Infected by the COVID-19 pandemic, in Q2 FY20, Rexel reported a 17.7% yoy decline in same-store sales (though with a gradual recovery) – which led the group’s adjusted EBITA margin to slip c.136bp during H1 FY20, despite numerous cost-cutting actions. As the uncertainty prevails amidst a probable second wave of the virus pandemic, management has refrained from providing the full-year guidance, but it expects to continue prioritising profitability and free cash flow.
Companies: Rexel SA
In the Coronavirus-infected Q1 FY20, Rexel’s top-line dropped by a low single-digit. But, the performance is likely to deteriorate in Q2 FY20, as numerous countries continue to follow containment measures for most of the period. However, the multi-channel distributor is well-positioned to sail through the crisis, on the back of adequate liquidity and timely taken cost-cutting and cash-preserving actions.
Despite low top-line growth in FY19 (although within the company’s previous guidance), Rexel continued to improve the profitability, FCF generation and indebtedness. Moving forward, priorities are likely to be the same, as overall market conditions remains challenging, especially for industrial activity across the US, Germany and China. Our positive stance is likely to be maintained.
During Q3 FY19, Rexel witnessed a sequential slowdown in its top-line growth – soft industrial activity in markets like the US, Germany and China being the key culprit. While management anticipates trading headwinds in the near term, the FY19 financial guidance has been maintained (includes 5-7% increase in adjusted EBITA). No material change in our estimates.
We reiterate our investment case on Rexel (Buy, 39% upside). We believe the stock has corrected more than warranted, as investors’ concerns regarding the macro-economic uncertainties and Amazon’s encroachment on the B2B distribution market have eclipsed the ongoing operational efficiency in the distributor’s business. The current level offers an attractive entry-point for mid-long-term investment, in our opinion.
Rexel’s top-line growth moderated sequentially in Q2, largely due to the weak performance in Europe. Profitability also remained under pressure amidst cost inflation. However, management expects an improvement in H2 19 EBITA growth and, hence, has maintained the full-year guidance. We will incorporate a more cautious view in our estimates.
Rexel’s Q1 FY19 results surprised the market with its sustained strong performance in North America, and a recovery in the European business. Management remains confident about healthy business activity in the rest of the year and has reiterated its full-year financial guidance. No significant change in our target price and stock recommendation.
The Q4 18 results missed our estimates as Europe under-performed. France entered into red territory, joining Germany and the UK (both already there). North America on the other hand held its baton tight, with the eighth consecutive quarter of revenue increase. Furthermore, Rexel confirmed the completion of its disposal plan and has kept its 2019 revenue and adjusted-EBITA outlook unchanged. Given the weaker than expected growth in Europe, we will be lowering our target price. No change in the stock recommendation.
Q3 results came in below our estimates as well as market consensus. Growth momentum in Europe was halted primarily by Germany’s underperformance (resulting from its turnaround efforts), France’s lower than expected growth (led by difficult comparables) and the UK’s continuing contraction (on the back of Brexit-led uncertainty). Offsetting this, the US remained upbeat, benefiting from strong underlying demand. We have lowered our estimates. No change in the stock recommendation.
The company reported its Q2 results which were ahead of our expectations. North America remained in the driver’s seat, with both APAC and Europe extending the support to the top-line momentum. The company-wide turnaround plan has started yielding returns but we expect more in the coming quarters. Management has reduced its disposal target but has kept revenue and adjusted EBITA outlook unchanged. We have tweaked our estimates slightly. No change in the stock recommendation.
Rexel reported Q1 18 results below our estimates as well as industry consensus. The company once again grew in all its operating regions. Growth rates for North America and Asia remained on an upward trajectory, a direct contrast to the European region, where growth momentum softened for the second straight quarter. We remain optimistic on the North American growth story, whereas Europe should remain subdued mainly due to an unfavourable base effect. We have revised our estimates downwards. No change in stock recommendation.
Rexel posted robust Q4 results ahead of our as well as market estimates. The company’s ongoing top-line momentum was once again supported by each of its three operating geographies. Despite favourable macro-economic tailwinds in major operating regions, Rexel’s ongoing efforts to finalise the fine print of an already stated broader strategy seems to be rightly placed. We will be revising our estimates slightly upwards. Our recommendation on the stock remains unchanged.
Rexel reported Q3 FY17 results ahead of our estimates (sales were higher but profitability was in line). All numbers are at constant currency and on a same day basis unless specified otherwise. Revenue increased by 5.2% (vs Q2: +2.8%, Q1: +0.6% and Q3 FY16: -3.7%) with a robust performance across all operating geographies. Europe grew by 6.5% (vs. Q2: +3.6% and Q1: +1.2%; c.54% of group revenue), largely led by continued strong consumer demand in France (+9.1% yoy; 35% of regional revenue). While Scandinavia (+9.4%), Germany (+5.5%), Benelux (+10.2%) and Switzerland (+6.5%) also posted robust growth, the UK region slipped again into the red after two quarters of sequential improvement (Q3: -2.4% vs Q2: -0.9%, Q1: -3.2% and Q4 16: -7.9%). This was mainly due to the inability to pass on increased raw material costs and a depreciating GBP.
North America grew by +3.3% yoy (vs. Q2: +1.9% and Q1: +1.2%; c.36% of group revenue) on the back of a favourable base effect (Q3 16: -6.0%) and improving demand in the US (+4.3% yoy; 78% of regional revenue). The US once again witnessed positive momentum in the O&G business (Q3: +30% vs Q2: +16.2% and Q1: 10.5%) and Rexel continued its the network expansion strategy. Canada tumbled by 0.4% (vs. Q2: +5.3% and Q1: -2.1%) due to non-renewal of a large wind contract, more than offsetting the favourable O&G demand.
APAC also bounced back with 5.1% growth (vs Q2: +1.4% and Q1: -4.8%; c.10% of the group’s revenue), riding on strong consumer demand in China (+9.6% yoy; 36% of regional revenue) and Australia (+10.2% yoy; 41% of regional revenue).
The adjusted EBITA margin came in at 4.2% (+17bp yoy), led by an improvement in Europe (5.1%, +23bp yoy) and APAC (1.3%, +24bp yoy), whereas North America clocked a 4.1% margin (-10bp yoy) on account of higher operational expenditure for future growth initiatives (branch opening/counter resets/logistics). Management reconfirmed its full-year financial targets (sales: low single-digit growth, adjusted EBITA: mid single-digit).
Rexel’s 2017 behaviour has left many stakeholders bewildered. The electrical goods distributor entered the New Year in a euphoric mood, riding on Trump’s ambitious infrastructure spending plans (further boosted by proposed tax cuts), and a gradual rebound in copper and crude prices. However, the stock turned turtle this April (slumped c.27% in just four months) despite witnessing better consumer demand and profitability during the year. Investors’ distrust is attributable to multiple factors, ranging from Trump’s unfulfilled promises to a fragile European economic recovery. But the biggest concern emanates from the increasing threat from Amazon. Although Rexel’s stock price has recovered c.15% over the past 45 days, let’s explore how tangible the threat from America’s most prominent e-com player is.
Rexel reported Q4 and FY16 results slightly ahead of our estimates. All the sales growth numbers are at CER and same-day basis unless specified otherwise. In Q4, the company’s revenue growth remained flat (vs Q3: -3.7% yoy) and registered a sequential improvement in all three regions. Europe returned to positive growth territory (Q4: +1.7%, Q3: -1.6%, Q2: -0.9%; 54% of group sales), on the back of strong construction activity in France, Scandinavia and Germany; jointly contributing c.50% of regional sales. The North American region also improved sequentially (Q4: -2% vs Q3: -6.0%, Q2: -4.2%; c.36% of group sales), on the back of a better performance in the US (Q4: -1.5%, Q3: -6.6%, Q2: -3.4%; catalysed by higher copper and oil prices). Similarly, the top line in the APAC region came in at -1.9% (vs Q3: -5.6%, Q2: -3.2%; c.10% of the group’s sales), largely driven by a better performance in Australia (+0.7% yoy, c.38% of regional sales; improved mining activity) and China (-1.9% yoy, c.37% of regional sales; strong industrial automation demand).
For the full year, the organic sales came in at -1.9% (vs FY15: -2.1%; our estimate: -2.3%). The FX headwind eroded c.€213m from the top line (depreciation of the British pound and Canadian dollar vs the euro), more than offsetting the c.€59m positive scope impact, and resulting in a reported revenue decline of 2.8% (FY15: +3.5%, our estimate: -3.8%).
The gross margin for FY16 improved to 24.2% (+14bp yoy). However, increased operating expenditure (depreciation and wages & salary) and the higher operating leverage pulled down the adjusted EBITA margin to 4.2% (-27bp yoy; our estimate: +4.1%).
Management announced a turnaround plan at the recent capital markets day and defined the three strategic priorities listed below:
• Accelerate organic growth (low single-digit in FY17 and higher than the market’s in the mid-term) by focusing on two fundamental pillars: a) more customers and more SKUs, and b) accelerating digitalisation.
• Increase capital allocation to high-growth geographies (announced a divestment programme worth c.€800m) and reduce the indebtedness ratio to below 2.5x.
• Improve operational and financial performance by improving the gross margin and strict cost control. Enhance the performance in high-growth potential areas (seven US regions, Germany, the UK and Australia).
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Strix has announced the strategic acquisition of LAICA a family owned business in Vicenza, Italy for €19.6m in a mixture of cash and shares. It will be earnings accretive in FY21 and is scheduled to complete by the end of FY20, with just Italian government approval outstanding. ZC operating profit estimates are unchanged in FY20 but increase by c. 8% in FY21 to reflect the contribution from the deal, the impact on earnings is smaller due to the issue of shares and higher tax in Italy. Management believe significant synergies, both cost and revenue, will be derived from the deal over the next 2-5 years. The interim results had been well flagged in the comprehensive trading update in late July and today’s statement confirms that profitability remains in line with the guidance of achieving a flat performance yoy in FY20. The interim dividend of 2.6p is in line with last year and in keeping with the commitment to at least meet the 7.7p paid in FY19. Unlike most peers, Strix has maintained guidance as well as its commitment to pay a dividend and today’s acquisition unpins the continuing strategy of diversifying the business into areas offering greater growth.
Companies: Strix Group Plc
Augean has reported interims to 30 June 2020. With the first half bearing the full impact of Covid-19, adjusted PBT decreased by 11% to £8.5m, which is in line with our expectation. With radioactive wastes, biomass for EfW and construction impacted by lockdown and depressed activity levels in its North Sea services, due to the low oil price, the results demonstrate the resilience of the Group and also the benefit of its key position in its markets with strategically located hazardous waste treatment and disposal facilities in the UK. Whilst the statement highlights that full year results are expected to be broadly in-line with market expectations, we have conservatively reduced forecasts. Nevertheless, with strong cash generation and sustained growth EV/EBITDA falls to 5.3x and 4.1x for FY21E and FY22E, a level that is substantially below sector constituents and transaction valuations.
Companies: Augean Plc
Strix has published reassuring interims and announced the acquisition of LAICA, conditional upon approval from the Council of Ministers in Italy. Against a backdrop of global disruption caused by COVID 19, Strix’s H1 performance is in line with expectations. Net sales down 21% YoY, with a much smaller impact on net profits on the back of strong cost management. Encouragingly, FY 20 profit expectations are now underpinned, at around £28.9m PAT. Taking into account the LAICA deal, we provisionally upgrade FY 21 PAT/EPS by 6%. The shares are already up materially YTD, but the Strix growth story remains compelling.
Judges Scientific is focused on acquiring and developing companies in the scientific instrument sector. Given the backdrop of H1, and the global nature of Judges' customer base, we see this morning's results as a significant achievement when set against the backdrop of significant COVID related headwinds. Revenue decreased by 6.8% (organic -12%) to £37.4m (H1-19: £40.2m) which, after the sensible management of the cost base, yielded an adjusted pre-tax profit of £6.4m (H1-19 £8.4m), a 22% reduction, and adjusted fully diluted EPS of 82.5p (H1-19: 107.0p). However, reflecting a commitment to its progressive dividend policy, and confidence in the business, the interim DPS is increased by 10% to 16.5p. With respect to H2, COVID related business risks remain, none of which are unique to Judges. However, given the relative strength of H1 (albeit at some expense to the order book), management flag ‘cautious confidence' in achieving full year market expectations. As such, our FY 2020E adjusted PBT and EPS estimates are unchanged this morning.
Companies: Judges Scientific Plc
Byotrol’s FY 2020 full-year results are inconsequential, given the dramatic and positive impact that the COVID-19 pandemic has had to product sales since the year-end. However, year-end cash was £0.1m above forecast at £1.7m and when combined with positive cashflow since year-end, Byotrol is well-resourced to finance its ongoing operations and steady growth. With the order-book remaining strong (c.£1.1m at 31 August), despite summer lull, and demand likely to persist for some time, given the emerging second wave of coronavirus, we upgrade EBITDA to reflect lower costs and higher licensing income. If, as we suspect, the demand curve has shifted sustainably to the right, this leaves room for further upgrades. Consequently, we raise our target price to 11p, at which level the stock would trade on EV/Sales and EV/EBITDA of 4.1x and 26.9x, respectively. Future revenues and milestones from licensing deals will be largely additive.
Companies: Byotrol Plc
Billington is a leading structural steel and construction safety solutions specialist. The Group has this morning announced that its structural steel division, Billington Structures, has been awarded three contracts with a combined value of £21 million, the largest of which is for a UK power based project (Midlands) that will add significant visibility (at good margin) to FY 2021E. The other two contracts, in the manufacturing and commercial office sectors, are for delivery in Q4 2020 and through 2021 respectively.
Companies: Billington Holdings Plc
Directa Plus is a commercially proven graphene supplier with a unique production process that creates high quality materials that are already used in a wide array of products internationally across multiple verticals. We expect the company to reach EBITDA positive in FY22 with existing cash reserves, leaving material upside in our expectations from some of its recently developed products such as the Co-Mask and Gipave.
We see Directa Plus as an underappreciated, undervalued and more mature and lower risk play in the UK listed graphene and speciality nanomaterials space and initiate with a Buy recommendation and 122p target price.
Companies: Directa Plus Plc
Today’s AGM Statement highlights further progress during H1. As anticipated at the final results on 6th August, trading has now returned to pre-COVID levels, with a particularly strong recovery in housing market activity. As at 31st August, the order book has increased by 5% to £69.4m from £66.2m at 31st, with contracts secured across the Group’s end markets. The Company has invested in its sales team and back office functions in order to support the recovery, though management continues to monitor costs given the near term uncertainty presented by COVID-19. In the absence of more restrictive lockdown measures, we would expect activity to continue to improve in the near term and the medium term prospects of the Group remain encouraging, supported by the UK’s net-zero target, which will require substantial investment in the UK’s utility networks. Fulcrum has also announced the appointment of Jennifer Cutler as CFO from 19th October, whose most recent role was Direct of Finance at Harworth Group Plc. The shares have justifiably outperformed since the full year results and today’s statement is supportive of this increase. Forecast guidance continues to be withdrawn given near term COVID uncertainties, but we anticipate reintroducing forecasts at the interim results.
Companies: Fulcrum Utility Services Ltd.
We initiate coverage on AFC Energy and see this as a significant long-term growth opportunity. We have only focused on the UK potential in EV Charging and Distributed Power in this note but believe the application will be far wider both in geography and application. Following a transformational 2019, we can see a clear near-term intrinsic value of 68p based on UK EV Charging and Distributed Power alone.
Companies: AFC Energy Plc
Billington provides structural steel and safety solutions to the construction industry. After record results in FY 2019, Billington's interim results to June 2020 reflect the anticipated disruption of Covid-19. However, the Group remained profitable in the period (revenue £32.8m, adjusted PBT £0.6m) and the balance sheet retained its significant cash backed strength. Further, although pricing pressure is still a significant feature in the market, as the announcement of £21m of orders yesterday demonstrated, there is still plenty of business to be won in less competitive segments. Our FY 2020E estimates remain suspended, but all other things being equal, it is not beyond the bounds of possibility that Billington could deliver a similar performance in H2 as reported in H1. The present order book is supportive of such a scenario. The outturn for FY 2021E is harder to determine, but there again, Billington is exposed to a number of verticals where investment continues and where competition is less pronounced. With its strong balance sheet likely a significant comfort to clients, the medium-term prospects for Billington, in our view, continue to be strong.
Spectra Systems, a leading provider of advanced technology solutions for banknote and product authentication markets, has announced a solid set of interim results. Moreover, significant H2 visibility, notably from central banking customers, yields upgrades to our FY 2020 and FY 2021 estimates with adjusted PTP increasing 17% and 16% to $5.8m and $6.1m respectively. In terms of H1 numbers, revenues increased marginally to $6.5m (H1-19: $6.4m), and adjusted pre-tax profit came in flat at $2.3m. The balance sheet retains its robust state which, even after the $4.1m FY 2019 dividend, distributed June 2020, still holds $10.9m (H1-19: $11.1m) of net cash (excluding restricted cash of $1.3m, H1-19 $1.1m). Our Sum-of-the-Parts valuation indicates a risked fair value more than 200p.
Companies: Spectra Systems Corp.
H1’20 was a period of significant revenue growth (+200% to €2.8m), driven by the Setcar acquisition, now fully integrated. Underlying progress was constrained by COVID, but the Group rose to the challenge, exemplified by the launch of the G+ enhanced Co-Mask (orders of €400k received to date). Good commercial progress has also been made with Gipave during the period, with three installations now in place. In our view, Directa is well positioned to deliver strong growth over the medium term as awareness of the performance and value of its technology continues to build.
Today's news & views, plus announcements from VOD, POLY, SMDS, BLND, BYG, WEIR, DC, SNR, SHI, INTU, IHR, CNC, ARE, INCE
Companies: INTU SHI INCE
SIMEC Atlantis has materially de-risked the Uskmouth conversion project with a framework agreement to fund 100% of phase 1 with a secured loan. Together with the recently announced investment in the fuel supply company, SIMEC Atlantis is now well placed to move towards financial close on the Uskmouth project in line with our expected timetable. We have updated our forecasts for the new investment and the recent results. Our central case valuation now reflects these and an assumed 100% debt financing for Uskmouth and rises to 68p from 55p.
Companies: SIMEC Atlantis Energy Ltd.
Who would have thought when reporting pre-tax losses of £10m after the first half to end June that Breedon would emerge so strongly from lockdown to trade through July-August (and into September) with LFL revenues ahead of comparative 2019 and expected H2 EBIT broadly in line with the equivalent 2019, resulting in a reinstatement of guidance ahead of current FY20 consensus. That is a mark of confidence as much in the group's operating capabilities as market recovery itself – a feature of Breedon's management quality over a consistent period of time. Investors will be impressed by the short-term recovery but also encouraged that the longer-term outlook remains positive with an emphasis to infrastructure markets in GB and Ireland plus, of course, its unrivalled ability to utilise its asset base very efficiently and to add to that platform with accretive acquisitions. The shares hit a COVID ‘low' of 63p but were trading as high as 100p in February. We would see that upper level as the more likely direction of travel for the shares with 90p justified by a forward 2022E rating of 7.5x EV/EBITDA, c14x PE, commencement of dividends and significant deleveraging through high net cash flow generation.
Companies: Breedon Group Plc