TP Group — Update 13 September 2016

TP Group

On a steady bearing

H116 results

Aerospace & defence

13 September 2016

Price	5.75p
Market cap	£24m

Net cash (£m) at 30 June 2016		7.5

Shares in issue	420.9m
Free float	99%
Code	TPG

Primary exchange	AIM
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	4.6	48.4	58.6
Rel (local)	7.4	36.5	46.1

52-week high/low

6.0p

2.1p

Business description

TP Group is a specialist engineering, technical and managed services group, delivered by four capability-based divisions: Design & Technology (4% FY15 revenue), Engineering (35%), Maritime (54%) and Managed Solutions (7%), primarily for defence, aerospace, energy & maritime markets.

Next events

Capital reduction court confirmation

8 September 2016

Analysts

Andy Chambers	+44 (0)20 3681 2525
Roger Johnston	+44 (0)20 3077 5722

industrials@edisongroup.com

Edison profile page

TP Group is a research client of Edison Investment Research Limited

Half year results from TP Group confirmed that progress is in line with market expectations for the full year. Revenues, profitability and cash flow all continued to improve, and order intake is growing in H2. The company’s strategy is being consistently delivered and once the recapitalisation is approved, TP Group should be well positioned to augment organic returns and shareholder value creation with strategic bolt-ons. Our revised sum-of-the-parts fair value estimate, based on the new divisional EBITDA contribution in 2017, is currently 8.48p.

Year end	Revenue (£m)	PBT* (£m)	EPS* (p)	DPS (p)	P/E (x)	Yield (%)
12/14	21.7	(3.4)	(0.8)	0.0	N/A	N/A
12/15	20.4	(1.2)	(0.2)	0.0	N/A	N/A
12/16e	22.7	(0.2)	0.0	0.0	N/A	N/A
12/17e	24.6	0.8	0.1	0.0	N/A	N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

H1 results underpin full year expectations

H116 saw a continuation of the improving trend apparent in 2015. Revenue has grown 13% to £9.4m (H115 £8.3m), generating a break-even performance at the EBITDA level, an improvement of £1m over the comparable period. Even more encouragingly, the company generated £0.5m of net cash flow leaving cash balances at £7.5m at the period end. While the group order book was marginally lower at the half year at £13.4m (£14.5m at FY15), subsequent order intake and indications suggest positive development through H2, with a strong Q3 order intake already apparent. Indeed, the change of management at TPG Engineering, which suffered from a downturn in activity in the energy sector, saw order intake improve 40% during H116, with the order backlog duration doubling to four months.

Management continues to deliver to plan

Management continues to deliver the transformation of the strategy and business model to plan, as it positions itself as a Tier 2 defence engineering and services group. A strong sales pipeline now stands at c£150m and includes two sole source contracts for the MOD in TPG Maritime worth c£50m that are due to start negotiation shortly. With organic opportunities looking promising, the recently announced capital reorganisation should enable the process to accelerate further. The greater flexibility to pursue M&A opportunities is expected to augment growth and shareholder value development. Management is likely to seek to maintain credibility by being very selective in the opportunities being presented.

Valuation: Moving to profitable growth

Our fair value for TP Group stands at 8.48p. We utilise the new divisional structure and FY17 expectations as the basis for our calculation. As the company moves increasingly into a profitable and cash-generating phase, normal metrics will clearly start to apply. However, we feel the acceleration of the strategy both organically and through M&A should deliver growth in shareholder returns ahead of the market.

Continued progress in H116

Exhibit 1: TP Group interim results summary H116

Half year to June (£'000)	2015	2016	% change
Revenue	8,340	9,363	12.3%
Cost of sales	-6,161	-6,878	11.6%
Gross Profit	2,179	2,485	14.0%
Gross margin	26.1%	26.5%
SG&A	-4,795	-3,262	-32.0%
Operating loss	-2,616	-777	-70.3%

Adjusted EBITDA	-965	12	-101.2%
D&A	-686	-540	-21.3%
EBIT	-1,651	-528	-68.0%
Exceptionals & one-offs	-965	-249	-74.2%
Operating loss	-2,616	-777	-70.3%
Net Interest	6	-69	-1,250.0%
PTP	-2,610	-846	-67.6%
Tax	70	70	0.0%
Net Income	-2,540	-776	-69.4%

EPS	-0.60	-0.13	-78.3%
FCF	-2,050	477	-123.3%
Net cash	6,623	7,482	13.0%

Source: Company reports

Group revenues increased by 13% largely as a result of the growth of TPG Maritime as it started to increase its strong opening order backlog. Growth was further supported by increased activity in TPG Managed Services where the pipeline of opportunities is developing rapidly. These more than offset a significant decline at TPG Engineering, principally driven by reductions arising from the energy sector that led to a low opening backlog. Gross margin increased by 400bp to 26.5%.

A break-even adjusted EBITDA in H116 represents a continuation of the full year performance in 2015. We expect progress to continue in the second half and maintain our forecast for adjusted EBITDA just above £0.9m for FY16 on revenue growth of 11% for the full year.

Exhibit 2: TP Group half-year breakdown by division

Year to Dec (£m)	H115a	H215a	FY15a	H116a	H216e	FY16e
Revenues
TPG Design & Technology	0.4	0.5	0.9	0.3	0.6	0.9
TPG Engineering	3.7	3.4	7.1	2.7	4.8	7.5
TPG Managed Solutions	0.5	1.0	1.5	1.2	0.7	1.9
TPG Maritime	3.7	7.2	10.9	5.2	7.2	12.4
Group	8.3	12.1	20.4	9.4	13.3	22.7

Adjusted EBITDA
TPG Design & Technology	-1.0	-0.6	-1.6	-0.7	-0.3	-1.0
TPG Engineering	-0.1	-0.1	-0.2	-0.6	-0.2	-0.8
TPG Managed Solutions	0.0	0.2	0.2	0.1	0.0	0.1
TPG Maritime	0.6	2.2	2.8	1.7	2.0	3.7
Central costs	-0.5	-0.6	-1.1	-0.5	-0.6	-1.1
Group	-1.0	1.0	0.0	0.0	0.9	0.9

Source: Company reports; Edison Investment Research estimates

Order intake augurs well for continuing growth

The huge order pipeline of £150m is potentially close to significant awards. Two MOD sole source contracts for submarine supply and support were recently announced and are under negotiation at TPG Maritime. Following the recent award by TKMS (Thyssen Krupp Marine Systems), the division now provides its air purification systems to almost all of the entire high end conventional submarine producers.

However, opportunities are being pursued not just in the UK but also in Europe, the Far East and Australasia. The combination of skill across the units is also allowing more effective tendering for a broader range of capability, which is also providing increased cross-selling opportunities and referrals.

The latest contract win also shows how the capability is being extended within the businesses. The large steam condenser supply contract won by TPG Engineering for a major UK chemical processing plant is the first of its kind for the division. The contract, worth just under £0.5m, includes not just the conventional heat exchangers, but also the other mechanical equipment (fans, pumps etc) and system packaging that make up the entire system. TPG Engineering will support installation and commissioning in early 2017 as well as the design and manufacture. It represents the first end-to-end solution for thermal equipment supplied by the Manchester based business.

Capital reduction should further progress the strategy

Having been approved by shareholders on 8 September, the capital reduction is expected to be confirmed by the Court on 28 September. By eliminating the accumulated deficit, TP Group should start to build increasing levels of distributable reserves as it increases profitability, until it commences dividend payments at some future date.

In addition, the reduction in the nominal value of the shares allows management to both incentivise employees as well as consider the use of equity issuance against future M&A deals. We continue to regard both of these factors as positive developments in the reorientation of the group.

Valuation: Move to profitable growth is key

Exhibit 3: TP Group peer sum-of-the-parts valuation FY17e basis

	EBITDA (FY17e)	PER (x)	Value (£m)	Notes
TPG Maritime	3.8	9.5	36.0	10% premium to UK A&D (9.3x EV/EBITDA)
TPG Engineering	0.1	11.9	1.2	UK Industrials average
TPG Managed Services	0.2	10.0	2.0	Average of Cohort and Babcock
TPG Design and Technology	-1.1	0	0.0
Less central costs	-1.1	10.5	-11.5	UK Industrials average
EV			27.7
Net cash			8.0	FY16 net cash
Equity value			35.7
Shares in issue (m)			420.9
Implied fair value per share (p)			8.48

Source: Edison Investment Research estimates

Our revised sum-of-the-parts peer group valuation is based on the new divisional split, and our forecast adjusted EBITDA generation for FY17. In our opinion, growth prospects for TPG Maritime warrant a premium compared to Aerospace & Defence peers, and TPG Engineering now looks much more like a traditional UK industrial engineering activity. Managed Services is compared to other defence outsourcing and technical advisory companies, namely Babcock International and Cohort. While we expect Design and Technology to generate a continued loss, the intrinsic value of its expertise should be worth more than zero, where we have, for now, positioned it.

As this methodology continues to value the group at less than the value of TPG Maritime plus net cash, we consider it likely to prove moderately conservative as TP Group grows top line, earnings and cash flow beyond 2017. It currently generates a value of 8.48p.

Exhibit 4: Financial summary

	£m	2014	2015	2016e	2017e
Year end 31 December		IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		21.7	20.4	22.7	24.6
Cost of Sales		(17.6)	(14.8)	(16.3)	(17.6)
Gross Profit		4.1	5.6	6.3	7.0
EBITDA		(2.1)	0.0	0.92	1.9
Operating Profit (before amort. and except.)		(3.5)	(1.3)	(0.2)	0.8
Intangible Amortisation		0.0	0.0	0.0	0.0
Exceptionals		(0.5)	(1.0)	(0.3)	(0.0)
Other		0.0	0.0	0.0	0.0
Operating Profit		(3.9)	(2.3)	(0.5)	0.7
Net Interest		0.0	0.1	0.0	0.0
Profit Before Tax (norm)		(3.4)	(1.2)	(0.2)	0.8
Profit Before Tax (FRS 3)		(3.9)	(2.2)	(0.5)	0.7
Tax		0.2	0.3	0.1	(0.2)
Profit After Tax (norm)		(3.2)	(0.9)	(0.2)	0.6
Profit After Tax (FRS 3)		(3.7)	(1.9)	(0.4)	0.6

Average Number of Shares Outstanding (m)		420.9	420.9	420.9	420.9
EPS - normalised (p)		(0.8)	(0.2)	(0.04)	0.1
EPS - normalised fully diluted (p)		(0.8)	(0.2)	(0.0)	0.1
EPS - (IFRS) (p)		(0.9)	(0.5)	(0.1)	0.1
Dividend per share (p)		0.0	0.0	0.0	0.0

Gross Margin (%)		19.1	27.4	28.0	28.4
EBITDA Margin (%)		-9.7	0.2	4.1	7.7
Operating Margin (before GW and except.) (%)		-15.9	-6.3	-0.9	3.2

BALANCE SHEET
Fixed Assets		15.9	15.0	15.0	15.0
Intangible Assets		14.9	14.5	14.5	14.5
Tangible Assets		1.0	0.6	0.5	0.5
Investments		0.0	0.0	0.0	0.0
Current Assets		17.1	13.7	14.5	15.9
Stocks		0.1	0.2	0.1	0.4
Debtors		7.2	6.4	6.3	6.6
Cash		9.6	7.0	8.0	8.8
Other		0.2	0.1	0.1	0.1
Current Liabilities		(7.6)	(5.8)	(6.0)	(5.9)
Creditors		(7.6)	(5.8)	(6.0)	(5.9)
Short term borrowings		0.0	0.0	0.0	0.0
Long Term Liabilities		(3.3)	(2.8)	(2.2)	(2.2)
Long term borrowings		0.0	0.0	0.0	0.0
Other long term liabilities		(3.3)	(2.8)	(2.2)	(2.2)
Net Assets		22.0	20.2	21.3	22.8

CASH FLOW
Operating Cash Flow		(3.4)	(1.6)	1.0	1.0
Net Interest		0.0	0.0	0.2	0.0
Tax		(0.0)	0.1	0.0	0.0
Capex		(0.2)	(0.2)	(0.2)	(0.2)
Acquisitions/disposals		0.0	(0.9)	0.0	0.0
Financing		(0.6)	(0.0)	0.0	0.0
Dividends		0.0	0.0	0.0	0.0
Net Cash Flow		(4.2)	(2.6)	1.0	0.8
Opening net debt/(cash)		(13.7)	(9.6)	(7.0)	(8.0)
HP finance leases initiated		0.0	0.0	0.0	0.0
Other		0.0	0.0	0.0	0.0
Closing net debt/(cash)		(9.6)	(7.0)	(8.0)	(8.8)

Source: Company reports, Edison Investment Research estimates

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

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Wellington +64 (0)48 948 555

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