Investing for growth
Although not reflected in headline financial progress, the benefits of recent investment were seen in improved performance in two of Low & Bonar Plc (LONDON:LWB)’s three divisions. Bonar, the largest division, is also investing for growth but weak civils demand affected FY14 profitability. We expect the new CEO to endorse and refresh the existing strategy later this year as the company targets improved financial performance. While the share price showed a positive response to the results announcement, the rating still offers investors a balance between reasonably priced growth and income.
Wider progress obscured by slower civils market
FY14 results were in line with Q4 guidance – and the prior year – with expectations having been lowered to reflect weaker demand conditions in the European civil engineering market and slow product approvals progress for the Saudi JV. While the results demonstrated the headwinds that the company faced during the year (including FX), they also contained some good areas of progress that were somewhat obscured by headline results. The Technical Coated Fabrics and Yarns divisions both delivered good profit uplifts compared to FY13 and, within Bonar, the Flooring and Industrial segments also grew well. Growth investment was a feature of cash flow in the year, particularly initial spending on a greenfield factory for Bonar products in China. Year-end net debt rose modestly over the year to £88m.
Strategy refresh expected
New CEO Brett Simpson joined the company in September and is starting to put his own mark on the business. No major strategic changes have been flagged at this stage. No radical change in direction is anticipated but we expect a capital markets event in May to be used to refresh key financial and operational targets including greater focus on customer service globally. As far as the headwinds go, sterling has strengthened further against the euro since the year end and wider European demand also seems very subdued. These effects remain on the watchlist but progress is anticipated in FY15.
Valuation: Improving sentiment
Low & Bonar’s share price has responded positively to the FY14 results newsflow and outlook comments. On modestly lower PBT estimates, LWB is trading on an FY15 P/E of 10.1x, EV/EBITDA (adjusted for pensions cash flow) of 6.4x and a prospective 4.9% yield. Investor sentiment appears to be improving but these metrics still offer a good entry point ahead of greater clarity on the impact of new management initiatives and the benefits of investment coming through.
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