Q1 20 is of course down due to the COVID-19 crisis
Despite the lack of guidance, Q2 is set to be worse, notably in SMS
However, we like the margin resilience and ongoing cost-cutting programmes
The clean balance sheet is a clear asset in these troubled times
We will fine-tune our numbers, with little impact on the valuation in our view
FY19 numbers were broadly in line with our and the street’s expectations.
The long-cycle businesses have been doing well, while the short-cycle ones are still under pressure.
Visibility remains low for the latter, explaining our rather cautious top-line expectations going into FY20.
The separate listing of SMT will be another focus for investors in the current year (c.15% of total revenues).
Q3 19 numbers well in line with H1 19 numbers.
Some expected one-offs (efficiency measures), all booked in Q3.
The long-cycle business is going well, while the short-cycle one shows further weaknesses.
All in all, no major changes in our numbers to be expected.
Q2 results are very decent, and margins remain high
However, the order intake was a bit weak in the quarter, due to SMT and SMS
The balance sheet remains very clean, which is not a surprise
At the end of the day, the stock is likely to be capped before visibility improves on the macro front
- the Materials & Technology segment should be isolated
- the aim is to give it higher growth prospects
- a future listing is contemplated, albeit not guaranteed
- this could also open the door to a disposal speculation, we believe
- the impact remains small on the group’s scale
- Q1 19 in line with the (good) FY18
- The current year is unlikely to show such a high level of earnings growth.
- Acquisitions will continue, since this is both the group’s model and the sound balance sheet enables it.
- After the great outperformance since H2 18, we expect a more moderate one.
- We’ll revisit our forecasts/valuation, which are probaby slightly too low at the moment.
Sandvik reported FY18 results showing record profits and revenues
Order intake reached SEK102.4bn, +9% yoy change, led by the Mining division, and SEK25.6bn in Q4 18, corresponding to +6% yoy growth.
Revenues reached SEK100.1bn, +11% yoy and SEK25.96bn in Q4 18, corresponding to +9% yoy growth.
The adjusted operating profit reached SEK4,700m in Q4 18, corresponding to an 18.1% margin, and SEK18.6bn in 2018, corresponding to an 18.6% margin.
The adjusted EPS reached SEK2.62 in Q4 18 (versus SEK2.35 in Q4 18) and SEK10.41 for FY18 (versus SEK8.04 in 2017), while cash flow from operations was SEK6,044m (versus SEK5,267m in Q4 17).
Sandvik reported a strong set of results in Q3 18 in all metrics: order intake, revenues, EPS and cash flow generation. The positive is that all three business units contributed to the performance and, geographically speaking, all areas delivered growth including China. Therefore, after the market correction, it may be time to reconsider the stock’s attractiveness.
Sandvik reported another strong quarter, including double-digit growth in both order intake and revenue, with growth reported in every area but led by Asia, and in every segment but with a stronger contribution coming from Mining & Rock Technology. Profitability was at record level, with adjusted EBIT at 19.4% of sales corresponding to c.28% growth ex. FX structure and Metals. The weak spot was the FCF generation which was 15% lower yoy due to the anticipated strong demand.
Sandvik reported robust results in Q1 18, including double-digit growth in revenue and a high single-digit growth in orders. These strong volumes led to delivery of record margins of 18%. Materials Technology was the strongest segment due to the improvement in tubulard demand, and China was the other bright spot. The only negative of this report was the poor cash-flow generation due to the negative WCR variation.
In Q4 17, Sandvik delivered strong figures showing solid momentum in demand for both Mining & Rock Technology and Machining Solutions. Besides the renewed momentum in demand, strong execution allowed the operating margin to return to the pre-crisis (2006/07)level of 17%. All these strong figures are encouraging, allowing visibility and strong prospects for 2018, while the operating leverage is now more limited and the EPS growth will now be mainly fuelled by volumes.
Sandvik reported Q3 17 figures which were overall in line with expectations.
Order intake was SEK21,888m, +13% yoy, driven by all segments but Mining was the bright spot (+18% yoy).
Revenues came in at SEK21,648m, +12% yoy, including a +17% organic increase for Mining.
Profitability improved significantly, with a 15.4% operating margin (a 210bp surge versus Q3 16).
EPS grew by 46% to SEK1.88 (versus SEK1.29 in Q3 16) but the cash flow from operations was down 16%, due to a slightly negative WCR variation (SEK-48m versus a SEK1,790m in Q3 16).
Sandvik reported Q2 17 results showing a strong overall yoy improvement.
Q2 17 order intake grew +17% yoy to SEK24,533m, boosted by Mining (+23% organically) and Materials (+40%) including large orders for SEK1bn, and +6% for Machining Solutions while revenues reached SEK23,553m, +9% yoy.
The operating margin reached 13.9% (13.3% in Q2 16) and 15.8% after adjustments. The cash flow from operations was SEK2,493m, a +22% increase versus last year.
The EPS for Q2 17 reached SEK1.75, corresponding to a +30% increase yoy.
The company aims to focus on its core business, with the disvestment of Sandvik process systems and, finally, the exit from Mining systems, and also the divestment of the welding and stainless wire business.
Strong momentum in orders support future revenue generation
- Order intake has reached SEK25,426m, which represents +16% yoy. The orders continue to strengthen.
- Revenues have reached SEK22,436m.
- Operating profit has risen by 45% yoy to SEK3,507m. The operating margin is 15.6%.
- Earnings per share is SEK1.81.
- Record-high Q1 cash flow from operations of SEK3,255m.
- Financial net debt amounted to SEK26.3bn in Q1. The net gearing is at 0.63x, which is the lowest level in recent history.
Europe represents 40% of the group’s revenue and Europe’s order intake has risen by +5%. North America represents 20% of the group’s revenue and a rise of +41% in the order intake. Asia represents 20% of the group’s revenue and a rise of +7% in the order intake. China showed organic sales growth of 31% during Q1. However, India was negative for the first time.
Sandvik reported strong figures in Q4 16, especially in the order intake and operating profitability.
Order intake reached SEK22.0bn, corresponding to +8% organic growth due to improved demand in Mining and Machining Solutions.
Revenues were flat in Q4 16 at SEK21.8bn.
The operating margin reached 15% in Q4 16 versus 11.1% in Q4 15.
Cash flow from operation was SEK4.4bn versus SEK3.4bn in Q4 15.
EPS reached SEK1.68 in Q4 16 versus SEK-0.12 in Q4 15.
The Board of Directors proposes a dividend of SEK2.75 (versus 2.50) per share. This would represent a yoy increase of 10%, while still safeguarding a strengthening of the balance sheet in the long term.
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A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
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The announcement that Avon Rubber is to sell milkrite | InterPuls, its dairy division, to DeLaval Holding for £180m gross proceeds is strategically logical and financially compelling. The fit of dairy and defence has always looked slightly anomalous and the terms of the deal show that the opportunity to augment dairy through value-accretive deals is difficult given the scale of the business and opportunities. Management must now recycle the cash balances that will be created into Avon Protection, where there are a greater number of potential investments.
Companies: Avon Rubber
Brick and concrete products manufacturer Forterra has raised c. £55m gross in an equity placing in order to maintain its strong balance sheet and support the Group's continued investment programme. It was accompanied by, in our view, a reassuring trading statement which we believe is backed by yesterday’s brick industry data and comments from housebuilders, which suggest that demand has been recovering from its lockdown lows, before the PM’s promises to “build, build, build” housing and infrastructure.
Resilient Trading Update
Companies: Macfarlane Group
Successful businesses ‘never let a crisis go to waste’. Indeed since an otherwise strong Q1’20 was interrupted by COVID-19, Mpac has further streamlined operations, accelerated R&D and launched new remote equipment diagnostic/acceptance testing, virtual reality & other ‘Industry 4.0’ services.
The Norcros operating companies largely performed relatively well in challenging market conditions (in both the UK and South Africa) in FY20 though year end trading was affected by COVID-19 lockdowns, as flagged previously. The group’s financial position appears robust following management actions (including foregoing an FY20 final dividend) and well-placed to both contend with weaker near-term markets and the pursuit of market share gains from a position of relative competitive strength. Our estimates remain suspended at this time.
As flagged in the April trading update, Solid State’s FY20 results showed a 19.7% growth in revenues and 34.3% jump in adjusted profit before tax. Demand from the medical and food retail sectors is strong but weakness in the oil & gas and commercial aviation sectors related to the coronavirus pandemic is likely to result in lower year-on-year sales during Q2 and early Q321. While management sees potential for a Q4 recovery, the current range of FY21 profit outcomes is wide, so it is not providing guidance.
Companies: Solid State
The year-end trading update was encouraging, with expected results showing good YoY growth, modestly below but close to our earlier expectations. Trading has been resilient, particularly in safety critical areas such as its nuclear exposure, with some weakness being seen in oil & gas, where there is limited exposure. Two new contract wins in the nuclear sector have also been announced today. FY 2021 forecasts remain under review. With strong finances, the company is well positioned to maximise M&A opportunities, through its PIE strategy.
Marlowe delivered a strong performance during FY20A, with +7% organic revenue growth, and improved Adj EBITDA margins. Integration of acquisitions is progressing well, and with receipt of c£40m gross proceeds, Marlowe is well placed to accelerate the consolidation of its markets. We leave our forecasts unchanged and reaffirm our Buy rating.
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Companies: PCI Pal
The group has issued a trading update for the year ended 31 May 2020 highlighting an adjusted EBITDA of at least £11.5m which is close to the group’s original expectation, despite widespread disruption to operations in the second half. The statement notes ample liquidity headroom in excess of £10m with net debt (excluding IFRS 16 lease liabilities) reducing in H2 to £7.5m as planned. The Group’s order book and prospect pipeline remains strong overall and the update is accompanied by the announcement of two meaningful contract wins in the nuclear sector. A further significant positive development is the grant of outline planning permission for the conversion of the group’s 7 acre Hayward Tyler site in Luton into residential housing for up to 1000 dwellings. Whilst financial guidance for FY2021E remains withdrawn at this point due to on-going uncertainties around the impact of COVID-19, we see the group continuing to demonstrate good resilience, operating at close to normal levels, supported by exposure to multiple markets and a strong customer base that includes governments and their agents.
Smart Metering Systems (SMS) has announced that it has emerged from the recent Covid-19 uncertainty in a strong financial position and taken the decision to return funds received from the Government under the Coronavirus Jobs Retention Scheme. Current net cash of £48m (not including furlough grant) is ahead of previous expectations and underlying profitability for the year to 31 December 2020 is expected to be in line with expectations prior to lockdown, despite the obvious interruptions to meter installation activity that it has caused. During lockdown essential emergency field engineering work continued and SMS completed the sale of a proportion of its meter asset portfolio for a gross cash consideration of £291m (£282m net). In March 2020, SMS announced that it would rebase its dividend to 25p (prospective yield 4.3%), index linked to FY24 and commencing payments in October 2020, quarterly thereafter. A phased resumption to meter installation activity commenced on 1 June 2020.
Companies: Smart Metering Systems
Successful K3 Capital placing to raise £30.45m (gross) at 150p to fund the £9.3m acquisition of Randd UK Ltd, an R&D tax credit specialist with an LTM EBITDA of c.£2.0m, with a margin of c.50% and revenues typically contracted for 5 tax years with many recurring thereafter, followed by future potential deals in SME exposed markets. K3 has established itself as an innovative company that is able to effectively gather, generate and mine large quantities of data in order to scale up M&A services to SMEs. Transferring these lead generation capabilities to adjacent SME markets can allow rapid growth from proven models, at scale.
Companies: K3 Capital Group
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Companies: Salt Lake Potash
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
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