0.7

(47)

(56)

(3)

0

0

Profit Before Tax (statutory)

 

 

16.7

12.4

21.4

25.9

(19.7)

(42.2)

2.2

12.9

16.7

Tax

(4.9)

(6.3)

(6.2)

(8.2)

2.1

(3.4)

(2.2)

(4.1)

(5.1)

Minorities

(0.3)

(0.5)

(0.5)

(0.6)

(0.6)

(0.6)

(0.3)

(0.6)

(0.6)

Other

(9.0)

(3.2)

Profit After Tax (norm)

18.3

18.6

19.0

19.9

21.4

11.8

5.9

11.1

13.9

Profit After Tax (statutory)

11.8

6.1

5.7

13.9

(18.2)

(46.2)

(0.3)

8.2

11.0

Average Number of Shares Outstanding (m)*

327.0

328.1

328.1

329.0

329.4

329.9

613.6

689.7

689.7

EPS FD- normalised (p)*

 

 

4.6

4.7

5.0

5.1

5.4

3.0

0.9

1.6

2.0

EPS - statutory (p)*

 

 

3.0

1.5

1.5

4.5

(4.8)

(12.1)

(0.1)

1.2

1.6

Dividend per share (p)*

2.3

2.4

2.4

2.6

2.6

1.2

0.4

0.6

0.8

Gross Margin (%)

EBITDA Margin (%)

11.1

11.8

11.8

13.2

12.5

9.1

8.1

9.4

10.1

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

7.9

8.4

8.4

8.9

8.1

5.1

3.6

5.0

5.8

BALANCE SHEET

Fixed Assets

 

 

230.2

232.0

 

261.2

257.0

209.4

200.4

200.4

200.4

Intangible Assets

105.8

89.9

104.8

91.7

51.6

48.5

45.4

42.3

Tangible Assets

119.3

132.0

150.3

144.5

137.0

131.1

134.2

137.3

Investments

5.1

10.1

6.1

20.8

20.8

20.8

20.8

20.8

Current Assets

 

 

192.0

187.6

 

202.9

222.4

222.2

190.4

194.8

201.2

Stocks

90.9

82.6

97.5

97.3

93.9

84.7

84.7

84.8

Debtors

62.8

62.9

63.4

72.3

63.9

56.6

57.0

57.4

Other

12.5

8.2

15.7

14.6

16.6

21.3

21.3

21.3

Cash

25.8

33.9

26.3

38.2

47.8

27.8

31.8

37.7

Current Liabilities

 

 

(87.7)

(114.4)

 

(88.9)

(94.7)

(104.1)

(74.8)

(77.5)

(80.4)

Creditors

(87.7)

(82.9)

(88.8)

(92.0)

(99.1)

(74.8)

(77.5)

(80.4)

Short term borrowings

0.0

(31.5)

(0.1)

(2.7)

(5.0)

0.0

0.0

0.0

Long Term Liabilities

 

 

(147.6)

(133.3)

 

(171.5)

(204.4)

(200.0)

(140.5)

(136.6)

(133.3)

Long term borrowings

(113.8)

(104.5)

(137.2)

(173.9)

(171.3)

(115.7)

(115.7)

(115.7)

Other long term liabilities

(33.8)

(28.7)

(34.3)

(30.5)

(28.7)

(24.8)

(20.9)

(17.6)

Net Assets

 

 

186.9

171.9

 

203.7

180.3

127.5

175.4

181.0

187.9

CASH FLOW

Operating Cash Flow

 

 

34.1

35.3

 

33.9

32.2

47.9

10.5

36.6

40.9

Net Interest

(4.5)

(4.5)

(4.9)

(4.4)

(5.1)

(5.3)

(4.3)

(4.2)

Tax

(7.7)

(7.5)

(10.8)

(10.3)

(5.4)

(2.2)

(4.1)

(5.1)

Capex

(20.2)

(33.7)

(22.2)

(34.4)

(16.0)

(16.0)

(21.0)

(21.0)

Acquisitions/disposals

3.0

0.0

21.7

3.8

0.0

5.6

0.0

0.0

Financing

0

(1)

(0)

(1)

0

50

0

0

Dividends

(8.8)

(9.0)

(9.2)

(10.0)

(10.1)

(2.0)

(3.2)

(4.7)

Net Cash Flow

(4.0)

(20.2)

8.4

(23.9)

11.5

40.6

4.1

5.9

Opening net debt/(cash)

 

 

86.8

88.0

 

102.1

111.0

138.4

128.5

87.9

83.9

Finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

2.8

6.1

-17.3

-3.5

-1.6

0.0

0.0

0.0

Closing net debt/(cash)

 

 

88.0

102.1

 

111.0

138.4

128.5

87.9

83.9

78.0

Source: Low and Bonar accounts, Edison Investment Research. Note: *Following the placing and open offer (announced 30 January 2019) we have amended historical reported EPS and DPS using an adjustment factor of 1.16. The number of shares shown for these years (up to and including FY18) is as they were originally reported.

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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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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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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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London +44 (0)20 3077 5700

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London, WC1V 7EE

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