Estimates upgraded
Avesco Group Plc (LONDON:AVS) has released a positive update and reported that FY14 profits will be ahead of market expectations. Trading was strong in Q4, particularly at CTUS, and cost savings from the group restructuring are coming through more strongly and quickly than anticipated. We have increased our normalised PBT by £0.5m for FY14 and see further upside for margin improvement going forward. Solid cash flows comfortably fund a progressive dividend policy and the FY14e yield of 5.7% is very attractive.
A busy summer
Avesco traded strongly over the summer, helped by the major events in Scotland (Commonwealth Games, Ryder Cup, referendum-related events) and a good result from Creative Technology US (CTUS) in what is normally a seasonally quiet period. Overall we now expect a £1.5m trading profit in H214 for the group versus a loss of almost £2.3m in H213. The turnaround is partly due to the ‘even/odd’ year effect, but more particularly illustrates management’s success in restructuring the group, both in CT Europe and Presteigne.
Good momentum going into FY15
We have increased our FY14e trading profit by £0.4m (all in CT) and reduced interest by £0.1m, producing a £0.5m or 11% increase in normalised PBT, to £4.9m. FY15e is an ‘odd’ year with few major sporting events, but we are encouraged by the restructuring progress and have increased our PBT estimate by £0.2m to £3m. As usual, asset utilisation is a key driver and there remains plenty of scope for margin expansion (our FY15e trading margin is only 3.9%). However, EPS is likely to be affected by higher current tax (as we flagged in June). We will introduce FY16 estimates in January; we would expect a strong bounce in profitability on the back of major sporting events including the August 2016 Rio Olympics.
Valuation: FY14e dividend yield of 5.7%
Avesco’s management is focused on cash generation and dividend growth and the FY14e yield of 5.7% is well above average. The prospective EV/EBIT is 6.7x (or 7.6x if FY14e and FY15e are averaged), while the EV/EBITDA is only 1.7x. A sound balance sheet is backed by high-quality rental assets (the diluted NAV per share was 163p at 31 March 2014).
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